Falling oil prices affect Azerbaijan's economy

Falling oil prices have rattled the petroleum market across the world. For oil-exporting countries like Azerbaijan, the economic implications are far reaching.

The economy of the former Soviet country is based on oil and gas extraction which account for 95 percent of its exports and 75 percent of government revenues.

During the oil boom of 2003-2007, the country's economy expanded by an average of 21 percent per year.

As prices of "black gold" drops sharply across the world, Azerbaijan is obliged to adhere to the new rules of the road, which have important economic implications for its economy.

Azerbaijan's gross domestic product growth slowed to 1 percent in 2015 compared with 2.8 percent in 2014, due to low oil prices, devaluation of the national currency and the impact of an economic crisis in Russia, according to the country's State Statistical Committee.

The price drop has not only reduced exports and government revenues, but also directly affected Azerbaijan's national currency, the value of which had been until then fixed to the U.S. dollar.

In February 2015, Azerbaijan had to devalue the manat by a third of its value. In December 2015, Azerbaijan and Kazakhstan introduced, after Russia, a floating exchange rate of their national currencies against the background of increasing pressure on the balance of payments.

According to Bloomberg, from Jan. 1, 2015 until January 21, 2016 Azerbaijani manat has lost 52 percent of its value against the U.S. dollar.

The depreciation of manat has sparked rising prices for goods and services in the country. The dramatic decline in the country's economic conditions triggered several protests since the start of the year, with 55 protesters arrested last week in Siyazan, a small town north of the capital Baku.

Last week, the Central bank of Azerbaijan ordered currency exchange booths to close, creating a black market in which the manat has traded above 2 to the dollar - half its value of a month ago.

On Jan.19, 2016, Azerbaijan said it is to impose a 20 per cent tax on taking money out of the country.

The State Oil Fund of Azerbaijan, which is charged mainly with accumulating and efficiently managing oil revenues, is expected to be particularly active in the development of the non-oil sectors. However, dwindling oil revenues will have a negative effect on its overall budget and its efforts to stimulate the non-oil sector.

The decline in oil prices also affects Azerbaijan's neighbor Georgia. Baku is one of Georgia's main trade partners - around 12 percent of Georgian export goes to Azerbaijan. Azerbaijan is also a top supplier of tourists to Georgia, bringing much needed revenue and opportunities for employment.