2009 Index of Economic Freedom

Quick Facts

Population:

• 8.5 million

GDP (PPP):

• $53.3 billion
• 30.6% growth
• 16.4% 5-year compound annual growth
• $6280 per capita

Unemployment:

• 4.3%

Inflation (CPI):

• 16.6%

FDI Inflow:

• $-601.0 million

Azerbaijan’s economic freedom score is 58, making its economy the 99th freest in the 2009 Index. Its overall score is 2.6 points higher than last year, reflecting notable improvement in business and labor freedom. Azerbaijan is ranked 17th out of 41 countries in the Asia–Pacific region, and its overall score is slightly less than the world average.

Azerbaijan's economy continues to undergo transformation and restructuring. In addition to its openness to global trade, relatively moderate taxation and government spending have been vital to the transition to greater economic freedom. In conjunction with efforts to moderate spending, the government intends to implement further reforms to reduce the non-oil fiscal deficit. Employment regulations have been modernized, increasing overall flexibility in the labor market.

Azerbaijan still faces substantial challenges, particularly in implementing more institutional reform measures. Property rights and freedom from corruption remain weak, and lingering government interference and control, both formal and informal, hurt overall monetary stability and hinder foreign investment. Economic diversification and the privatization of large-scale enterprises have slowed in recent years but should continue to improve long-term competitiveness.

Background Back to the top

Azerbaijan has a long-running dispute with Armenia over the Nagorno–Karabakh region that has cost thousands of lives and large amounts of territory. Despite a cease-fire since 1994, over 800,000 Azeris still live as refugees. Azerbaijan is in transition, both politically and economically, and has been increasing its links to the West. Oil and gas revenues and foreign direct investment have been increasing, but the country faces significant environmental issues common to its Caspian Sea neighbors. Overfishing of sturgeon has threatened the production of caviar.

Business Freedom 74.6 Back to the top

Azerbaijan's overall regulatory environment has improved. Starting a business takes less than half the world average of 38 days. Obtaining a business license involves more than the global average of 18 procedures, but closing a business is relatively easy.

Trade Freedom 78.4 Back to the top

Azerbaijan's weighted average tariff rate was a relatively moderate 5.8 percent in 2005. A weak legal regime, arbitrary customs administration, regulatory conflicts of interest, subsidies, export restrictions for some goods, and customs corruption add to the cost of trade. Ten points were deducted from Azerbaijan's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 79.7 Back to the top

Azerbaijan has a high income tax rate and a moderate corporate tax rate. The top income tax rate is 35 percent, and the top corporate tax rate is 22 percent. Other taxes include a value-added tax (VAT) and a property tax. In response to food shortages, the VAT was waived and customs duties reduced on all imports of flour, wheat, and rice for one year beginning in April 2008. In the most recent year, overall tax revenue as a percentage of GDP was 17.8 percent.

Government Size 77.5 Back to the top

Total government spending, including consumption and transfer payments, is moderate. In the most recent year, government spending jumped to 27.4 percent of GDP, with public infrastructure projects receiving most of the increased expenditures from oil revenues. Power supply and water companies remain in state hands.

Monetary Freedom66.3 Back to the top

Inflation is accelerating, averaging 14.0 percent between 2005 and 2007. The government continues to control prices on most energy products and operates several state-owned enterprises. Ten points were deducted from Azerbaijan's monetary freedom score to adjust for price-control policies.

Investment Freedom30.0 Back to the top

The Law on Protection of Foreign Investments permits foreign direct investment in most sectors. Prohibited areas include those relating to national security and defense, and the government carefully controls other key sectors, such as energy and communications. Non-transparent, arbitrary, and corrupt government bureaucracy, weak legal institutions, and predatory behavior by politically connected monopoly interests have severely hindered investment outside of the energy sector. The law provides that Azerbaijan will treat foreign investors in a manner “not less favored” than the treatment accorded to local investors and allows repatriation of profits, revenues, and other investment-related funds as long as applicable taxes have been paid. Azerbaijan regulates most foreign exchange and capital transactions. Foreign citizens and enterprises may lease but not own land. Expropriation may occur in the event of natural disaster, epidemic, or other extraordinary situation. Foreign investors are entitled to adequate compensation.

Financial Freedom40.0 Back to the top

Azerbaijan's financial system is not fully developed but is growing rapidly. Availability of long-term financial instruments remains limited, providing virtually no viable domestic savings options other than bank accounts. The market for government and corporate bonds remains small and illiquid. Banking-sector capital has been increasing rapidly. In 2007, non-performing loans declined considerably, bank credit grew by 96 percent, and private banks (outgrowing state-owned banks) accounted for over 55 percent of total assets. Some international banks have opened representative offices. The government sold a 50 percent stake in the state-owned Kapital Bank in September 2007, and the bank was further privatized in 2008. Azerbaijan also eliminated limits on foreign ownership of domestic banks effective January 1, 2007.

Property Rights25.0 Back to the top

Azerbaijan's judiciary is corrupt and inefficient and does not function independently of the executive. The poor quality, reliability, and transparency of governance, as well as regulatory abuse and poor contract enforcement, significantly impede the ability of many companies to do business. Politically connected business interests benefit from their control of lucrative sectors. Amendments to the Civil Code adopted in 2007 that permit the authorities to forcibly purchase property are likely to create additional opportunities for the abuse of property rights.

Freedom From Corruption21.0 Back to the top

Corruption is perceived as pervasive. Azerbaijan ranks 150th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007, a sharp drop from 2006. Judicial and police corruption are widespread. Ongoing problems include arbitrary tax and customs administration that creates opportunities for graft, regulatory practices that favor monopolies, and corruption at all levels.

Labor Freedom87.0 Back to the top

Azerbaijan's labor market is relatively free, with flexible employment regulations as a result of recent reform measures. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is not burdensome.