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Country Commercial Guides FY 2000: Azerbaijan Report prepared by U.S. Embassy Baku, released July 1999 Note*

CHAPTER II. ECONOMIC TRENDS AND OUTLOOK

Azerbaijan's economic future depends on how the GOAZ proceeds with economic reform and uses the revenue from its energy resources. Despite its oil wealth, and a flourishing trading sector, there has been slow progress toward a market economy. Under a three-year agreement with the IMF signed in December 1996, the GOAZ is continuing the policies of fiscal and monetary austerity first adopted in 1995. As a result, inflation fell and the Azeri Manat (AZM) was relatively stable at 4000 AZM to the US$ until recently when it was devalued. The new exchange rate as of July 19, 1999 was US$ 1 = 4300 AZM. Reflecting this change, prices for imported food products have risen 10-15%. As an adjustments of salaries to the new prices has not yet taken place, living standards have dropped by 10%.

In 1998, GDP growth increased by 10%, however, growth is projected to be no more than 5% for 1999 and will be distributed as follows: 28% from industry, 18.8% from transport and communication, 10.5% from construction, 9.7% from agriculture, and 6.4% from trade and services. . Azerbaijan's foreign trade for 1998 had a negative balance of US$471 million. During the first 5 months of 1999, as the result of industrial stagnancy and a decline in exports, the negative balance was US$144 million and could reach US$500 million by the end of the year.

International financial institutions have opened credit lines totaling US$1.5 billion to Azerbaijan for 1999, amounting to 37.4 percent of their GNP, to be used for financing various investment projects in Azerbaijan. On July 14, 1999, EBRD allocated an additional US$1.5 million line of credit to Azerdemiryolbank for the development of small and medium sized enterprises The minimum loan amount will be US$50 thousand, and the maximum US$150 thousand. The maximum credit term will be five years with an annual interest of 25% depending on the commercial risk. Enterprises financed by the EBRD credit must be 51% Azeri owned. EBRD will continue to work with other Azeri banks to promote economic growth.

Key in their switch to a free-market economy has been the move toward privatization, which began in 1996. The program calls for the privatization of 70% or more of all state-owned enterprises (SOEs). Implementation of the privatization effort is the responsibility of the State Property Committee. Between the period May 1997 to December 1998, more than 20,600 companies were privatized, and proceedings started for many others.

Agricultural potential is substantial. Of the non-oil sectors, agriculture is considered to be the most important, contributing about 30% to Azerbaijan's annual GDP and employing between 34-38% of the population. This is because parts of Azerbaijan have good weather conditions and fertile soil that are favorable to many different types of crops, including: fruits (apples, cherries, grapes, olives, lemons, persimmons, melons, raspberries, strawberries, currants, plums, peaches, pears, and pomegranates); vegetables (tomatoes, potatoes, carrots, beets, cabbage, cucumbers and onions); grains (wheat, maize, barley); tea; nuts; tobacco; and cotton. This growing environment is appreciably enhanced by an extensive network of canals and pipelines stretching almost 25,000 miles providing needed irrigation to more than 6.5 million hectares of arable land. However, this irrigation system was constructed during the time of the old Soviet collective farming system and, while still functioning, many parts are now in serious disrepair. Many of the collectives and state-owned farms have since been privatized under the Law on Land Reform that went into effect in 1996. As a result, 98% of the farmland is now in private hands, and is comprised of more than 20,000 small farms.

Livestock and dairy products are another important sector contributing to the Azeri economy. Small private farms produce cattle, sheep, goats, pigs and poultry. A report by the U.S. - Azerbaijan Chamber of Commerce places 82% of Azerbaijan's meat production and 94% of its milk production coming from the private sector. Fishing is another significant sector, with 90% of the world's caviar coming from the Caspian Sea.

Farm production has declined steadily despite the country's tremendous agricultural potential. Today, many of the food products consumed by Azeri's are imported. They import 30% of all meat products, 95% of vegetable oil, 45% of milk, and 99% of their sugar. This is principally due to the lack of an adequate agricultural infrastructure. Agricultural output could be expanded dramatically with the right combination of government policies, farm management, modern inputs and marketing techniques.

Energy remains the keystone of Azerbaijan's economic future. In this regard, oil production is projected to peak between 1.5 and 2 million barrels per day between the years 2010 and 2015. However, despite its potential oil wealth, it still faces several years of tight finances, as the GOAZ will not receive revenues from Production Sharing Agreements (PSAs) until costs of initial outlays are recovered, a fact that may preclude substantial GOAZ revenues (other than signing bonuses) until well into the next decade. Recent discoveries of major offshore gas deposits will be used both to supply Azerbaijan's energy needs and to generate needed revenue from exports to Turkey and Eastern Europe.

Outside of oil exploration and production, the strongest prospects in the economy are providing supplies and services to support the oil and gas industries. Baku's expatriate community and a relatively small moneyed class of Azerbaijani's are also creating demand for recreation, entertainment, and retail services in the capital.

The national infrastructure, built in the Soviet period, is in poor condition. Since independence there has been almost no public investment or maintenance of public infrastructure. Roads are inadequate and deteriorating. The electrical generation and distribution system is in poor condition. Eighty percent of arable land was irrigated, but the irrigation system is virtually inoperable. Baku experiences shortages of gas, water, and electricity. Elsewhere in the country, the electricity supply is poor, and gas supply is almost non-existent. Public utilities are financially crippled by their inability to collect payment from their customers.

Y2K is not perceived to pose any significant problems for Azerbaijan. Most government and private institutions do not depend on integrated systems. As they are not connected to networks, they will not be subject to serious setbacks in the event problems do occur. Because the few networks that are in place tend to be newer, they are generally Y2K compatible with little need for upgrade.

Azerbaijan's internal economy should not be significantly affected as the distribution of civilian goods and services relies very little on technology as a means by which to conduct business and, even then, does not rely on integrated systems to any great extent. Credit card transactions and point-of-sale systems are rarely found in Baku. Likewise, automated money transfer systems and ATM machines are few in number in Azerbaijan. In addition, few homes have personal computers Emergency civilian services will not be affected by the Y2K bug as local police and fire stations are at best only partially dependent on technology and, therefore, do not rely on systems integration. Water systems in Azerbaijan are fairly dated and, for the most part, run manually with analog monitoring and distribution systems.

Computers at hospitals throughout the country are generally out-dated, stand alone units primarily used by doctors for personal records and notes. The National Ministry of Health (NOH) requires all medical records be maintained in hard copy in NOH central archives so their contents can be accessed telephonically by any medical facility throughout the country. The same national standard holds true for pharmaceutical prescriptions. Such record must be kept in hard copy by patients themselves or by the prescribing doctors. The sectors thought to be most venerable to Y2K are banking, telecommunications, and transportation. However, most banks now appear they will be ready to meet the challenge. The fact that no national computerized banking system exists lessens the prospect of any significant Y2K problem. To further assure the effects of the new millenium are minimal, the National Bank of Azerbaijan has issued instructions to all financial institutions to establish special task forces to identify and resolve any potential Y2K problems.

The National Bank has recently moved into a new building and is purchasing a Y2K compatible systems network. The International Azerbaijan Bank is already using a 4-digit year field and thus should experience no problems.

The oil industry has been preparing for the new millenium for some time and it's generally felt that oil and gas production will not be hampered to any degree. In this regard, a large number of resources have been allocated to ensure that no problems will materialize. The AIOC set aside $9 million for Y2K evaluation and upgrades, and is expected to be 98-99% compliant by January 1.

All of the western airlines flying in and out of Baku indicate they will be fully Y2K compliant by the end of the century. However, there is voiced-concern that Baku's air traffic control system (AZANS) will not be compliant by that time and that flights will not be taking place during the first week in January 2000. While AZANS is in the process of upgrading its equipment and hopes to have it completed and operational by December 1999, not much time will remain in which to test and place the new system "on-line."