Azerbaijan: Important Economic Developments in 2017

2017 - Contradictory Reform

1. On 31 January a presidential decree was signed, providing for the addition of a list of areas of activity for which the import of machinery, technological equipment and facilities has been released since 2016 from the payment of tax for a period of 7 years.

2. On February 7, by order of the Azerbaijani President, a new Ministry of Transport, Communications and High Technologies was created, to which the former Ministry of Transport joined.

3. On April 19 was established the first private credit bureau in Azerbaijan.

4. On 22 June, President Ilham Aliyev signed a decree on additional measures to develop and improve the ASAN Visa system with the introduction of changes to the "Regulation on the ASAN Visa system".

5. On July 13, in Sumgait, there was a foundation laying ceremony of the plant for the production of solid dosage forms by Scandens Pharmaceuticals Industries Ltd.

6. On August 1, the President of the country signed a regulation on the Financial Stability Committee.

7. On September 5, the International Bank of Azerbaijan completed the process of restructuring foreign debts.

8. On 14 September in Baku signed a contract for the development of the Azeri-Chirag-Gunashli (ACG) field block in the Azerbaijani sector of the Caspian Sea until 2050.

9. The new Baku-Tbilisi-Kars railway corridor opened on October 30.

10. On December 26, the Mortgage and Credit Guarantee Fund of Azerbaijan was established.

Summary of the Year 2017

The economic background of 2017 was very controversial. The crisis was never recognized, however, all the government's efforts were aimed at overcoming it. It is expected that the economy can reach the end of the year even by a small increase of + 0.3%. The country's balance of payments surplus has been restored. A critical drop in investment in the economy was halted. All year high inflation remained (13%), but next year the government intends to bring it down by half. This year, for the first time in a few years, the government has adopted a growth budget. The recession seems to be over.

The International Monetary Fund believes that the economy's exit from the recession is due to two factors - an active macroeconomic policy of the government and a noticeable growth by the end of the year of prices in the world oil market. Indeed, as a result of tight monetary policy, it seemed that it was possible to ensure stability in the financial market. True, the price of this was quite high - lending to the economy declined by almost 25% or approximately 4 billion manats. But the foreign exchange market stabilized: from the end of February, the dollar began to decline and today fell by 11.5%, to 1.7001 AZN / USD.

The economy was highly favored by oil prices. Since the beginning of 2017, as a result of the efforts of OPEC member countries and states outside the cartel, stability in the world oil market has been restored, and price growth has begun. Oil has risen in price 2.4 times, from 27 to 65 dollars per barrel at the end of the year. Evidence of certain calmness in the government is the fact that the growth of the budget of 2018 will be almost exclusively due to transfers from the State Oil Fund, which, in comparison with the previous budget, are almost a half times increased.

Major projects and agreements of the year, of course, paved the way for future economic growth. Nearly two years of work on signing a contract to extend the work of the consortium for ACG until 2050 was completed. This will significantly increase the country's energy security in the coming decades. Near the end of the year, almost all financial problems with the SGC have been solved, in part, only funding for TAP remains unresolved. Next year, the first gas supplies to the South gas corridor of gas from the Shah-Deniz-2 field start. At the end of November, the Baku-Tbilisi-Kars railway finally opened. The infrastructure for new industrial enterprises, which are being built in the industrial and agricultural zones created by the state, has been fully prepared. At the same time, the government continued to expand its sources of profit in foreign currency - through transit revenues, revenues from tourism, and the agricultural sector.

Much of what is happening during 2017 can be conditionally called a rehearsal of growth - through reforms, through disorderly attempts to "self-identify" the economy. But there still were more problems than solutions.

After the oil sector (for large projects it was necessary to find additional external sources of financing) the problem of the whole year was the banking system. To begin with, in fact, in the entire year of 2017, the government solved the problems of the looted International Bank of Azerbaijan (financial support for the bank, the acceptance by the state of the bank"s debts to external creditors, the transfer of a large part of the IBA assets in Agrarkredit to the newly created Azerbaijan Industrial Corporation, etc.). But, if the IBA story could be considered an emergency situation, force majeure, the subsequent bankruptcy of other banks, lesser ones, revealed deep flaws in the whole banking system and, above all, the loss of control over them. Of course, devaluations, problem loans made banks very vulnerable. But under the murmur of the crisis, assets were stolen there, loans were issued without collateral and interest - an eloquent example is Bank Standard. Demir Bank, the country's oldest bank, was the last to hit this rink, with good indicators and a noticeable participation of foreign capital. The management crisis in the banking system continues, although it can also be called restructuring.

The economy in 2017 had a benchmark, within which the government's work was built - the Strategic Roadmap for the Development of Azerbaijan until 2025 (it was approved on December 6, 2016). It is early to judge how successful it is.

The outgoing year is marked by a business fever in the agrarian sector. Of course, this process was influenced by the opening of the Russian market for Azerbaijani agricultural products, government subsidies provided to the sector. By the end of the year it became obvious that new holdings (in particular Pasha Holding, which created two agricultural companies) are coming to this sector. In this process, even the urban middle class is involved. Nevertheless, the government may be hampered by a number of factors - the sector's mood for extensive growth, the difficult relationship between large processors and farmers, and the lack of self-organization of farming, in particular, in large-scale farming. Nevertheless, next year the growth in this sector is expected to reach more than 6%.

Recall that in 2015 the economy literally floundered under the pressure of unexpected problems that had fallen on her. In a very troublesome year of 2016, steps were taken to carry out a series of urgent reforms, without which the economy could plunge into a full-blown crisis. And 2017 was designated by the president of the country as "the year of reforms". The very attitude to reforms has become more thorough and pragmatic.

Reforms cannot be carried out without the constant renovation of old institutions and the creation of new ones. The government began to take institutional steps new in nature after it became clear that a crisis is inevitable. In the sphere of management, it is the creation of the Financial Markets Supervision Authority (FIMSA), the reform of customs, the tax service, the unification of a number of ministries, the creation of legal persons in public law.

Since 2017, mechanisms for investment promotion and export promotion have begun to work. The functions of the Accounting Chamber of the country were noticeably expanded and the tasks of the Azerbaijan Investment Company were clarified, which is now responsible for the operation of industrial zones with tax breaks. Toward the end of the year, the process of creating state agencies was accelerated. The most significant event here was the creation of the Mortgage and Credit Guarantee Fund of Azerbaijan.

Infrastructure was the pride of the government. But finally there is a clear realization that it is not enough to create an infrastructure - we still need to have mechanisms to keep it in working order. As an example, one can cite the creation of the State Agency for Roads or the transfer of a few wind farms, subordinate to the State Agency for Alternative and Renewable Sources, to the company Azerishig. An Energy Regulatory Agency is being established under the Ministry of Energy. But there are doubts as to whether it can become an independent regulator in this sphere.

So far, reform follows the current situation in the economy. But, apparently, the next steps are inevitable. The economy needs advanced and profound reforms. For a breakthrough in the economy, it is necessary to revise the entire system of economic relations in the country - a resolute and consistent struggle against corruption, monopoly and unfair competition.

Most of all there were failures in the management link. One can, as far as you like, search for explanations for the frequent displacements of ministers. About someone you can say that he was a bad crisis manager, the other is unreasonably greedy, overgrown with connections inside the system. Someone will call this the redistribution of property. But, according to any, the dismantling of the oligarchy in power structures is already obvious. The minister-oligarchs are replaced by the ministers-executors.

As for the struggle against economic monopolies, its borders were outlined in 2016. Almost destroyed is the monopoly in the state customs. The President of the country initiated the adoption of amendments to the Criminal Code, which provides for criminal punishment for monopolists for criminal conspiracy against competitors. However, the Code of Competition, regulating these relations, was never adopted. And the unregulated monopoly almost always suppresses small and medium business, and on the other hand it hinders the appearance of foreign companies in the country. It is conservative in its very essence.

It is impossible not to notice how the implementation of the law on the declaration of incomes of officials, adopted 10 years ago, has been postponed every year. Here, the initiative, apparently, should come from the Ministry of Taxes. It should be assumed that the new Minister of Taxes has already received the authority and this issue will return all the same to the agenda. By the way, the appointment of the new Minister of Taxes (and it was the former Minister of Education Mikail Jabbarov) is connected, apparently, not only with pressure on the oligarchs. It is not ruled out that this agency will be transferred to the Ministry of Finance by creating on the basis of the Ministry of Finance the Revenue Service, where it will enter, except for tax and customs. In any case, this option is not excluded and indirect confirmation of this was the first foreign visit of the new Minister for experience to Georgia.

Doubts about the growth of the economy in the years to come are almost gone. The IMF is even convinced that after the start of the Southern Gas Corridor, the growth of the economy may amount to 3.5-4% annually. But the question is whether this growth will become different in quality. Periods of enchanting GDP growth in the Azerbaijani economy have already been experienced...

Meanwhile, the social situation of the population continued to deteriorate. Any increase in household incomes in the housekeeper continues to be offset by high inflation. From 2017, the retirement age will begin to grow, which is always a problem in conditions of unemployment. Many problems of the budget, customs, tax authorities, and always unprofitable communal structures are shifted to the population. From the beginning of the year, excises for the import of tobacco and alcoholic beverages will increase. There were expectations of growth in transport tariffs A small increase in the minimum wage or subsistence level is unlikely to add optimism to the population.

There will be no greater growth. The economy should be released - to privatization, from state to private partnership. But no less important are the "local" events of the year, such as the establishment of the unemployment insurance fund, the transition from passive employment programs to active ones, the creation of business incubators.

But, first of all, the development of the economy should be long-term and sustainable. You can even pray for oil if oil prices start to rise, but you cannot rely on it. To do this, it is enough to get acquainted with two rather contradictory estimates of the future oil that the head of British Petroleum Robert Dudley and the very authoritative energy agency Bloomberg suggested this month.

No one today will argue that in the economy it is necessary to pursue an effective macroeconomic policy, continue structural reforms and develop human capital. But in the center should be the development of human capital. We have before us the experience of Russia, which, despite the difficult times for the economy, is increasingly investing in human capital.

Any serious reform of the economy is always in a risky neighborhood with political reforms. This is always a challenge for the authorities. There is a wide reform of the judicial system. Challenges are for that and exist to respond to them - preferably on time.