Retrospective analyses of the initial results of economic reforms in Azerbaijan: qualitative assessment

Different perspectives on economic reform in Azerbaijan have played an important role in the emergence of this article. There are two contradiction approaches in this regard. Officials say the reforms in the country are moving fast and yielding significant results. Some independent and opposition experts is claimed that the reform is like imitation. Our goal is to measure the initial results of structural and personnel changes in the name of reform by assessing strategic aims identified in the documents that are the conceptual framework for economic reform through interim indicators.

3 years ago, on December 6, 2016, the President of the Republic of Azerbaijan signed the Decree “On Approval of the Strategic Roadmap for the National Economy and Key Sectors of the Economy”.[1] “The Strategic Roadmap for the National Economy Perspective of the Republic of Azerbaijan”[2] (hereinafter Strategic Roadmap – SR) has four strategic goals selected within the national economy perspective. As a result of implementation of these goals and strategic roadmaps for 11 sectors, sustainable and competitive development of the non-oil sector is expected to be achieved by balancing the real and financial sectors.

The SR is intended to provide fiscal stability in Azerbaijan and to establish monetary policy based on floating exchange rate regime in line with its first strategic goal. The second strategic goal in the national economy perspective is to ensure economic dynamism by increasing efficiency and implementing privatization in the activities of legal entities whose shares (stocks) are controlled by the state. The third strategic goal is the development of human capital that by developing the labor market, the government will adapt it to the national economy perspective. Finally, the fourth strategic goal is further improvement of the business environment.

In this article, we will try to assess how much has been achieved in achieving four strategic goals in the last three years. To do this, first we need to measure the accessibility of strategic goals based on quality changes.

1) Although the monetary policy is intended to be based on floating exchange rates to ensure fiscal stability, the US dollar will remain stable for a long time at the level of 1.7001 AZN / USD. Commenting on this, the Chairman of Central Bank, Elman Rustamov, said that the transition of the manat to the floating exchange rate regime should take place gradually, which will require some time and a number of regulatory decisions. He also said that “taking into account the interest of the population and business people, we do not want the sharp reduction or increase of the manat. In the exchange rate policy, “interim regime” is used, which is an integral part of the “floating exchange rate” regime.[3]

Although it has been over three years in defining this strategic goal in the SR, no significant progress has been made towards achieving it, in fact the so-called “interim regime” of the Central Bank is no different from the regular fixed rate regime. However, a report[4] by the Center for Analysis of Economic Reforms and Communications, based on the results of monitoring and evaluation of “the Strategic Roadmap for the National Economy Perspective” for 2017, says that by 2020, a full floating exchange rate regime will be applied in Azerbaijan. However, since over the last three years, the Central Bank has not made any changes in its exchange rate policy, the intended goal has not been achieved. This, in turn, suggests that the economy, especially foreign trade and investment, does not benefit from the regulating and stimulating functions of the national currency.

2) While envisaging increase in efficiency and implementation in privatization in the activities of legal entities whose shares (stocks) are controlled by the state in order to achieve the goal of ensuring economic dynamism, there has been no special change in this process over the past period. According to the State Committee on Property Issues, the number of joint stock companies established on the basis of state-owned enterprises was 1607, of which only 3 have been formed in the last two years.[5] At the same time, the implementation of the Presidential Decree “On Improvement Measures regarding the Preparation of the State-Owned Shares of the “International Bank of Azerbaijan” Open Joint Stock Company for Privatization” on July 15, 2015 has not been fully fulfilled. Although steps have been taken to improve the “International Bank of Azerbaijan” Open Joint Stock Company envisaged in the decree, its preparation for privatization is slow. Thus, taking into account the opinions of the State Committee on Property Issues of the Republic of Azerbaijan and the Central Bank of the Republic of Azerbaijan, the action plan on privatization of state-owned shares in the authorized capital of the “International Bank of Azerbaijan” OJSC should be developed and submitted to the President of the Republic of Azerbaijan within six months. However, no information has been released about the work done during the four years since that time. Only the Minister of Finance, Samir Sharifov, told the press in 2018 that there were companies interested in privatizing the state-owned shares of the International Bank. He added: “First of all, the privatization of the “International Bank of Azerbaijan” should be consulted and the business strategy of the bank should be developed. That is, these processes are still in progress. Potential investors will pay attention to the Bank’s market role, place, specific weight, business model and make final decisions on the basis of it before acquiring its assets.”[6]

The second objective of this strategic goal is to improve the efficiency of the public sector in the economy as a result of the implementation of the reform program of state-owned enterprises. In this regard, I would like to note that in the last 3 years, no steps have been taken towards restructuring or privatizing state-owned companies. Consequently, execution level on receipts with respect to loans, which are purchased from credit institutions under state guarantee of the Republic of Azerbaijan and transferred to state-owned companies as executors, remains low. Therefore, the main source of their debt service for foreign loans is the state budget revenues. Thus, in the reporting year, expenditures on the foreign debt service in the state budget for 2017 and 2018 were 9.2% and 9.9%, respectively.[7]

External state debt payments for 2019 were projected at 2,162,171.0 thousand manats, which is 92.6 percent of total state debt service expenditures, 9.4 percent of state budget revenues, and 8.7 percent of state budget expenditures.[8]

Although indicators on foreign state debt service were below the limit set by “the Strategy for Medium and Long Term Public Debt Management in the Republic of Azerbaijan”[9], approved by the Decree of the President of the Republic of Azerbaijan dated August 24, 2018 (the limit set by the Strategy is 15%), the fact that foreign debt paid by budget funds is mainly attributable to state-owned enterprises suggests that management in this sector is poorly structured and the potential for reform is burdensome. Furthermore, in the reporting period, state-owned companies remained the main users of budget loans and subsidies. 

3) When it comes to the government’s investment in human capital to achieve the goal of labor market development, “the State Program for the Education of Azerbaijani Youth Abroad in 2007-2015”, which had a leading role in this area, has not been extended. Even though 212.7 million manats[10] has been spent on the “State Program on Study Abroad”[11], which is financed by the State Oil Fund of the Republic of Azerbaijan (SOFAZ), this amount cannot be considered sufficient as an investment in human capital for 12 years. Expenditures for this purpose from 2016 to 2020 was only part of an unfinished study abroad projects. Only the SOFAZ’s 2020 budget[12], approved on December 26, 2019, provides for the allocation of 10 million manats to finance the “State Program to Increase International Competitiveness of Higher Education in the Republic of Azerbaijan for 2019-2023”[13]. Regarding changes to human capital in education and health as a whole, the introduction of compulsory health insurance, piloted in the reporting period, is expected to begin by stages in 2020. With regard to science spending that plays a significant role in the development of human capital, in 2018, from 122,949.4 thousand manats, allocated for science expenditure, 117,793.9 thousand manats, or 95.8%, were executed in the reporting year, the share of science expenditures in the state budget expenditures for the same year was 0.1 percentage points less than the corresponding figures for 2016 and 2017[14]. With regard to education expenses, the state budget was planned to allocate 2,274,570.2 thousand manats in 2019, which was 531,879.8 thousand manats, or 30.5%, higher than the corresponding figure of 2017 budget, and 230,580.7 thousand manats, or 11.3%, higher than the corresponding figure of 2018.[15]

4) Finally, with regard to further improvement of the business environment for the fourth strategic goal, , the President of the Republic of Azerbaijan signed a decree on the approval of the Action Plan[16] dated June 2, 2017, on implementation of the Decree of the President of the Republic of Azerbaijan No 2199 dated July 13, 2016, “On Additional Measures to Improve the Business Environment in the Republic of Azerbaijan and Further Improve the Position of Our Country in International Rankings”. However, in 2019 World Bank's “Doing Business” Report[17], Azerbaijan's position has deteriorated by 9 points compared to the previous year. At the same time, in the “Global Competitiveness” Report[18] released by the World Economic Forum (WEF) for the period, Azerbaijan's position has dropped from 39th place in 2017 to 69th place in 2018, and it has risen by 11 steps to 58th in 2019. As you can see, the work on improving the business environment and improving our country's position in international rankings has not progressed well during the reporting period. The fact that Azerbaijan is not yet one of the 50 most competitive countries in the world indicates that the reforms in this area are weak.

However, one of the highlights in the reporting period was that although the Presidential Decree[19] “On Deepening Reforms in the Judicial-Legal System” dated April 3, 2019, intended to facilitate entrepreneurs' access to the courts and to establish a specialized court for disputes arising from tax and customs payments, compulsory state social insurance payments, as well as other matters related to entrepreneurial activity to ensure that business disputes are handled by judges with deeper legal knowledge and experience in the relevant field, this work was also delayed.

Besides, I would like to point out that frequent fluctuations in taxation conditions and tax rates during the reporting period are the major reasons that prevent local investors from investing in their businesses and prevent foreign investors from entering the country. Amendments to the Tax Code[20] are so frequent and rapid that the rules change again without the entrepreneur mastering old changes.

In conclusion, I would like to note that any progress for the first two out of the four strategic goals outlined in “the Strategic Roadmap for the National Economy Perspective of the Republic of Azerbaijan” have not been made, and the measures for the third and fourth goals have been partially implemented. Therefore, there is much more to be done in the next five years to achieve strategic goals. This requires agile structural changes and institutional reforms in the government.

[1] https://president.az/articles/35542

[2] https://static.president.az/pdf/38542.pdf

[3] https://fed.az/az/maliyye/manati-uzdurek-ya-yox-analiz-35211

[4] http://iqtisadiislahat.org/store//media/documents/SYX/Milli_iqtisadiyyat_hesabat_2.pdf

[5] http://www.stateproperty.gov.az/page/view/20

[6] http://teref.az/sosial/96678-beynelxalq-bankin-ozellesdirilmesi-lengiyecek-engeller-var.html

[7] http://sai.gov.az/upload/files/ICRA-2018-FINAL(1).pdf

[8] http://sai.gov.az/upload/files/REY-DB-2019.pdf

[9]https://static.president.az/media/W1siZiIsIjIwMTgvMDgvMjcvMjI0ODFuN2NnYl9fRE9WTEVUX19CT1JDVV9TVFJBVEVRX1lBXy5wZGYiXV0?sha=67f1b296c90ca1f2

[10] https://oilfund.az/report-and-statistics/recent-figures

[11] https://edu.gov.az/upload/file/xaricde-tehsil-dovlet-proqrami.pdf

[12] https://oilfund.az/report-and-statistics/budget-information/41

[13] http://www.e-qanun.az/framework/40711

[14] http://sai.gov.az/upload/files/ICRA-2018-FINAL(1).pdf

[15] http://sai.gov.az/upload/files/REY-DB-2019.pdf

[16] http://www.e-qanun.az/framework/35658

[17] https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf

[18] http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf

[19] https://president.az/articles/32587

[20] http://www.e-qanun.az/code/12