Azerbaijan is an economy in transition in which the state continues to play a dominant role. It has important oil reserves and a significant agronomic potential based on a wide variety of climatic zones. Since 1995, in cooperation with the International Monetary Fund (IMF), Azerbaijan has pursued a highly successful economic stabilization program, which has brought inflation down from 1,800% in 1994 to 2.5% in 2002. GDP in 2002 grew by 9.8%, the seventh consecutive increase. The national currency, the manat, was stable against the dollar in 2002. The budget deficit equaled a modest 0.4% of GDP in 2002.

Progress on economic reform has generally lagged behind macroeconomic stabilization. The government has undertaken regulatory reforms in some areas, including substantial opening of trade policy, but inefficient public administration in which commercial and regulatory interests are co-mingled limit the impact of these reforms. The government has largely completed privatization of agricultural lands and small and medium-sized enterprises.

For more than a century the backbone of the Azerbaijani economy has been petroleum. Now that Western oil companies are able to tap deepwater oilfields untouched by the Soviets because of poor technology, Azerbaijan is considered one of the most important spots in the world for oil exploration and development. Proven oil reserves in the Caspian Basin, which Azerbaijan shares with Russia, Kazakhstan, and Turkmenistan, are comparable in size to the North Sea, although exploration is still in the early stages.

Azerbaijan has concluded 21 production-sharing agreements with various oil companies. Eastern Caspian producers in Kazakhstan also have expressed interest in accessing this pipeline to transport a portion of their production. Partner sanctions of the Baku-Tbilisi-Ceyhan oil export pipeline was completed in August 2002 and construction awards here announced. Construction began in the second quarter of 2003, with completion projected by the end of 2004. A Baku-Tbilisi-Erzurum gas export pipeline was sanctioned in February 2003.

Environmental Issues
Azerbaijan faces serious environmental challenges. Soil throughout the region was contaminated by DDT and toxic defoliants used in cotton production during the Soviet era. Caspian petroleum and petrochemicals industries also have contributed to present air and water pollution problems. Several environmental organizations exist in Azerbaijan, yet few funds have been allocated to begin the necessary cleanup and prevention programs. Over-fishing by poachers is threatening the survival of Caspian sturgeon stocks, the source of most of the world's supply of caviar. The Convention on International Trade in Endangered Species has listed as threatened all sturgeon species, including all commercial Caspian varieties.