Setting the scene

The most recent history brought up the conflict over Nagorno-Karabakh, a predominantly ethnic Armenian enclave within Azerbaijan which was granted special status as an Autonomous Oblast in 1923. In February 1988, the demand by their population to be transferred to the Armenian jurisdiction led to violent reprisals against ethnic Armenians. The conflict dominated Azerbaijan's politics for many years until a second ceasefire agreement was formalised in July 1994. Furthermore, it seriously affected its economic progress.

In December 1991, under the presidency of Ayaz Niyazi ogly Mutalibov, Azerbaijan voted for independence, and according to the Almaty Declaration, it became a founding member of the Commonwealth of Independent States (CIS). Following its independence the country initiated the move towards a market economy, but the reforms progressed slowly. By the mid 1990s the economy had continued to decline, with a decrease equal to 50-60 per cent of the Gross Domestic Product (GDP) since independence, and with the annual rate of inflation averaging 720.6 per cent. In 1991 the GDP decreased by 0.7 per cent and by a further 22.6 per cent in 1992. The next three years have seen a continuing decrease by 23.1 per cent (in 1993), 21.1 per cent (in 1994) and 16.3 per cent (in 1995).

In September 1992, Azerbaijan joined the International Monetary Fund (IMF), which strongly supported its stabilisation and reform programme. In 1994, a Systemic Transformation Facility (STF) was agreed, followed by a standby arrangement in 1995 as recognition of 's liberalisation of prices and unification of the exchange rate. By the end of March 1996 Azerbaijan had received US$110 million from the IMF in loans, of which $90 million were the STF loans and $14 million were standby loans. In mid-March 1996, the IMF praised Azerbaijan's reform initiative and agreed some $80 million in loans to fund a privatisation programme, first to privatise 8000 small businesses and a further $260-350 million to cover the establishment of private and joint stock companies under a three-year economic restructuring programme to run to 1999.

The World Bank was next to offer Azerbaijan loans of $300-400 million in May 1996 for the next three years. The restructuring of the state sector is continuing with the goal to privatise 70 per cent of all state-owned enterprises.

Azerbaijan is one of the richest in oil and gas reserve countries in the world and foreign investment primarily supports this sector. However in the last two years investors started to move towards different opportunities within the country's mineral, manufacturing, agricultural and tourism sectors. The Government has taken several measures to lay the foundation for a stable investment climate and is introducing various incentives.

Under the Government of Prime Minister Arthur Razizade, Azerbaijan joined the path of positive growth, achieving a 1.2 per cent growth of the economy in 1996 and five per cent in 1997. The Government managed to reduce rapidly a monthly rate of inflation to nine per cent in 1997. As the trend of macroeconomic reforms is strong, with a forecast of six per cent growth for 1998, Azerbaijan attracts the attention of other financial donors. Japan announced that it will release $633 million in aid from its Overseas Economic Co-operation Fund (OECF) to support the economic reforms programme. The International Finance Corporation, the financial arm of The World Bank has granted Azerbaijan US$1.7 million as the first part of a total $3.4 million credit to support small and medium-sized businesses.

The outlook is now more optimistic than in earlier years, and the long-term potential is definitely positive.

Mahmud Mamed-Kuliyev, Azerbaijani Ambassador to the UK
Azerbaijani investments

The significance of foreign investment in the Republic of Azerbaijan
Arthur Razizade, Prime Minister of Azerbaijan