ECONOMIC GROWTH IN AZERBAIJAN: STRONG BUT SLOWING.

GDP in Azerbaijan was reported up 6.5 percent in the first quarter of 1999 (Russian agencies, Central Asia and Caucasus Business Report, April 24-28). While this growth looks impressive compared to other countries, it suggests that Azerbaijan’s economy is slowing: GDP growth of 7.4 percent was reported for 1999 and 10.0 percent for 1998. Much of the slowdown can be attributed to a weakening in the large inflows of foreign investment into Azerbaijan’s oil sector.

Foreign direct investment (FDI–which accounts for some 19 percent of Azerbaijan’s GDP–is estimated to have dropped 21 percent in 1999 to US$754 million (MPA News, March 10). This decline was sufficient to reduce overall investment by 3 percent last year, and investment showed only weak (2.4 percent) growth in the first quarter of 2000. Falling investment also slowed the construction sector, which grew only 1 percent last year. The slowdown now seems to be moving to the services, which also cater to oil investors. While growth in the service sector was reported at 12.3 percent in 1999, it slowed to 2.4 percent in the first quarter.

Growth in Azerbaijan’s all-important extractive sector also seems to be slowing. Despite a 20 percent increase in oil production last year–largely due to the activities of the AIOC, the only major foreign consortium now producing oil in Azerbaijan–value-added produced in the industrial sector grew by only 3.5 percent during 1999 and the first quarter of 2000. Growth in the extractive sector as a whole, which produces some 40 percent of industrial output, was only 6.5 percent in the first quarter. Manufacturing growth slowed to 3.2 percent, while production of electricity, gas and water actually dropped 2.2 percent (Turan, April 25).

The boost in Azerbaijan’s first-quarter GDP came from the transport sector–freight turnover was reported up 36 percent–and from retail trade (up 9 percent). The strong growth in freight turnover reflects increased transport of Azerbaijani and Kazakhstani oil through Azerbaijan. Retail trade has been boosted by large increases in real wages, and these are likely continued through 2000. In the longer term, however, these sectors are unlikely to sustain high growth rates unless foreign investment returns to its pre-1999 levels. However, greater pessimism about potential oil reserves in Azerbaijani waters seems to have been behind the slowdown in FDI last year. It remains to be seen whether higher oil prices will change investors’ minds about Azerbaijan’s oil prospects. The government’s apparent disinterest in privatization could also keep some potential investors at bay.

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