Azerbaijan Grapples with Economic Slowdown Amid Oil Sector Challenges

Azerbaijan's economy faced a significant slowdown in 2023, with growth plummeting from 4.6% in 2022 to a mere 1.1%, sparking concerns within the government about avoiding the middle-income trap, according to the article "Could the economy of Azerbaijan fall into the middle-income trap?" by economist Gubad Ibadoglu.

Last year's lag in economic growth, falling below global, South Caucasus, and Central Asia averages, has prompted policymakers to prioritize strategies to avert stagnation. The World Bank's report on the economies of Europe and Central Asia forecasts a modest economic growth of 2.3% in 2024 and 2.4% in 2025 and 2026 for Azerbaijan. However, this outlook has been revised downwards by 0.1 percentage point compared to earlier projections.

Azerbaijan's struggle with economic downturn is exacerbated by a steady increase in population, leading to a decline in GDP per capita. Despite averaging $3,156.6 from 1990 to 2024, GDP per capita has failed to recover from a peak of $7,990.8 in 2014, due in part to the currency devaluation in 2015.

The decline in economic growth and per capita income signals the risk of falling into the middle-income trap, necessitating urgent measures to bolster the non-oil sector's competitiveness. This includes fostering a conducive environment for a free market economy, rule of law, and combating monopolistic practices.

The challenges facing Azerbaijan's economy stem largely from its heavy reliance on the oil sector. A decline in oil production, from 51 million tons in 2010 to 30.2 million tons in 2023, coupled with sluggish growth in the non-oil sector, has hampered overall economic performance.

In 2023, the mining sector, dominated by oil and gas, accounted for 67.4% of industrial production and contributed 40.5% to the country's GDP. Despite a slight increase in gas production, oil extraction witnessed a decline, impacting export revenues, which are heavily dependent on the energy sector.

The downward trajectory in oil production at the Azeri-Chirag-Guneshli (ACG) field, Azerbaijan's primary oil reservoir, has been evident over the past two decades. Peak production in 2010 has since plummeted by 44.5%, exacerbated by a lack of significant production increases elsewhere.

Efforts to stabilize oil production, including the construction of the Central Eastern Azeri (ACE) platform, are underway. However, the observed negative trend suggests continued challenges in the coming years, necessitating comprehensive policy reforms to diversify the economy and mitigate reliance on oil revenues.

The decline in oil production poses significant fiscal and monetary challenges for Azerbaijan, necessitating adaptive policies to navigate through economic headwinds and ensure sustained growth in the long run.

Может ли экономика Азербайджана попасть в ловушку среднего дохода?