October 22, 2010 / 10:08 AM / 10 years ago

UPDATE 1-Azerbaijan hikes arms spending, GDP growth to slow

* 2011 budget sees 3.8 pct GDP growth, 5.0 pct inflation

* Based on oil price estimate of $60 per barrel

* Hikes military spending in 2011 by 90 pct

(Adds details, background)

By Lada Yevgrashina

BAKU, Oct 22 (Reuters) - Oil-producing Azerbaijan adopted a 2011 budget on Friday forecasting its slowest economic growth rate in a decade but hiking military spending by 90 percent in its armed stand-off with Armenia.

The budget sees a 3.8 percent increase in gross domestic product (GDP) next year, far slower than the oil-fuelled boom period of 2003-07 when the economy of the ex-Soviet republic expanded at an average rate of 21 percent.

The budget is based on an estimated oil price of $60 per barrel and targets inflation of 5.0 percent.

Revenues are projected at 12.061 billion manats ($15.076 billion), and spending at 12.748 billion manats, an increase on 2010.

The budget sees a boost in military spending next year to 2.5 billion manats ($3.1 billion) from 1.6 billion manats in 2010.

Azerbaijan is massively outspending landlocked neighbour Armenia in an effort to tip the balance in their conflict over Nagorno-Karabakh, a mountain enclave where ethnic Armenians threw off rule from Baku with the support of Armenia as the Soviet Union collapsed two decades ago.

Azeri President Ilham Aliyev, who frequently threatens to take the region back by force, told the government this week the military spending hike was “natural, as we live in a state of war and we’ll do whatever possible to strengthen our army.”

A ceasefire was declared in Nagorno-Karabakh in 1994, but the past two years have seen an uptick in skirmishes on the frontline.

Renewed war would threaten oil supplies to the West from Azerbaijan, host to oil majors including BP (BP.L), ExxonMobil (XOM.N) and Chevron (CVX.N).

The mainly Muslim country of 8.3 million people, sandwiched between Russia, Turkey and Iran, expects GDP growth of 6.0 percent in 2010, down from 9.3 percent in 2009.

The economy grew 4.1 percent in January-September 2010, marking a slowdown from the 6.1 percent registered in the same period of last year.

Significant foreign assets, strong international reserves, and limited exposure of its banking system to flows on global financial markets shielded Azerbaijan from the worst of the global economic crisis. Armenia, its economy closely linked to Russia’s, saw a GDP contraction of 14.4 percent last year.

The International Monetary Fund, which forecasts 4.3 percent Azeri GDP growth this year, has urged Azerbaijan to diversify its economy away from an overwhelming dependence on oil sales, with oil revenues levelling off and projected to decline within a few years. ($1=0.8 manats)

Writing by Matt Robinson and Margarita Antidze; editing by Toby Chopra

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