After state sovereignty was regained in 1991, it became evidently necessary in the Republic of Azerbaijan to transform public-political and socio-economic systems for the purposes of the formation of an independent national economy system that would be based on the democratic state system as well as free market relations. It was that same year that the government had to resolve such important tasks as the strengthening of national independence; the establishment of a legal and secular state; transition to a market economy system; provision of the territorial integrity; improvement of the safety and socio-economic prosperity of the population; and many others.

Economically, the years after the independence can be divided into two main periods. The period of 1991-1995 was characterized by economic chaos and regression. The period after 1996 is known for an increase in macroeconomic stability and dynamic economic development.

The situation during the first period was strongly aggravated by political (unstable political situation during 1991-1993), military (20% of the territory of Azerbaijan was and still is under the occupation of Armenian military forces as a result of Armenia's military aggression against Azerbaijan. The majority of the one million refugees from Armenia and internally displaced persons from the occupied regions of Azerbaijan are still forced to live in unbearable conditions in refugee camps. Even though most of the refugees and IDPs are capable of working, they do not have permanent jobs and have to make their living on random incomes and meager governmental allowances) and economic (the break up of mutual cooperation ties and economic relations that were formed over decades between the former Soviet states, have led to a rapid decline in production rates, limitation or suspension of production activities by most of the enterprises, widespread unemployment and reduction of salaries, as well as the rise of inflation. The actual economic capacity of Azerbaijan was disregarded in governmental efforts to increase salaries and improve the social security climate together with the introduction of numerous benefits for various groups of the population, in which this further encouraged inflation which ultimately led to hyperinflation) problems faced by the Republic of Azerbaijan.

The process of liberalization of price policy and foreign economic activities was started in the Republic of Azerbaijan over that period. The liberalization processes led to abrupt raise of prices in Azerbaijan until 1995. The price of consumer goods increased in 1991 by 2.07 times against figures of 1990, and was growing in several times every year (10.12% times in 1992, 12.3 times in 1993, 17.65 times in 1994).

The legalization of economic reforms was also reflected in adoption of the State Programme "On Business Development in Azerbaijan (1993-1995)" in 1993.

Considering that only sporadic unmethodical activities were taken in place of serious reforms in business sector until 1993, the adoption and implementation of the programme played an important role in the achievement of positive results in that area (increase in the number of small and medium enterprises, expansion of foreign trade relations, etc.)

One can easily note that feeble reformative efforts and cosmetic economic activities at the first stage of economic reforms produced a very negative impact upon Azerbaijan's economic performance. Gross domestic product (GDP) of 2.7 billion AZM in 1991, was reducing by 13-20% annually from 1991 to 1995. Average cash income decreased in 3.6 times, and cash income per capita - in 1.4 times. The continuous recession in production activities has led to increasing unemployment rates. The percentage of working people among able-bodied population reduced significantly during 1991-1995.

For four years starting 1991, the actual salaries of population reduced in 8.2 times. This encouraged economic recession and hyperinflation (inflation peaked at 1763.5% in 1994). Inflation processes were also inspired by serious decline in production, political unstableness, the war, spontaneous activity of market elements and other economic processes, as well as the multiplication of state debts, salaries and benefits to disadvantageous groups of population, and unreasoned money-credit, taxation-budget, financial-baking and foreign trade policies which did not correspond to the country's real economic capacities.

The years from 1991 to 1995, referred to as the period of economic recession, produced the following negative sequences as the result of unfavorable economic reforms and numerous unreasoned economic activities: (i) paralysis of financial and banking systems; (ii) budget deficit formed 13% GDP in 1993; (iii) the coverage of budget deficits by the National Bank led to excessive money supply; (iv) money emission formed 40-45% population incomes in 1992-1994; (v) the amount of credits formed 55-60% gross domestic product during 1992-1994; (vi) interest rates of the National Bank reached 250% in 1994; (VII) rapid inflation of Azerbaijan's new currency - Azerbaijani Manat, released to circulation in 1992 - and weakening of exchange rates against Russian Rouble in 9 times, and against US Dollar in 245 times until 1995; (viii) peak of inflation in Azerbaijan; (ix) foreign trade turnover reduced by 42% during 1992-1994; (x) not a single dollar of foreign investments was made into national economy until 1994; (xi) actual cash incomes of population reduced significantly over the reported period, etc.

Within a short historical period after the independence and even in spite of the unfavorable starting conditions, significant results were achieved in the fields of socio-economic development and integration into the world economic system as the result of far-sighted policy and intensive activities of the late President of Azerbaijan, the national leader Heydar Aliyev. The greatest achievement was that the Azerbaijani model of the state system establishment and development was established over the past period.

It should be applaused that the second stage of economic reforms in the Republic of Azerbaijan was based on a number of large-size political documents (concepts, strategies and programmes) which were either adopted (the State Assistance Programme to Small and Medium Businesses in Azerbaijan (1997-2000), the State Programme of Small and Medium Business Development in the Republic of Azerbaijan (2002-2005), the State Programme of Mechanical Engineering Industry Development in the Republic of Azerbaijan (2002-2005), the State Programme of Agricultural Development in the Republic of Azerbaijan (2002-2006), the Concept of Demographic Development in the Republic of Azerbaijan, the State Programme of Tourism Development in the Republic of Azerbaijan during 2002-2005, the State Programme of Poverty Reduction and Economic Development in the Republic of Azerbaijan (2003-2005), the State Programme of Socio-Economic Development of the Regions of Azerbaijan (2004-2008), etc.) or at the stage of adoption (the Employment Strategy of the Republic of Azerbaijan, Integrated Strategy of Trade and Investments in Non-oil Sector, etc.)

The strategic directions of this model, based at the principles of long-term and dynamic development, are as follows: 1) the formation of a sustainable national economic system based at the principles of free market relations; 2) efficient utilization of the existing natural-economical, technical-production and scientific-technical potential for economic purposes; 3) rational integration of the national economy into the world economic system.

The distinguishing features of such an economic policy could be described as simultaneous implementation of correlated programmes in each of the foregoing directions; adoption of future-aimed and courageous decisions which might be non-standard, but perfectly correspond to objective criteria of economic development; consideration for national mentality and experiences of the progressive countries. The viability and efficiency of economic reforms and development model in Azerbaijan is proved by major achievements made in the field of socio-economic development of Azerbaijan during the last few years. So, this model resulted in qualitative changes, including restrained inflation (inflation did not exceed 2.3% in Azerbaijan since 1996 and only in 2004 climbed up to 6.7%), elimination of practices of financing of the state budget deficiency by the National Bank, reduction of the state budget deficiency to 1.2% of GDP, in the national economy within a very short time. As the result of these changes, a country with paralyzed economy has achieved a certain kind of macroeconomic stability in 1096, and moved further on to dynamic economic development starting 1996. GDP growth reached 1.3% in 1996, 5.8% in 1997, and averaged 10% during 1998-2004.

Among the principle directions of consecutive and systematic economic reforms in Azerbaijan was the privatization of state properties and establishment of favorable conditions for free businessmen. Land and agrarian reforms are institutionally completed already. Over 1350 thousand hectares of land were passed free of charge to villagers, while kolkhozes and sovkhozes were transformed into farms. 99.0% agricultural products are currently produced by the private sector. This process encouraged significant socio-political changes and increased economic efficiency of various agricultural sectors. This has also led to significant reduction in importation of food products (e.g. meat and dairy products, potatoes and onion, etc.) over the last few years.

The first stage of privatization of state properties has been completed and the second stage was started in the Republic of Azerbaijan during the reported period. Communication, transportation, chemistry, mechanical engineering and fuel/energy enterprises were made available for privatization over the past period. Business development and privatization processes have led to increase in the specific weight of non-state sector in GDP up to 73.5% in 2004. There was also a significant increase in the flow of investments into economy of Azerbaijan the last few years. Investments exceeding USD 17 billion were made into the national economy from all sources of financing after the independence.

The establishment of the State Oil Fund in the year 1999 particularly stands out in the series of activities carried out during the reported period. This timely decision has heralded the beginning of a new stage in the economic development of Azerbaijan and resulted from the national leader Heydar Aliyev's long-term economic strategy aimed at the preservation of national riches for the future generations and ensuring comprehensive economic development of the country.

At the same time, the last years witnessed a continuous increase in financial security of population and economic development in the regions and rural areas. These are the results of the reduction of poverty, the improvement of socio-economic prosperity and implementation of economic reforms and activities (we already mentioned which political documents these reforms and activities are conducted in the frame of) in the regions and rural areas.

This manifests the beginning of a qualitatively new stage in economic development of Azerbaijan. The national leader and late President of the Republic of Azerbaijan Heydar Aliyev said: "one can assume that the transition period is over in our country and we have founded the state of Azerbaijan with its independent political and economic foundations".

The new stage aims at increasing the competitiveness of the national economy, efficient integration into the world economic systems and ensuring a long-term dynamic socio-economic development in the country. Mr. Ilham Aliyev, the President of the Republic of Azerbaijan, has identified the tasks which are important for the achievement of this goal in his economic policy decrees. These particularly concern the strengthening and efficient utilization of the economic potential of Azerbaijan, including development of non-oil sector (formation of oil-independent national economy in Azerbaijan), entire and efficient utilization of the potential of each and every region in Azerbaijan, the establishment of favorable conditions for the opening of numerous workplaces, private business development, increasing the scope, quality and target groups of social services, the reduction of poverty, etc.