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Akbar Novruz

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In its latest assessment, the Asian Development Bank (ADB) has painted a cautiously optimistic picture of Azerbaijan’s economic trajectory, with falling inflation, a manageable budget deficit, and opportunities for private sector-led green growth—provided crucial reforms are implemented.

According to ADB forecasts, Azerbaijan’s inflation rate, which dropped significantly from 8.8% in 2023 to 2.2% in 2024, is expected to inch upward to 4.2% in 2025 before stabilizing at 3.5% in 2026. The sharp decline in 2024 was largely driven by falling prices in key consumer categories, particularly food, which saw inflation fall from 9.6% to just 1.3%. Similar drops were noted in non-food goods (from 8.4% to 1.6%) and services (from 8.2% to 4.0%).

However, the report cautions that this disinflationary trend has not been entirely steady. An adjustment in fuel prices in June 2024 prompted a slight rebound in inflation, lifting the annual rate from 0.6% in May to 2.2% by December. This serves as a reminder that while global trends—like a drop in food prices—have eased inflationary pressure, domestic variables such as energy pricing continue to shape the inflation outlook.

Revenue growth and controlled deficits

Looking ahead, the ADB forecasts that Azerbaijan’s budget revenues in 2025 will total 30% of GDP, with tax revenues accounting for 12%, additional non-tax revenues for 7%, and transfers from the State Oil Fund (SOFAZ) for 11%. Expenditures are projected to slightly outpace revenues, rising to 32% of GDP, resulting in a moderate budget deficit of 2.4% in 2025—expected to shrink to 2.0% in 2026.

Spending priorities also reflect a balanced approach. Current expenditures will constitute 19% of GDP, while capital investments will take up 11%. Notably, social protection and support programs are projected to increase by 8%, representing 12% of total government spending, with state investment comprising 2% of GDP.

Yet, even as the macroeconomic indicators trend positively, ADB’s report underscores the need to address deeper structural challenges to unlock long-term growth—particularly through the private sector.

Azerbaijan’s strategic role as a regional transport hub in the Middle Corridor offers a natural gateway for private sector expansion, particularly in digital technologies and green energy. But to fully capitalize on these opportunities, the report stresses the urgency of reforming state-owned enterprises (SOEs), especially in the energy sector, which currently dominate key areas of the economy and crowd out private initiatives.

ADB recommends corporatizing SOEs and enabling them to access finance independently of sovereign guarantees. The adoption of environment, social, and governance (ESG) standards is also highlighted as crucial to enhance competitiveness and sustainability.

Additionally, public-private partnerships (PPPs) are seen as a promising but underdeveloped mechanism. While Azerbaijan adopted a new PPP law in 2022, ADB notes that its implementation remains in its early stages. Identifying viable projects and developing suitable financial structures will be key to advancing this framework.

Are women’s economic participation a missed opportunity?

The report also draws attention to gender gaps in the private sector. Although women are heavily involved in agriculture, only 24% are engaged in entrepreneurship. ADB suggests that increasing women's access to training, financial resources, and business networks can help drive broader economic inclusion and growth.

As Azerbaijan moves toward economic diversification and green development, ADB’s findings highlight a dual challenge: maintaining macroeconomic stability while fostering a vibrant, inclusive private sector. Inflation is under control for now, and fiscal policy remains disciplined. But the next phase of growth may depend less on oil and gas revenues and more on whether Baku can create space for innovation, entrepreneurship, and sustainable partnerships.

With targeted reforms, Azerbaijan could not only consolidate its role as a regional energy and logistics hub, but also emerge as a leader in sustainable, inclusive economic transformation.