The significance of foreign investment in the Republic of Azerbaijan

Arthur Razizade
Prime Minister of Azerbaijan

After Azerbaijan gained its independence, the economy went through an extremely complicated period. The war between Armenia and Azerbaijan, a transport blockade, and many other factors related to the transformation period led to stagnation of the economy. Between 1991 and 1994 the real Gross Domestic Product (GDP) fell more than twice, industrial production fell by 67 per cent, agricultural output 47 per cent, and average monthly inflation was running at 22-25 per cent. Banking and financial systems practically collapsed.

Thanks to gigantic efforts made by the country, by the end of 1994 Azerbaijan reached social and political stability. This allowed the country to find solutions to many economic problems which had accumulated over the past years.

Following international recognition of Azerbaijan's economic stability and many meetings and talks, in September 1994 Azerbaijan signed its first oil agreement with the most important oil companies in the world. Very close relations were established with many international banking and financial institutions including The World Bank, the International Monetary Fund (IMF), the European Bank of Research and Development (EBRD), Islamis Development Bank, Arab-Kuwait Economic Development Fund, the Overseas Economic Co-operation Fund, Japan, Germany's Credit Bank for Reconstruction, etc. With the help of constructive consultations from the experts representing these organisations, in 1995 and 1996 two economic programmes were introduced. As a result, as quickly as the end of 1995, the first positive signs of economic stabilisation were noticeable, and in 1998, for the first time since 1996, the country witnessed its first economic growth.

From the beginning of 1997, economic stabilisation and growth became irreversible. The year ended with 5.8 per cent growth of GDP, average monthly inflation growth went down to 0.3 per cent, and the exchange rate of manat, the national currency, went up by seven per cent against the United States (US) dollar.

The investment process played a decisive role in the process of financial stabilisation, while the economic growth of Azerbaijan had a fantastic effect on the investment process. The share of the direct investment in the GDP rose from 23 per cent in 1995 to 43 per cent in 1997. Investment per capita in 1997 amounted to US$220, which is the highest among the former Soviet republics.

Looking at the share of foreign investment in total investment, which now accounts for 80 per cent of the total, eight times more than three years ago, an increased interest among international investors in Azerbaijan is very easy to notice. Investors started to move from the oil sector to other sectors of Azerbaijan's economy, and if in 1994 as much as 90 per cent of the foreign direct investment (FDI) went to the oil sector, in 1997 it was only 70 per cent.

The inflow of foreign investment to the oil sector strongly channelled the development of other sectors like construction and infrastructure, and also influenced employment. In 1996 and 1997, $200 million was invested in tenders of Azerbaijan's construction sector, and the biggest part of building materials used here comes from Azerbaijan. Foreign investment also provided the citizens of Azerbaijan with the possibility of earning better money in many different ventures in sectors like oil, retail and supermarkets, trade centres, and many different foreign companies and joint ventures.