ADB Economic Diversification Support for Azerbaijan Proves Challenging

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The FINANCIAL — The Asian Development Bank’s (ADB) support for Azerbaijan has helped advance inclusive economic growth by focusing financing for infrastructure outside the developed Baku–Absheron region. But its support for diversifying Azerbaijan’s oil-based economy—the country’s biggest development challenge for nearly two decades—was insufficient, says an assessment by ADB’s Independent Evaluation Department of the bank’s $5.1 billion loan and other support for Azerbaijan since 2011.

The evaluation notes that ADB’s focus on infrastructure development until 2015 was positive but not sufficient for economic diversification and recommends that ADB’s work in Azerbaijan should focus more on building human capital through investments in skills development, health, and social protection in parallel with developing infrastructure and supporting the government’s structural reforms.

Government policies and infrastructure investments to diversify economic activity beyond oil—which account for 75% of gross domestic product and 90% of exports—only had some success in agriculture and food staples, which benefited from special development initiatives. No non-oil sectors except food staples have increased their share in total exports beyond 2% in dollar terms, and what gains have been made were largely because of the weaker manat.

“The obstacles to boosting non-oil sectors are formidable, but they must be overcome to enable the economy to become more resistant to external shocks, create jobs, and reduce large disparities between regions,” – said Mr. Kapil Thukral, the evaluation’s team leader.

Among the barriers are inadequately skilled workers and low productivity, structural problems blocking the emergence of a vibrant private sector, and tight access to credit from risk-averse banks.

“The government and ADB share the objective of diversifying the economy by boosting non-oil sectors that are likely to do best in regional and world markets. This will be vital for absorbing a rapidly growing labor force of which less than 1% is employed in the economy’s dominant oil sector. Besides, developing non-oil high-tech sectors will also improve the country’s overall competitiveness. But making progress in these directions will require considerable resources, political commitment, and analytical work,” said Mr. Marvin Taylor-Dormond, the General Director of Independent Evaluation at ADB 

The study says the focus of economic diversification should be on the tradable sectors in which Azerbaijan has a comparative advantage in export markets. But these sectors—which include manufacturing—are just beginning to be fostered. The evaluation recommends that ADB’s support for economic diversification include more analytical work to nurture some of the 11 sectors identified for development in the government’s 2016–2025 strategic road map for the economy.

ADB’s program for Azerbaijan during 2011–2017 consisted of 47 projects. This was a testing time for the country covering the end of an oil boom; falling oil prices; recession; sharp devaluations in the manat, the local currency; and a modest recovery from 2017. Energy was the largest sector supported, accounting for 42% ($2.1 billion) of total financing followed by transport, at 27% ($1.4 billion).

Notwithstanding the weak progress in its support for boosting tradable non-oil sectors—a result of ADB’s late involvement in this critical area of Azerbaijan’s economic development—the evaluation found the program successful overall. This is mainly because its largest programs, in energy and water supply, were successful. The transport program was also successful, though it was somewhat weaker.

ADB is one of Azerbaijan’s few development partners that has provided financial support for structural reforms and working with the government to improve a policy environment still hampering economic diversification. This proved valuable for securing government support for cost-recovery electricity tariffs proposed by ADB to close the financing gap in the energy sector. ADB also helped lay the groundwork on a budget framework to delink government revenue and spending from the world oil prices on which the economy is still so dependent.

“ADB’s experience in policy dialogue with Azerbaijan’s authorities on tariffs and the fiscal framework has demonstrated the virtues of listening to them, taking their concerns into account, and working with them to find solutions to move forward,” –  said Mr. Walter Kolkma, the Director for Independent Evaluation Thematic and Country Division at ADB.

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