WB proposes scenarios for Azerbaijan’s potential economic growth until 2050

The World Bank (WB) offers several scenarios for Azerbaijan’s potential economic growth over the next three decades, Report informs referring to the WB.

“The baseline simulation projects that annual GDP growth would decelerate from around 1.5 percent in the mid-2020s to zero in the longer term. Consequently, GDP per capita would remain below $7,000 by 2050, limiting social and economic development in Azerbaijan,” reads the report.

WB analysts believe that first, the economic slowdown is driven by structural conditions, such as adverse demographic trends and declining oil reserves: “These headwinds are hard to change with policy, so economic reforms to improve other fundamentals are needed to revive growth.

Second, compared with its peers, Azerbaijan is lagging mainly in productivity and private investment, suggesting some potential for growth driven by the private sector. An ambitious reforms package focusing on these fundamentals could boost long-term annual GDP growth by around 1.7 percentage points. In this case, GDP per capita would surpass $10,000 by 2050.”

A key assumption of the baseline simulation is that recent trends in the growth drivers, as outlined in preceding section, will continue until 2050, according to the WB. These trends are: Azerbaijan has about eight years of oil reserves and many decades of natural gas reserves; historically high investment in physical capital is expected to decline in the future; population growth is declining sharply and the population is ageing rapidly; human capital growth would remain close to zero until 2035 and increase to 0.2 percent when today’s children will join the workforce; and non-energy sector productivity set to 0.5 percent until 2050 to match the median growth rate of upper-middle-income countries over the past two decades.

Under the baseline growth path, Azerbaijan’s GDP growth would slow from 1.5 percent in 2024 to zero by 2050, with an average growth of only 0.5 percent over 2024-2050.

The projection is even less encouraging in per capita terms. GDP per capita growth is projected to start just below 1 percent and approach zero by the mid-2030s. As a result, GDP per capita would increase from $5,900 in 2020 to $6,500 in 2050, a cumulative growth of only 11% over 30 years.

“The overall growth rate masks substantial heterogeneity across sectors. While the baseline projection displays declining growth rates in both energy and non-energy sectors, the severity of the slowdown is much sharper in the energy sector. Non-energy GDP is projected to grow at 1.6 percent, on average, until 2050, declining from 2 percent in the 2020s to 1.3 percent in the 2040s. On the other hand, the energy sector is projected to decline at 2.3 percent, on average, over the same period, falling from nearly zero growth in the 2020s to -3.5 percent in the 2040s, and due to the sector’s significant role in the economy, consequently, dragging the overall GDP growth down,” reads the report.

“The engine of extra growth generated by the reforms package is the non-energy sector. The reforms package would boost non-energy GDP growth by nearly 2 percentage points until 2050. On the other hand, the reforms package would not prevent the contraction in the energy sector in the long term. There are two main reasons for that. First, the reforms package would not address declining oil and natural gas reserves, which is the main drag on growth in the energy sector. Second, the reforms package increases the productivity of the non-energy sector relative to the energy sector. This productivity gap drives the extra investment toward non-energy activities, further reducing the impact of the reforms on the energy sector,” the WB noted.

“The potential gains from moving to a new growth model are significant. By improving productivity in the non-oil/gas sector and building human capital to the level of its structural peers, Azerbaijan can boost average growth by a minimum of 1.7 percentage points from 2024-2050. This would leave the average Azerbaijani at least 40 percent richer as compared to the current growth trajectory. A more ambitious set of reforms that accelerates structural transformation and reduces inefficiencies could boost productivity and average incomes further.”

“Under the reforms package, GDP per capita is projected to increase from $5,880 in 2020 to $10,213 in 2050. This represents a cumulative growth of 74 percent, vis-à-vis the baseline scenario’s 11 percent. While energy GDP per capita would fall sharply even under the reforms package, non-energy GDP per capita would increase from $3,499 to $8,912 from 2020 to 2050 (a 155 percent rise),” the WB added.