The 2006 budget now assumes a 70% increase in spending (in dollar terms) with the bulk going to the military, wages, infrastructure projects, and social assistance. Part of the increase in expenditures will be financed by revenues from the oil fund. The IMF has expressed concern about the impact in inflation and macroeconomic stability as well as governance if the capital budget is not well managed. The State Oil Fund (SOFAZ) was established as an extra-budgetary fund to ensure macroeconomic stability, transparency in the management of oil revenue, and the safeguarding of resources for future generations. All oil revenue profits from the development of new oil fields now flow into SOFAZ, and are held offshore. SOFAZ assets amounted to $1.3 billion as of September 2005. Nevertheless, SOFAZís sterilization effect is limited since it does not cover SOCAR, the State Oil Company.

Progress on economic reform has generally lagged. 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. Azerbaijan is still plagued by an arbitrary tax and customs administration, a weak court system, monopolistic regulation of the market, and corruption.

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. Azerbaijan celebrated first oil for the BTC pipeline in May 2005, and the pipeline is expected to operate at full capacity once oil reaches Turkey by March 2006. Eastern Caspian producers in Kazakhstan also have expressed interest in accessing this pipeline to transport a portion of their production. A Baku-Tbilisi-Erzurum gas export pipeline was sanctioned in February 2003.