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Akbar Novruz

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Azerbaijan's Economy Minister signals that strong foundations are no longer sufficient.

Saying the quiet part loud, the setting was a policy forum, with the audience composed of tax administrators and economic technocrats. But the message Economy Minister Mikayil Jabbarov delivered in Baku last week, at a forum titled 'A Look into the Future of the Tax System: A New Governance Model and Data-Driven Decisions', carried a frankness unusual for ministerial addresses in the region. Azerbaijan's economy, he said plainly, is not growing as fast as it should, and that is not acceptable.

In short, Azerbaijan is rich on paper. Its economy tells a different story.

It came at the end of a year in which real GDP growth slowed sharply to 1.4 percent, down from 4.1 percent in 2024, a deceleration that international institutions had anticipated but that nonetheless landed with some force. For a country that holds combined central bank and sovereign fund reserves of approximately $85 billion, maintains low public debt, and sits astride some of the most strategically significant energy and transit corridors in Eurasia, growth of 1.4 percent is, as Jabbarov put it, not a reflection of what the country is capable of.

The remark has since prompted debate among economists and policymakers about what is holding Azerbaijan back and what a realistic path to faster, more durable growth would look like.

Not fast enough

Azerbaijan's macroeconomic foundations are, by most conventional measures, genuinely solid. The State Oil Fund of Azerbaijan (SOFAZ), the sovereign wealth vehicle through which hydrocarbon revenues are managed and invested, has seen combined reserves with the Central Bank grow from $70 billion at the end of 2024 to $85 billion by the end of 2025. Public debt remains low by regional and global standards. The fiscal framework is conservative, and the country has maintained a fiscal surplus despite slowing growth.

The problem is not the stock of resources. It is the flow. After expanding by 4.1 percent in 2024, driven by a 6.2 percent surge in non-hydrocarbon GDP, with construction, communications, transportation and hospitality all contributing, the economy shifted gears sharply in 2025. Hydrocarbon output fell, the boost from elevated public investment in reconstruction faded, and softer global energy prices produced knock-on effects across the broader economy. The result was a growth of 1.4 percent for the year.

"The current pace of economic growth does not fully reflect the country's real economic potential and does not satisfy us," said Economy Minister Mikayil Jabbarov while speaking at the forum on March 5.

Looking ahead, the forecasts from international institutions are not alarming, frankly. The IMF projects GDP growth of 2.1 percent in 2026, stabilising at around 2.5 percent over the medium term. The European Bank for Reconstruction and Development and the World Bank offer similar trajectories, the EBRD forecasting 2 percent for 2026, the World Bank 2.4 percent. S&P Global is more cautious, projecting 2 percent annually across 2025-2026. None of these figures are cause for crisis, but none of them suggests an economy operating anywhere near what Jabbarov described as its real potential.

The core tension in Azerbaijan's economic story is not new. Hydrocarbon revenues remain the dominant source of budget income and foreign exchange. The country holds substantial reserves, approximately 7 billion barrels of oil and 1.7 trillion cubic meters of natural gas, but production at the Azeri-Chirag-Gunashli block and other major offshore deposits has been in gradual decline for several years. That decline is structural, not cyclical, and no amount of policy reform at the ministerial level will reverse the underlying geology.

The consequence is a widening gap between the performance of the oil and gas sector, which contracted by 1.8 percent in the first eleven months of 2025, and the non-oil economy, which grew by 3.2 percent over the same period. The non-oil sector's share of GDP has risen from 58.3 percent in 2018 to 71.5 percent in 2025, a meaningful structural shift. Between 2021 and 2025, non-oil GDP grew at an average annual rate of 5.9 percent in real terms. But the non-oil sector has not yet grown fast enough or large enough to compensate for the drag from declining hydrocarbon production, particularly in years when energy prices are softer. Perhaps the current strategy is focused on this - at least, ever since the past year and a half period.

The IMF's February 2026 Article IV mission put the diagnosis succinctly: 'declining hydrocarbon reserves' and 'weaker domestic demand' are the defining constraints on Azerbaijan's medium-term growth outlook. Addressing the first requires diversification at a pace and scale that has not yet been achieved. Addressing the second requires structural reforms that go beyond tax administration.

What was Jabbarov's forum actually about?

It would be a misreading to interpret the minister's remarks purely as an expression of dissatisfaction. The forum itself was substantive, and Jabbarov used it to announce a series of policy directions that sketch the outlines of the government's response.

On the tax side, revenues reached 16.4 billion manat ($9.65 billion) in 2025, the highest level in Azerbaijan's recent fiscal history. Tax revenues accounted for 12.7 percent of GDP, up 3.4 percentage points from 2018. In the non-oil and gas sector specifically, tax revenues reached 13 percent of non-oil GDP, with the private non-oil sector now accounting for 76 percent of total tax receipts from the non-oil economy. Employment formalisation has advanced too: the share of labour contracts in the non-oil private sector rose from 38.5 percent in 2019 to 54.4 percent in 2025, with the number of formal contracts exceeding one million for the first time.

These are structural improvements rather than headline growth numbers, and they matter for the longer trajectory. A broader tax base, greater formalisation, and improved fiscal administration all reduce the economy's vulnerability to hydrocarbon price swings. But the minister was also explicit about the next phase of reform. A new policy package covering 2027-2030 is being prepared under the 'Azerbaijan 2030' development vision, focused on building an export-oriented non-oil economy, improving access to credit for businesses, and making more active use of the Alat Free Economic Zone and the country's transit infrastructure.

One of the more genuine threads running through the forum debate concerns the business environment, particularly for small and medium-sized enterprises. SMEs are the conventional engine of economic diversification, but access to finance remains constrained, competition in some domestic markets is limited, and certain sectors remain insufficiently liberalised to attract the private investment needed to drive faster growth.

Foreign direct investment has been moving in the right direction: investments in fixed capital from foreign sources grew by 24 percent in 2025, while investment in the non-oil private sector rose by 11.1 percent. In the non-oil industry alone, investment growth reached 26 percent. Jabbarov pointed to the country's strategic geographic position, its transport and logistics infrastructure, and the mechanisms of the Alat Free Economic Zone as key instruments for sustaining and accelerating this trend. The planned introduction of more flexible tax arrangements for ICT companies, startups, and highly qualified specialists signals an effort to move up the value chain, away from resource extraction and toward knowledge-intensive activity.

Regional imbalances remain a less-discussed but significant constraint. Economic activity is heavily concentrated in Baku and its surroundings, while the country's regions, with their potential in agriculture, manufacturing, and tourism, remain underleveraged. The peace agreement with Armenia and the planned extension of the Middle Corridor through Armenian territory may eventually open new economic geographies within Azerbaijan itself, but that story is still in its early chapters.

The broader picture that emerges from Jabbarov's remarks, and from the data surrounding them, is of a country that has built genuinely impressive macroeconomic foundations, reserves, low debt, a growing non-oil tax base, and improving formalisation, but has not yet translated those foundations into the kind of sustained, diversified growth that would reduce its structural dependence on hydrocarbons.

The IMF's February 2026 mission captured the challenge well: Azerbaijan is 'appropriately focused on diversification,' but realising that focus requires deepening capital markets, increasing labour productivity, reducing the state's footprint in the economy, and tackling the informality that still persists in parts of the labour market. These are medium-term tasks, not ministerial announcements.

What Jabbarov said last week was, in essence, that the government knows the gap between potential and performance exists, and that closing it is now the central objective of economic policy. The admission itself is the easy part. Baku has the reserves, the location, the infrastructure, and now, apparently, the political will to acknowledge that none of it is working quite hard enough. What it has not yet demonstrated is the capacity to turn that acknowledgement into the kind of structural change that diversification actually demands. That is the test the 2027-2030 package will face. And it is a test that no forum, however well-themed, can pass on the government's behalf. As in most resource-dependent economies, navigating the transition away from hydrocarbons, the harder work has always been execution.