Azerbaijan’s New Macroeconomic Reality: How to Adapt to Low Oil Prices

Abstract

Despite the accumulation of significant revenues from crude oil exports and remarkable economic growth over the past 15 years, Azerbaijan’s economy has been hit hard by the recent drop in global oil prices and has experienced a period of painful economic adjustments. The government has attempted to change the traditional distributive approach that is based largely on oil revenue distribution in favor of a new earningoriented model that is expected to benefit from a robust non-oil sector. It is clear that the oil price slump caught the government off guard and poorly prepared to cope with the new low price environment. Clearly, it will be difficult to build a new model of development quickly and thoroughly in a short period of time. While the availability of the state oil fund reserves mitigates the risk of financial and macroeconomic collapse in the near future, the effects of a large informal economy make it difficult to regulate the economy using only conventional instruments, such as money supply and credits. Thus, to be effective, authorities’ anti-crisis measures should be accompanied by institutional and administrative reforms.