Azerbaijan Economy

Subchapters:

Basic data
Public finances and the state budget
Banking system
Tax system

Basic data

Between 2016 and 2019, the country’s economy slowly grew by 1-2% year-on-year. In terms of the “Doing Business Report” ranking compiled by the World Trade Bank for the year 2021, Azerbaijan took a very good 34th place out of 190 evaluated countries (for comparison, the Czech Republic ranked 41st). The degree of export risk of the OECD is in the 5th group out of 7. The national debt in 2021 reached 17.7% of GDP (9.69 billion USD), for 2022 it is estimated to increase slightly to 18.5% of GDP (11, 24 billion USD). Check ebizdir for economical facts of Azerbaijan.

In 2020, Azerbaijan’s economy, like other world economies, was affected by the Covid-19 pandemic. However, the fluctuation of the oil price on world markets was key to the country’s economy. Although the price of oil was at an all-time low (15.81 USD/barrel), it was not such a shock to the economy as in 2016, which corresponds to the speed of the economic recovery. After the second oil shock in 5 years, the country is even more focused on diversifying the economy. Unemployment increased in the short term, however, according to official indicators, it will again be around 6% in 2022. The average rate of inflation reached 11.9% in the first half of 2022, it is expected to decrease to 10.1% by the end of 2022. For the years 2023-2026, a reduction in inflationary pressures is expected and the inflation rate is expected to be around 4%.

Azerbaijan experienced hot moments in 2020 while maintaining a fixed exchange rate of the Azerbaijani manat against the USD (1 USD = AZN) since 2016. The currency was kept free of devaluation in a turbulent year only thanks to significant interventions by the government and the central bank. In 2021, the situation became stable again.

Azerbaijan is the strongest economy in the South Caucasus based on the extraction and export of mineral resources, especially oil and gas. It considers diversification of the economy as its priority along with the development of non-mining sectors and attracting foreign investment outside the petrochemical sector. Prospective sectors in Azerbaijan are primarily agriculture, energy, construction, etc. From the point of view of international trade, Azerbaijan mainly exports raw materials (oil, gas, vegetables, especially tomatoes and apples to Russia) and imports products with higher added value (machinery). Income from oil and gas production creates space for the development of the local economy.

Pointer	2019	2020	2021	2022	2023
GDP growth (%)	2.2	-4.3	5.6	3.9	3.4
GDP/population (USD/PPP)	15,043.80	14,410.00	15,580.00	16,750.00	17,640.0
Inflation (%)	2.7	2.8	6,7	10.1	4.2
Unemployment (%)	5.3	7	6.4	6.1	6
Export of goods (billion USD)	18	9.8	35.8	41.7	33.4
Import of goods (billion USD)	13.7	8.7	12.4	12.8	13.4
Trade Balance (Billion USD)	8.5	2.5	9.5	10.8	9.2
Industrial production (% change)	1.8	-5	5.2	3.4	3.7
Population (millions)	10.1	10.1	10.2	10.3	10.4
Competitiveness	ON	ON	ON	ON	ON
OECD export risk	05.VII	05.VII	05.VII	ON	ON

Source: EIU, OECD, IMD

Public finance and state budget

Public finance	2021
State budget balance (% of GDP)	-1.1
Public debt (% of GDP)	50.3
Current account balance (billion USD)	6.1

Taxes	2022
AFTER	ON
F.O	ON
VAT	ON

In December 2021, the law on the state budget for 2022 was adopted by the decree of President I. Aliyev. The main source of income continues to be the oil sector (55%), transfers from the State Oil Fund will increase by 0.7% compared to 2021 (500 million AZN to AZN 1 billion). The state budget for 2022 was approved with a deficit of 3.5% of GDP (at an oil price of USD 50/barrel). Approved spending for 2022 is AZN 29.9 billion ($17.5 billion). The main sectors for spending in 2022 will be defense and national security, education, health and social protection and security. AZN billion (USD billion) will be earmarked for post-conflict reconstruction. Approved revenues for 2022 are AZN 2billion ($1billion), representing a 5.5% increase over 2021 approved revenues but a 0.6% decrease over actual 2021 revenues.

Azerbaijan’s economy grew by 5.6% in 2021, and moderate GDP growth is also expected in 2022 (3.3%). Public debt in 2021 corresponded to 50.3% of GDP. The final deficit of the state budget in 2021 was 1.1% of GDP (originally approved was 1.8% of GDP). State foreign exchange reserves in 2021 saw an 11% increase and reached AZN 1billion (USD 7.8 billion). The fixed AZN to USD exchange rate since 2017 stabilized again in 2021 after a turbulent 2020, when the rate of AZN to 1 USD was maintained only with significant government interventions.

Banking system

The banking sector in Azerbaijan currently consists of 26 commercial, mostly private banks. The only two banks with majority state ownership are International Bank of Azerbaijan (IBA) and Azer-Turk Bank. So far, IBA remains the largest financial institution in Azerbaijan by all indicators and can be considered a bank of systemic importance. The state of the banking sector in Azerbaijan has long-term negative effects on its high fragmentation, the growing number of bad debts and the absence of modern financial products.

The issue of access to financing by business entities is one of the key ones in Azerbaijan. The EBRD’s analysis shows that only less than 15% of Azerbaijani companies use some kind of credit for their activities, while in most cases it was a personal loan of the company owner. On the contrary, 77% of Azerbaijani companies that considered taking out a loan were either directly rejected by local banking institutions or were convinced of the disadvantage of such a step. The standard interest rate offered by local banks proves them right to a large extent, as it ranges from 12-15% pa for loans in foreign currency and even 24-28% pa for loans in AZN

Another problem is the high dollarization of the local economy, which significantly reduces the manat liquidity of individual banks, thereby further limiting their ability to provide credit services. The practice of so-called “family loans”, i.e. loans provided without adequate risk analysis and guarantees, is also common, which further undermines the ability of banking houses to lend funds on a market basis. Loan prices on the Azerbaijani financial market are disproportionately high even in comparison to comparable emerging markets. Due to the relatively small size of its banking sector, Azerbaijan has sufficient funds for the eventual recapitalization of systemically important banking houses. This statement is proven by the case of the International Bank of Azerbaijan, which, as a result of a long-term bad credit policy, got into problems after the devaluation. which culminated in the announcement of a technical default in May 2017. As a result of the intervention of the majority owner, i.e. the state, IBA’s management was changed and its consolidation is currently underway. The fate of economic reforms as such depends to a large extent on the successful implementation of the restructuring of the banking sector.

Tax system

(if possible use Deloitte tax guides and highlights, available on the website https://dits.deloitte.com/#TaxGuides )

The cornerstone of the Azerbaijani tax system is the Tax Act of 2000. Since 2006, the Double Taxation Avoidance Agreement has been in force between the Czech Republic and Azerbaijan.

The following types of taxes exist in the country:

Personal Income Tax (from 14%) – a progressive tax to which all natural persons and residents are subject.
Corporate profit tax (Corporate profit tax, 20%) – a company based in Azerbaijan pays this tax on the income it has in the country and abroad. A permanent establishment of a foreign entity is also a taxpayer, in which case only income realized on the territory of Azerbaijan is taxed. The income of a non-resident legal entity that does not have a permanent establishment in Azerbaijan is taxed at the source of payment without the possibility of applying deductible items.
Value Added Tax (VAT, 18%.) – 3 business operations with VAT – exempt operations, zero-rated taxed operations and fully taxed operations. Imported goods are subject to taxation, except for certain types of plant and equipment that create or expand the capital of the business. Certain types of activities in the oil and gas industry have a special, simplified tax regime.
Excise Tax – this tax applies to beer, alcoholic beverages, motor vehicles, yachts, petrochemical products, cigarettes and tobacco products.
Assets Tax (1% PO)
Land Tax – varies depending on the size, location and use of the land.
Road Tax – 0.02 AZN per 1 liter of fuel.
Mineral Resources Tax
Simplified Tax – applicable to non-VAT payers with gross sales not exceeding 120,000 AZN per year, who do business in relevant tax-defined areas.