Azerbaijan is an economy in transition in which the state continues to play a dominant role. It has important oil reserves and a significant agronomic potential based on a wide variety of climatic zones. During the late 1990s, in cooperation with the International Monetary Fund (IMF), Azerbaijan pursued a successful economic stabilization program, with annual growth exceeding 10% since 2000. In 2007 Azerbaijan's gross domestic product increased by 24.7%, with growth in 2008 estimated at 18.6%. Increases in oil production have largely driven this rapid growth as the oil sector accounted for 52.8% of GDP in 2007 and more than 50% again in 2008. Output expansion has been largely driven by oil-sector foreign direct investment (FDI) and related spillover effects in the construction and transportation sectors, although there have also been substantial gains in agriculture. Inflation remains a major risk that could accelerate in the context of further increases in fiscal spending, high oil prices, and an inflexible exchange rate, although factors attributable to the global financial crisis may mitigate some of the inflationary trend. Importantly, the higher inflation also reflects customs restrictions that are in place due to supply constraints that limit import competition and monopolies that continue to control many sectors of the economy. The national currency, the manat, is artificially stable and was allowed to appreciate against the dollar by 6.1% in 2005, 5.4% in 2006, and 3.4% in 2007.

The 2009 consolidated state budget sets spending at $14.8 billion, an increase of about 16% over 2008. More than 40% of revenues will be provided by transfers from the State Oil Fund (SOFAZ), based on an estimated oil price of $70 per barrel. The IMF has expressed concern about the impact on inflation and macroeconomic stability as well as governance if the capital budget is not well managed. The State Oil Fund was established as an extra-budgetary fund to ensure macroeconomic stability, transparency in the management of oil revenue, and the safeguarding of resources for future generations. All oil revenue profits from the development of new oil fields now flow into SOFAZ, and are held offshore. The State Oil Fund continues to play a critical role in promoting macroeconomic stability and in dampening the impact of massive energy revenues upon the economy. SOFAZ currently has assets in excess of $10 billion, with assets expected to grow to approximately $12 billion in 2009. In 2007, the United Nations awarded SOFAZ a public service award for its transparency, accountability, and responsiveness in the public sector. Nevertheless, SOFAZ's sterilization effect is limited since it does not cover SOCAR, the State Oil Company. Both the IMF and the World Bank continue to emphasize the need to coordinate the budget planning process to integrate a medium-term spending framework with financing plans and the government's broader oil-revenue management strategy.

Azerbaijan has made efforts to modernize and reform its economy. The World Bank named Azerbaijan “Top Reformer” in its “Doing Business 2009” report, reflecting its significant efforts to simplify its domestic regulatory requirements. The government has undertaken regulatory reforms in some areas, including substantial opening of trade policy, but inefficient public administration, in which commercial and regulatory interests are co-mingled, limits the impact of these reforms. The government has largely completed privatization of agricultural lands and small and medium-sized enterprises. Azerbaijan is still plagued by an arbitrary tax and customs administration, a weak court system, monopolistic regulation of the market, and corruption.

Azerbaijan is considered one of the most important spots in the world for oil exploration and development. Proven oil reserves in the Caspian Basin, which Azerbaijan shares with Russia, Kazakhstan, Turkmenistan, and Iran, are comparable in size to North Sea reserves several decades ago.

Azerbaijan has concluded 21 production-sharing agreements with various oil companies. Azerbaijan celebrated first oil for the Baku-Tbilisi-Ceyhan (BTC) pipeline in May 2005, and the official completion ceremony was held in Turkey in July 2006. The BTC pipeline is now operational and has a maximum capacity of one million barrels per day. A parallel Baku-Tbilisi-Erzurum gas export pipeline opened in September 2006. In October 2008, the first tanker carrying oil from Kazakhstan’s Tengiz field departed for Azerbaijan.

Environmental Issues
Azerbaijan faces serious environmental challenges. Soil throughout the region was contaminated by DDT and toxic defoliants used in cotton production during the Soviet era. Caspian petroleum and petrochemicals industries also have contributed to present air and water pollution problems. Several environmental organizations exist in Azerbaijan, yet few funds have been allocated to begin the necessary cleanup and prevention programs. Over-fishing by poachers is threatening the survival of Caspian sturgeon stocks, the source of most of the world's supply of caviar. The Convention on International Trade in Endangered Species (CITES) has listed as threatened all sturgeon species, including all commercial Caspian varieties. CITES imposed a ban on most Caspian caviar in January 2006, but lifted it in January 2007.

GDP (2009 projected): $43.65 billion (Government of Azerbaijan).
GDP real growth rate (2007): 24.7%; (2008 est.): 18.6% (International Monetary Fund, Government of Azerbaijan).
Per capita GDP (2009 projected): $7,143. (Government of Azerbaijan).
Inflation rate (2008): 20.2% (Government of Azerbaijan).
Unemployment rate (est.): 15%-20%.
Natural resources: Petroleum, natural gas, iron ore, nonferrous metals, alumina.
Agriculture: Products--cotton, tobacco, grain, rice, grapes, fruit, vegetables, tea, cattle, pigs, sheep, goats.
Industry: Types--petroleum and natural gas, petroleum products, oilfield equipment, steel, iron ore, cement, chemicals, petrochemicals.
Trade: Exports--$1.557 billion (2008, first quarter), $6.1 billion (2007): oil and gas, chemicals, oilfield equipment, textiles, cotton. Imports--$1.214 billion (2008, first quarter), $5.1 billion (2007): machinery and parts, consumer durables, foodstuffs, textiles. Major trade partners--Italy, Russia, Turkey, Israel, U.S., Iran, other EU, and other countries formerly part of the Soviet Union. (Government of Azerbaijan)