A Story of Transformation

The World Bank In Azerbaijan—Celebrating 20 Years of Fruitful Partnership

In 2012 the World Bank Group and Azerbaijan celebrate 20 years of successful partnership—a partnership marked by a most impressive transformation. Just two decades ago, Azerbaijan was building its statehood on the ashes of the Soviet Union, torn by war and political uncertainty, with more than 60% of its population living below the poverty line and only $14 million in foreign currency reserves. Today, poverty has fallen to less than 10% and the sovereign oil fund alone has savings of over $35 billion. In 2011, Azerbaijan graduated out of the IDA, the part of the Bank that provides concessionary “soft” loans to poorer developing countries, into the ranks of middle-income countries that borrow from the Bank purely on market terms and conditions.

Delivering Results to Improve People’s Lives

Azerbaijan became a member and shareholder of the World Bank in 1992 and has since received over $2.97 billion for 43 projects. The World Bank helped develop an appropriate regulatory environment in the oil sector, which facilitated investments by the world’s leading companies. Investments by the International Finance Corporation, the private sector financing arm of the World Bank Group in oil production and transportation infrastructure, also helped lay the foundations for Azerbaijan’s prosperity. The Bank also supported the creation of the State Oil Fund of Azerbaijan (SOFAZ), which has saved over half of the oil revenues the country has received since 2004. SOFAZ has become a model for other resource-rich nations seeking to develop more transparent mechanisms for managing commodity wealth.

The Bank has also been supporting the government in its institutional reform agenda. We helped to design and implement an ambitious land reform program as well as agricultural development projects, which provided 80,000 farmers around the country with access to financing. Through an improved system of agriculture extension and advisory services, farmers are learning to use modern farming methods and better quality seeds to improve crop yields and make more money. The World Bank has rehabilitated irrigation networks covering 56,000 hectares of agricultural land.

Over 80% of the current World Bank portfolio is in much needed physical infrastructure—especially roads, railways, water, and sanitation—and supports Azerbaijan’s goal of providing high-quality public services to its population. Since 2001, more than 300 kilometers of highways have been built or rehabilitated and further investments are being made in this area, making the travel and transportation of people and goods much safer and quicker.

The Bank has also been very engaged in supporting the modernization of Azerbaijan’s educational and health systems. We have financed the development of new curricula, teaching materials, and methods so that students are better equipped to face the requirements of a rapidly changing world and job market. Similarly, doctors and nurses are being retrained and health facilities are being modernized in over a dozen rayons in the country. The positive impact of the Bank’s support is also being felt by the more than 1.3 million pensioners in Azerbaijan who can now receive their monthly payments instantly at ATMs.

Azerbaijan no longer needs to borrow from the World Bank, but continues to appreciate it for the global knowledge of best practice that its staff brings with it. In addition, projects financed by the Bank follow the highest standards, both in terms of technical quality and management approaches, as well as support capacity building among counterparts and local contractors.

The Challenges Ahead

The most significant challenges are common to several countries across the region—namely, the need to ensure strong and inclusive growth going forward, and to diversify and rebalance the structure of growth and investment. The upshot is that while Azerbaijan has achieved some remarkable successes in recent years, much of this stemmed from the rise in oil production following the coming onstream of the Azeri-Chirag-Guneshli (ACG) field. However, oil production has plateaued already and will fall further in the medium run in the absence of new discoveries. Furthermore, the oil sector will not create enough jobs to keep the growing and young Azerbaijani population gainfully employed. Hydrocarbon dependence will therefore have to be reduced. Currently, public spending is nearly 40% of GDP and over 100% of non-oil GDP. Oil accounts for over 90% of total exports. This situation is clearly not sustainable. At the same time, in order to get some perspective on what is needed to effectively diversify, it should be noted that if per capita incomes are to increase from current levels to $20,000, non-oil exports will need to increase 50 fold—a massive scaling up, though from a low level.

Developing a new diversified non-oil, export-led development model will clearly not be easy. For one, the “new normal” of slower growth in advanced countries suggests that export-led growth—the best option for achieving higher living standards and faster job growth in countries such as Azerbaijan—may have become harder to achieve. What this really means is that it becomes more important to get the other ingredients in the mix just right.

Other factors will further compound the diversification challenge. The large capital and revenue inflows related to oil exports in the past seven years have led to an overall real effective exchange rate appreciation of around 40%. This makes it more difficult for non-oil exports to be competitive in global markets unless there is a compensating increase in productivity. Managing an appropriate monetary exchange rate and fiscal policy will also be important in this respect, as will building physical infrastructure. But these policies will have to be complemented by a highly educated and skilled workforce as well as by entrepreneurs that are willing to innovate and acquire new technologies and know-how. The government has introduced notable reforms on the institutional front, particularly through the fight against corruption, administrative improvements in tax, customs, and business registration, and the move to draft a competition law. However, market institutions need further strengthening so that they can fulfill their role of facilitating innovation and productivity growth and providing a supportive and investment-friendly business environment. All over the world, SMEs are the crucibles of job growth. And to promote these SMEs, competition policies that are focused on leveling the playing field will be critical.

While developing non-oil exports will not be easy, there are good examples of other oil exporters that have done so successfully. Norway’s per capita non-oil exports are 50 times those of Azerbaijan’s. Malaysia’s per capita non-oil exports are 28 times those of Azerbaijan’s. Azerbaijan can therefore certainly improve its performance on this front, and significantly.

Working Together for a More Prosperous Future

The government is fully aware of the need for diversification and has engaged with the Bank and other development partners to create a comprehensive and cross-cutting action plan for sustainable and shared non-oil, export-led-growth. The Second High-level Economic Policy Forum held by the government in Baku on March 5 and 6, 2012 in collaboration with the World Bank marked a significant step forward in this context. International experts and policymakers from around the world worked with representatives of the government on Azerbaijan’s strategy for entering and competing effectively in global markets.

The World Bank looks forward to deepening further our cooperation with the government and to supporting Azerbaijan every step of the way to create an even more prosperous future, where the benefits of economic growth are enjoyed by all and where everyone has an opportunity to make their lives better.