Azerbaijan has been doing a good job managing the oil boom buoying its economy, the European Bank for Reconstruction and Development (EBRD) says in its latest biennial country strategy, released during the bank’s annual meeting in Belgrade.


With annual GDP growth averaging 10% since 2000, and in a position to double during the next two years, the Caspian nation has so far achieved economic growth without significant macroeconomic imbalances.


Azerbaijan has made real progress in developing an institutional framework for the responsible management of oil and gas revenues. Part of its energy windfall is set aside in a State Oil Fund, created in 2000 and worth nearly US$1bn, whose functions are increasingly open.


Socar, the state oil company, is undergoing restructuring and commercialisation. And Azerbaijan actively supports the UK government’s Extractive Industries Transparency Initiative (EITI), which promotes transparency and accountability by demanding of governments and extractive industry companies alike, “publish what you pay, publish what you receive”.


In March 2005, Azerbaijan became the first country to issue an EITI.
However, substantial challenges for Azerbaijan still lie ahead. Achieving and maintaining the efficient and equitable management of energy revenues and ensuring they support economic diversification will be essential, as almost half of Azerbaijan’s population still lives below the poverty line today.


The investment climate has to be significantly improved to support private-sector investment. At present, noted Olivier Descamps, business group director for southeastern Europe and the Caucasus, speaking on the eve of the bank’s annual meeting, corruption is widespread and pervasive, the banking sector is weak and undercapitalised, in most areas the regulatory environment is underdeveloped and inadequate and laws and regulations are often arbitrarily enforced. Because the presidential elections of 2003 failed to meet international standards, it adds, the parliamentary elections due in November 2005 will be an important benchmark of Azerbaijan’s democratic development.


The EBRD has set out a two-year strategy for further engagement that both builds on its existing large-scale energy-sector investments and supports economic diversification, especially to micro, small and medium-sized enterprises outside the oil sector. The bank will foster policy dialogue on banking, focussing on improving competitiveness, while looking for equity investments in the sector. It will seek improvements in the investment climate through policy dialogue. And it will target sustainable