Quarterly collapse

Results of third quarter were summarized. The GDP growth continued declining, despite the hopes that it could be increase. During three quarters it was 39.8 billion AZN with the growth of 1.1%. EBRD forecasts is 2% growth, while government hopes for 2.2%.

During three quarters 2012 the industrial production in Azerbaijan totaled 25.8 billion AZN. This is down 3.5% against the same period in 2011. Specific weight of extracting industry In the commercial products constituted 76.4%. The pace of production in the extracting industry slowed down by 5.7%, while in the non-oil industry the growth of industrial production was 7.7%. Although the growth in the processing sector reached 7.9%, 18.3% of industrial products fell to it. During three quarters this sector ensured about $580 of additional cost per capita. In Russia the processing industry makes $1,200-1,400 per person, in US – about $6000, in Germany - $8000 and in Switzerland - $11,000. So, the talks that in the post-industrial societies the services have a full burden are seriously exaggerated. The processing industry must grow.

Constant demonstration of economic successes by the government is depressing. Even indexing of social and basic part of pensions or extended social aid to the low-income families stipulated by the law is presented as improvement of population’s living standards. Economists call into question the government’s statements about creation of 700,000 jobs, which is based on state statistical information. Azerbaijan is on the 66th (a year before 67) place on the environment for business, while Georgia is among the top ten and Armenia is on the 32th place (a year before 57). We do not talk about any shortcomings in economy and this is strange against the background of the accumulating problems.

The critical look at the economy and open announcement of its weak spots are necessary. The government is not willing to do that. It tends not to notice a gap in the labor productivity, slow speed of updating of the funds, especially as, speed of emergence of a new product.

Turkmenistan’s economy is considered to be a closed one, but even diversification in it is even higher, than in Azerbaijan. Turkmenistan has recently announced the ”open door” policy for the foreign investors. Turkmenistan President may simply have “untied hands” – the circle of oligarchs in the country will be able to oppose to foreign capital coming to the country. With all its natural resources Azerbaijan hesitates to start. And as a result we are seriously behind our neighbors on the structural reforms, creation of new manufactures and development of financial system.

Some conflicts are on the surface. The government claims that 82% of GDP is ensured by the private sector. At the same time during three quarters the state sector ensured 94.6% export of the country, which means that private sector was not involved in creation of export products. Share of state sector in import constituted 20.4%. In other words, in this situation the entire private sector moved to the commerce and services sector and maintaining of these fields through import.

Last month we saw growing concern in the government. For a long time it seemed that risks in economy come from the world gas and oil prices. But it turned out that they are caused by oil production decline. President strongly criticized BP company and this has brought results. It seems like next will be the turn of influential economic groups, contribution of which in economy could have been bigger and which could actually fully monopolize it.

Concealment of economic information, especially in the public sector, starts playing a very negative role. Application of term of commercial secret in all the sectors, including state ones, makes the whole system close with all following consequences. It is hard to understand why name of the shareholder or its share in the capital of the enterprise is a secret information. It is getting more difficult when any information is concealed. Majority of the state enterprises and then the entire private sector, which is in this or another way is connected with the government join this game. One could take it as a fact connected with the famous principle “money like silence”, especially in the corrupt economy. There must be confidence that the clearing house does its job. But the clearing house was hunting only weak economic structures. Big companies have never been its victim. They are especially inaccessible from the point of view of audits. It is not a surprise that public organizations do not request any estimate costs of construction of roads or public buildings any more. If even president was not submitted estimate of cost of big projects, though he insisted on that in the past, then it is absolutely impossible for the others.

The classic example of that is functioning of the grain fund of the country under the Ministry of Emergency Situations. Cabinet of Ministers has recently published the resolution to allot 30.5 million AZN to buy 250,000 tons of grains. It is impossible to find out how much grain is accumulated in the Fund. It is even harder to find out how much grain does the Fund buy from the local manufacturer – standards are inapplicable here. Many interests intersect here, though both population and the bread makers should have a clear picture of the situation at the grain market.

There is a lot of fuss in the agrarian sector, which is related to the current state of affairs. It is planned to unite farms into cooperatives, but their number should reach about 50. But terms and conditions of uniting are under questions. The good year for fruit and vegetables (growth of fruit production increased by 10.3%) encouraged the officials to bring up the issue of creation of special wholesale and retail markets for the products export in the regions. It is a common knowledge that customs has long time ago monopolized fruit export and it is unclear who can breach the wall. It is possible to reduce fruit prices inside the country by creating special purchasing companies. But they should be supported with special privileges, otherwise, hardly anybody will want to start this difficult business. In short, all the measures are halved.

The state budget for fiscal year 2013 has been released. The budget revenues are planned at 19,154,000,000 AZN, while expenses – 19,810,000,000 AZN. The budget deficit is going to be 656 million AZN, but the previous experience shows that the budget will have proficit. State expenses constitute almost one third of the budget. The earnings of the budget will be ensured by the Oil Fund and the taxes from the oil industry. It is clear that reduction of transfers from the Oil Fund previously planned in 2013 will not take place. They increased even more and next year they will total 11,350,000,000 AZN or $14.5 billion. This constitutes 59.3% of all budgetary proceeds, up 14.5% against this year’s forecast. The government’s thoughts are understandable. The oil production continues declining and this negatively affects the budgetary revenues. The deficit should be covered with something. The opposition economists say that without the oil industry the government would have been unable to meet its minimum budgetary commitments. On November 13 the law on budget is put on discussion of parliament. One can say in advance there will be no heating debates on the budget between the Ministry of Finance and the Ministry of Economic Development. There will be discussions on the growing transfers from SOFAR or financing of separate fields. The transfers cannot become of subject of discussion, because SOFAR activities do not envisage any frameworks. For instance, Russia has Reserve Fund, “incombustible” part of which should constitute 5% of GDP. There are debates if the limit could be reduced.

The leaders in the expenses are still capital investments – 6915 million AZN (19.8% of forecast for this year), defense costs – 1528 million AZN (8.6%) and agriculture – 494 million AZN (4.6%). The education costs – 1530 million AZN (+1.2%), costs for social security – 1813 million AZN (1.6%) and health costs – 666 million AZN (+0.5%) will grow rather moderately.

Foreign debts of the country are not high. Considering that the tension around the budget will remain, the desire to ease the debt burden is natural. The costs for servicing foreign debt will grow by 2.7 times in the budget for fiscal year 2013. Although with the foreign debt of 8% with carefulness could seem inappropriate.

Next year investments into economy will grow up to 18 billion AZN (+17.3% against this year’s forecast). The share of the government or actual budgetary costs will total 14.4 billion AZN (63.3%) of all investments. 69.4% of all investments will be allocated to the non-oil sector. In its forecasts the government has taken into consideration further reduction of oil production volume. In 2013 volume of export will total $29951 million (-2.1%). The import of goods will grow significantly up to $10,572 million. The growth here will total almost $1.5 billion (+16.5%).

The hopes are still pinned on significant strategic currency resources of the country. By the end of quarter 3, 2012 they totaled $45 billion and by the end of the year they expected to grow up to $50 billion. By trying to stop talks about excessive allocation of the Oil Fund’s resources into economy, the government has decided to increase profitability of the Fund’s resources through their clear-cut diversification. SOFAR has already placed $400 million in Turkish lira in the Turkish banks at 8% per annum. It has recently bought and placed 3 billion rubles or $100 million in Gasprombank and also bought expensive immovable property in the centre of Moscow. During 3 quarters, 2012 incomes from management of the Fund’ resources increased by 2.7 times up to 440.4 million AZN.

But in any case it is risky just to hope for the oil revenues. For instance, during 3 quarters SOFAR revenues dropped by 17.8%, while expenses increased by 72.5%. We actually witness growing embezzlement of oil incomes and incomes from placement of resources compensate them just insignificantly.

It seems like economy has come to a certain standstill and not only become of reduction of oil production. For instance, the previous decade was marked with creation of new development institutions (AIC, AIF) and technological innovations in the fields. Now the processes have stopped, though there are more challenges in economy and they should be responded. The new business is not seen on the horizon – all fields of economy are occupied by big players. The law-makers also confirm the stagnation period. Not considering the prolongation of adoption of the Code of Competition, the laws are not passed. For instance, the law on securities, which the State Securities Committee has been waiting impatiently, the law on appraisal activities or amendments to the law on Islamic banking. Adoption of the town-planning code could called an event, but it has no standard acts. Population is already in panic. One official has already said ahead of time that the houses built during the Communist leader Nikita Khrushev in the micro-regions will be demolished and newly high-rise houses will be built on their place.