EBRD's Transition Report provides positive dynamics in Azerbaijan's economic landscape

Over the past 30 years, Azerbaijan and the European Bank for Reconstruction and Development (EBRD) have established a robust partnership. The EBRD has significantly supported Azerbaijan in its economic transformation and diversification efforts, with over 3 billion euros financed for various projects in the country. Notably, half of this funding is allocated to the private sector.

Azerbaijan has implemented 13 infrastructure projects through state companies, with substantial backing from the EBRD. Additionally, the bank has provided crucial support for the country's energy projects, including the Southern Gas Corridor and the Trans Adriatic Pipeline (TAP), the latter receiving 1 billion euros in financing from the EBRD.

The recently unveiled EBRD Transition Report for 2023–2024 provides a comprehensive assessment of Azerbaijan's economic outlook and structural reforms.

Regarding diversification of the economy, EBRD is actively involved in supporting the development of Azerbaijan's private sector, particularly in non-oil industries, while emphasising the need for improved governance in private and state-owned enterprises.

As reported by Azernews, citing the bank, it provides key insights concerning developments, especially EBRD's focus Areas in Azerbaijan.

Access to Finance: Efforts are underway to enhance access to finance for local businesses, with a focus on encouraging lending by banks and non-bank financial institutions. Initiatives are also aimed at developing local currency and capital markets to bolster economic growth.

Green Economy: Azerbaijan's transition towards a green economy is receiving support from EBRD, with financing allocated for renewable energy projects, increased energy efficiency measures, and the promotion of cleaner transport and sustainable infrastructure.

Donor Contribution: Azerbaijan also serves as a donor to EBRD, with a total contribution of €3.6 million. Half of this contribution is allocated to the Eastern Europe Energy Efficiency and Environment Partnership (E5P) Fund, while the remaining half is directed to the Azerbaijan – EBRD Cooperation Account.

Economic Dynamics and Challenges

Economic Growth Moderation: The report highlights a moderation in economic growth in 2023, with the non-oil sector experiencing a slowdown. Factors such as lower energy prices, declining oil production, and sluggish growth in the non-oil sector have contributed to a GDP growth rate of less than 1 per cent in the first seven months of 2023.

Support for IT Sector: There is a growing emphasis on supporting the development of the information technology (IT) sector and digitalization of the economy. New tax legislation provides incentives for IT companies and employees, while the capital market is benefitting from a new digital platform facilitating online securities issuance.

Middle Corridor Development: Significant strides are being made to develop the Middle Corridor trade route and promote renewable energy. Azerbaijan is collaborating with Kazakhstan and Georgia to coordinate cross-border energy transmission and non-oil goods transport along the corridor.

Structural Reform Agenda

Economic Diversification: Structural reforms are crucial for diversifying Azerbaijan's economy, with an emphasis on strengthening the regulatory framework to encourage competition and reduce the state's influence across various sectors.

Renewable Energy Market: Reforms are needed to enhance the legislative and regulatory frameworks for the renewable energy market, including measures to control monopolies and attract foreign investment.

Middle Corridor Capacity: Enhancing the institutional capacity of state-owned infrastructure companies along the Middle Corridor and streamlining tariff unification and customs procedures with partner countries are identified as key priorities.

Macroeconomic Developments

Growth Slowdown: After two years of robust growth, Azerbaijan's economy has experienced a slowdown, attributed to declining oil output and inflationary pressures. However, energy exports are expected to continue driving short-term growth.

Transition to Green Energy: The government's focus on green energy transition is evident, with collaborations underway for the joint development and transmission of green energy through international partnerships.

Digitalization and Employment Opportunities: Digital initiatives, such as the launch of an online securities issuance system, are contributing to capital market development. Additionally, recent reforms have broadened employment opportunities for women by lifting restrictions on hazardous jobs.

As Azerbaijan navigates through economic challenges and pursues structural reforms, collaborations with international partners and targeted investments in key sectors are expected to play a pivotal role in driving sustainable growth and economic diversification.

This analysis of the EBRD Transition Report underscores the importance of strategic interventions and policy reforms in shaping Azerbaijan's economic trajectory in the coming years.

It should be noted that Azerbaijan became a member of the EBRD on September 25, 1992. Representing the Republic of Azerbaijan at the EBRD is Minister of Economy, Mikayil Jabbarov, with Minister of Finance, Samir Sharifov, serving as the alternate leader.

The collaboration between the Bank and Azerbaijan is governed by the Country Strategy Document for the period 2019-2024. This strategic framework prioritizes financing projects in the following areas:

- Facilitating economic diversification through support for competitiveness and good governance.
- Enhancing resilience by fostering the development of financial markets.
- Promoting the transition to a green economy and fostering regional connectivity.

Investments in Azerbaijan total €3.108 billion euros across 177 projects. Additionally, the State Oil Fund of the Republic of Azerbaijan is a contributor to the Equity Participation Fund established by the EBRD, with a capital contribution of €100 million out of the fund's total value of €350 million.