Azerbaijan’s investment attraction strategy "Beyond the oil"

Azerbaijan, with its considerable energy potential and favourable geographical location at the junction of Europe and Asia, has been a leader in the region in attracting foreign direct investment (FDI) for three decades.

In order to maintain investment attractiveness in the realities of the 21st century, the country is implementing large-scale economic reforms. Industrialisation is underway with reliance on industrial clusters and FEZs with preferential treatment for residents. With active attraction of external capital, the country is developing "green" energy, digitalising the economy and financial sector.

According to World Bank estimates, in 2023 the growth of non-oil sector capitalisation was driven by state investments, mainly in the reconstruction of the Karabakh region. Apparently, this trend will continue this year: according to the State Statistics Committee, in the first quarter of 2024, fixed capital investments increased by 4 per cent.

The stability of macroeconomic parameters, the surplus balance of payments and trade, high level of gold and foreign exchange reserves over the years contributed to the growth of Azerbaijan's investment attractiveness at the global level and was confirmed in the reports of international rating and donor organisations.

In the post-industrial era, successful and sustainable economic growth is largely linked to the ability to attract capital in advanced digital and green technologies, to introduce corporate governance expertise into its economic system, to form sustainable mechanisms of public-private partnerships and a regime of benefits and preferences to optimise the process of attracting investors. Moreover, along with the growth of external capitalisation, the country gains access to advanced technologies, including modern equipment and technologies in the form of patents, licences, know-how, and staff development programmes.

In recent years, the efforts of the Azerbaijani government have been directed in this direction, which is confirmed by the assessments of many international rating and donor structures. Thus, over the past decade and a half, Azerbaijan has twice taken leading positions in the Doing Business 2009 and Doing Business 2019 reports in terms of improving the business environment and stimulating investment attraction opportunities, and was named one of the 20 most reforming countries in the Doing Business 2020 report.

As follows from a report by the Eurasian Development Bank, Azerbaijan ranked fourth among CIS countries in attracting FDI in 2022. In the FDI Standouts Watchlist research published in January this year, based on the International Monetary Fund and fDi Markets monitoring data, Azerbaijan ranked seventh among the world's top 10 countries in terms of FDI attraction potential in 2024.

The growth of the country's investment attractiveness is evidenced by the statistical data for 2023: thus, last year FDI in the country's economy increased by 6.1 per cent to over $6.658 billion, while in the non-oil sector the growth rate was 11.1 per cent, which indicates the attractiveness of our country's non-resource industries for global capital. These positive trends were generally maintained in the first quarter of the current year: according to the State Statistics Committee, investments in fixed capital exceeded 3.809 billion manats ($2.24 billion) with a 4 per cent growth, with investments in the non-oil sector increasing by 4.8 per cent.

The World Bank's (WB) April report on the economy of Europe and Central Asia "Unlocking the Power of the Private Sector", published recently, says that in 2024, Azerbaijan's non-oil sector will continue to grow steadily (at least 4 per cent) due to active financing of the construction sector, which is facilitated by state investments in the reconstruction of liberated territories. According to the report, in general, gross investments in fixed assets will increase by 5.4 per cent in 2024.

Meanwhile, the recently released April report of the Asian Development Bank (ADB) - Asian Development Outlook (ADO) in 2024 also forecasts growth in public investment, which will remain the driving force behind the total volume of investment in the forecast period. At the same time, ADB experts believe that declining oil production and weakening oil prices pose certain risks to planned public investments.

Therefore, Azerbaijan currently faces a key task to strengthen consistent steps to increase the investment attractiveness of the domestic non-oil sector by improving the parameters of the business climate. To this end, fiscal and customs legislation and administrative rules have been progressively liberalised in recent years, and the Competition Code (CC) has recently been adopted, also aimed at encouraging investment activity by strengthening the fight against monopolisation of certain areas of the economy, suppressing unfair competition, etc. There are fifty agro-parks and about two dozen industrial zones and neighbourhoods in the country, and an industrial and logistics Alat FEZ has been created: residents of these clusters are given extensive tax and utility preferences, and these structures play a key role in attracting FDI into the domestic non-oil sector.

The most important step to increase the attractiveness of the investment environment in the country should be the imminent adoption of the Strategy for the Encouragement of Foreign Direct Investment: the document is being developed by specialists of the Ministry of Economy and the Agency for the Promotion of Export and Investment of Azerbaijan (AZPROMO) and is aimed at implementing the best international practices in this area.

The long-term goals of the strategy include improving the investment climate and increasing the efficiency and return on investment by upgrading investment mechanisms and tools. It is also necessary to increase the share of portfolio investors (including transnational corporations) to attract FDI mainly in the real sector of the economy, including the active use of public-private partnerships in the process of increasing the capitalisation of the domestic economy. The objectives of the strategy include the creation of a favourable and competitive environment for FDI with a focus on the implementation of effective high-tech export-oriented projects with a high level of added value.

For the same purpose, an identification fund is being formed in the country with the support of the Innovation and Digital Development Agency (İRİA) under the Ministry of Digital Development and Transport of Azerbaijan. The purpose of the new fund is to minimise the risks associated with investing in startups and other areas of the IT sector, as well as to support the activities of venture capital, business angels, etc. The state-supported identification fund acts as an intermediary, providing support for both startups and investors in the early stages of investment, which in the long term contributes to the development of the innovation sector, creating a favourable environment for investment in the digitalisation of our country's economy.

The Entrepreneurship Development Fund (SIF) under the Ministry of Economy is also working on similar tasks, having developed its own ESG (Environmental, Social and Corporate Governance) model following international standards. Currently, the Foundation has prioritised co-investment in "green" projects, where a preferential 5 per cent annual loan rate is applied. In particular, SİF has already supported the implementation of solar panels at a poultry farm, the development of charging infrastructure stations, and an environmentally important project for the production of building materials using recycled materials.