Azerbaijan’s path: from oil wealth to digital economy Caliber.Az review

Over the past three decades, Azerbaijan has shaped its economic policy based on its significant oil and gas potential and its advantageous geographical location at the crossroads of Europe and Asia. This foundation has enabled the country to successfully grow its foreign exchange reserves, maintain macroeconomic stability, and increase investments.

During discussions on the draft “State Budget for 2026” at a plenary session of the Milli Majlis (parliament), it was noted that the government’s economic policy continues to focus on these three strategic objectives. However, in the realities of the 21st century, much greater effort is needed to shift investment flows towards the goals of the Fourth Industrial Revolution (4IR), as well as the digitalisation of the economy, the “green” transition, and the development of the agro-industrial complex (AIC).

“Azerbaijan’s economic policy is aimed at achieving three strategic goals: ensuring macroeconomic stability, maintaining the resilience of strategic reserves, and sustaining high rates of economic growth,” Finance Minister Sahil Babayev said on December 2 in parliament. “Although these three goals can, to some extent, conflict with each other, and it is difficult to develop them all to the same maximum degree, we strive to ensure a connection between them and build our policy around finding the right balance.”

For many years, Azerbaijan’s economic development has been underpinned by its significant energy and logistics potential, along with stable macroeconomic indicators, a trade and balance of payments surplus, resilient monetary and fiscal policies, and substantial foreign exchange reserves. These strengths have been consistently recognised in reports by international rating agencies and donor organisations. Despite global crises and periodic economic downturns, Azerbaijan has largely maintained this enviable stability over the long term.

Azerbaijan has maintained strong macroeconomic stability even amid external shocks. Notably, international rating agency Moody’s recently upgraded the country’s sovereign credit rating to Baa3, giving it an investment-grade status. This reflects the resilience of key macroeconomic indicators, including keeping inflation close to the target range (4 ± 2%), maintaining a positive trade balance and current account, and sustaining fiscal surpluses, low public debt, and sound monetary and fiscal policies.

Despite global crises in recent years, Azerbaijan has steadily increased its strategic foreign exchange reserves, which reached $82.5 billion between January and October—up 16.2%. These reserves remain well above international benchmarks, covering 37 months of imports and exceeding the country’s external public debt by roughly 16 times. During the same period, the Central Bank of Azerbaijan’s reserves rose 4.2% to nearly $11.434 billion, significantly enhancing the bank’s ability to manage money supply sterilisation and stabilise the national currency.

Azerbaijan’s long-term success in steadily accumulating reserves and maintaining macroeconomic stability has largely been driven by its energy export and transit potential. Over the past decades, the energy sector has attracted the majority of foreign investment. Notably, following the signing of the “Contract of the Century,” around $110 billion in foreign investment flowed into Azerbaijan’s energy sector between 2000 and 2020.

As GDP and state budget revenues have grown, the country has gained greater capacity to expand public investment. As Finance Minister Sahil Babayev emphasised, the 2026 state budget allocates a significant volume for investment: “The share of investment-oriented expenditures in the state budget stands at 34%, which is above the global average and higher than in other post-Soviet countries.”

Most public funding has been directed towards large-scale infrastructure, social, housing, and other projects, particularly in the revival of the Karabakh and East Zangezur regions. Over the past five years, more than 20 billion manats ($11.7 billion) of budgetary investment have been directed to these areas, with an additional 13.5 billion manats (approximately $8 billion) planned for 2026–2029.

The growth of Azerbaijan’s state budget and its capacity to independently fund major infrastructure projects is a positive achievement. However, Finance Minister Sahil Babayev has emphasised that in the coming years it will be crucial to reduce the state’s dependence on oil and gas and provide targeted support for the non-oil sector.

The non-oil sector has become increasingly important to the domestic economy over the past fifteen years: its share of GDP rose from 49% in 2011 to 68% by the end of 2024. The Finance Minister noted that in 2026, the goal is to raise non-oil revenues in the consolidated state budget to 63%, increasing further to 70% by 2029.

Azerbaijan also faces the challenge of significantly expanding non-oil exports, which will require increased foreign direct investment in high value-added manufacturing and high-tech industries.

Regarding domestic exports, in January–October 2025 their total volume amounted to $17.065 billion, a 6.4% decline. This reduction was driven by lower oil exports, while non-oil exports grew by 6.6% to $2.99 billion. Nevertheless, current non-oil export figures cannot be considered satisfactory, both in comparison to oil and gas exports and in terms of overall volume. The government has set a target of raising total non-oil exports to $5.3 billion by the end of 2026, but given current trends, achieving this goal will be challenging.

These trends underscore the need to boost investment in the non-oil sector. Deputy Minister of Economy Sahib Alakbarov noted that total investments in Azerbaijan’s non-oil sector over the past 20 years reached $213 billion. While substantial, the share of foreign direct investment (FDI) remains limited, particularly in industry, agriculture, transport, telecommunications, and pharmaceuticals, and is practically negligible in IT and Industry 4.0 sectors.

For comparison, in 2024, FDI in Azerbaijan’s economy amounted to $7.046 billion, while investment repatriation (the return of foreign assets, profits, or capital to the investor’s home country) reached $7.3 billion. However, the most concerning fact is that 79.3% of FDI inflows went to the oil sector. This means that all non-resource sectors of the domestic economy were able to attract only about one-fifth of foreign capitalisation, roughly $1.4 billion, which is very modest.

One of the few sectors experiencing a recent boom in FDI is renewable energy (RE). The vast majority of projects in Azerbaijan’s RE sector are financed by foreign investment, and in the next couple of years, the total is expected to exceed $2.8 billion. Thanks to the construction of eight industrial-scale solar and wind power plants, the country’s energy system is projected to expand by an additional 2 GW by 2027, and potentially even more “green” capacity. This success in Azerbaijan is largely due to the implementation of international best practices and the creation of an advanced regulatory and administrative framework: in essence, the RE sector operates under a transparent business climate modelled on the “Contract of the Century.”

It is extremely important to expand national expertise in developing “green” energy, applying the standards established in this sector to other non-oil industries, with a focus on demonstrating and promoting the de-monopolisation of production. Equally important is the creation of a regime of fiscal incentives for investors who invest in Fourth Industrial Revolution (4IR) segments, industrial digitalisation, and the software business. This would help increase the profitability of knowledge-intensive industries, making them more attractive for foreign direct investment (FDI).