Azerbaijan Needs Accelerating Diversification of Non-Oil Economy: ADB Report

Azerbaijan, Baku, 4 April /corr. Trend I.Khalilova / The economic outlook in Azerbaijan for 2008 and 2009 remains positive and GDP growth rates are projected at 15.7% and 18.0%, Asian Development Bank's 2007 report, placed on bank's official website, says.

Crude oil and natural gas production, respectively, are projected to rise by an average of 21% and 26% in the forecast period.

While FDI inflows into the sector will gradually decline, domestic investments, largely public, will increase by 8% over the forecast period, supporting growth. Continuing growth in oil export volumes in 2008-2009, in

conjunction with high global oil prices, will keep the current account running a large surplus of 38-40% of GDP.

Expansion in the non-oil sector, including agriculture, is expected to remain at about 9%. It is expected that over 54% of tax revenues will be collected from oil-related industries. SOFAZ will become the second-largest source of government funding, accounting for about 15% of the total. State spending is set to increase by 34.9% to 27.0% of GDP.

Inflation will remain in double digits, given the expansionary fiscal policy. To help keep it in check, NBA will likely make further increases in the refinancing rate, expand open-market operations, and raise commercial banks' reserve requirements for external borrowing in order to limit this source of capital inflows. Higher inflation than in major trading partners risks weakening non-oil export competitiveness.

The Government has already taken some steps to diversify the non-oil economy, but needs to accelerate the process. It faces several policy issues, and in response may have to take steps along the following lines. First,

it should develop a national strategy for economic diversification, based on an analysis of the country's comparative advantage and development priorities. In particular, decisions to develop any new sectors or industries

should take into account financial affordability and economic viability to ensure maximum development impact. Second, it needs to adopt special policies for developing the non-oil sector that have been identified as priorities by the national strategy. Public investment should be carefully administered, and private investment, both domestic and foreign, attracted through favorable market incentives.

Third, the Government needs to promote processed products in resource-based sectors (such as petrochemicals and agroprocessing), which are less affected by world price fluctuations and which have greater value added than the basic resources themselves.

"The country is in a good position to expand their output because of its rich natural resources and its relatively high level of human capital," the report says.

Lastly, since regional cooperation is a prerequisite for long-term economic sustainability, it needs to boost intraregional ties. It is expected that a new road connecting Azerbaijan and Turkey via Georgia, which opened last year, will greatly enhance regional cooperation and trade by providing an alternative corridor to those through the Russian Federation and the Islamic Republic of Iran.

The correspondent can be contacted at: [email protected]

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