Well-Fed Years Over; What to Do?

How the population’s loyalty was bought

It is widely believed about the Azerbaijani economy that the authorities have appropriated almost all oil and gas revenues. However, this opinion does not fully reflect the real picture. Over the past 15 years, the ruling regime has managed to achieve stability not only through police measures. Azerbaijan was able to combine the characteristics inherent in all economies of the rentier countries, as well as to a certain extent unique features. In short, the Republic of Azerbaijan has an economic structure based on the distribution of oil revenues from the budget, and instead of adhering to the principles of a free market the power feeds the population in one way or another from the budget.

The stability and public consensus in the country is based on the fact of massive financing of all segments of the population from the budget, which led to a completely unhealthy economy and its loss of competitiveness. Including, regardless of the political orientation of society, almost all strata perceive it naturally and demand that the state pay salaries and benefits to the population, keep prices at a low level and open jobs.

Since the mid-2000s, when petrodollars poured into the country, economic activity in the country was beneficial for most of the population. Some stability and socio-economic well-being (which came after the military operations in Karabakh and the political confrontation in the 90s) led to a retreat the majority of the population from political processes. In order to obtain the loyalty of the population, the authorities made financial concessions, which in the long run led to big problems.

Fake pensions, low utilities, non-use of property taxes, excessive inflation of the state apparatus, widespread corruption among petty officials, artificial preservation of the high exchange rate of the national currency and other factors have led to a temporary increase in the welfare of the population. The ruling elite enriched itself through plundering the budget, but at the same time created the conditions for the existence of all strata of the population. Oil money, large remittances of labor migrants from Russia, large state infrastructure tenders, a construction boom in Baku extinguished unemployment. Against the background of all this, people were not very interested in human rights, political and economic freedoms, the absence of a social lift, and total corruption. Historical experience shows that such problems begin to manifest themselves clearly in conditions when problems arise in the existing political and economic structure. And they arose from a decline in oil revenues since 2015, and events that were regarded as confrontation between clans were in fact contradictions that arose as a result of lower incomes and attempts to redistribute property again.

Despite all the attempts of the state to smooth out the crisis, the country began to fail in the mechanism of feeding the population from the budget, as was the case in previous years. The sources of corruption for medium and small officials have been curtailed. The 2020 pandemic has further exacerbated the government's financial problems. This was one of the main reasons for the introduction by the authorities of the most severe quarantine regime, which was accompanied by increased control over financial channels and currency flows.

Oil revenues decreased by four times

Although there were no shortages of warnings from independent experts about the impending crisis and the need to change the existing economic system, the authorities did not take them seriously, and no preventive measures were taken. The unexpected global changes have had a devastating effect on the country's foreign exchange earnings. In short, we can note several reasons for the loss of oil revenues by Azerbaijan.

1. Falling world oil prices. And no one doubts that prices will not return to their previous high level.

2. Azerbaijan is reducing production not only under the OPEC + agreement, but also for natural reasons. At the beginning of the year, this reduction was taken into account in the budget of the Oil Fund. If not this, then next year there is a high probability that production will decline from 45 million tons in 2013 to 30 million tons in 2021.

3. According to an agreement with foreign oil companies, with low oil prices, Azerbaijan's income is not 75%, but less.

Based on the above factors, we can make a simple and somewhat rough comparison: having sold 45 million tons of oil for $ 110 and taking revenue for 75% and selling 30 million tons of oil for $ 42 - there is a 4-fold difference in revenue between them. That is, revenues from Azerbaijani oil fell by 4 times and this trend will leave a heavy mark on the political and socio-economic life of the country.

The activation, at the present time, of civil society is connected precisely with the above-mentioned factors. Until last year, the oil and gas sector, which forms the country's foreign exchange earnings, found itself in a difficult situation, and receipts from tourism were stopped due to the COVID-19 pandemic, while financial resources from migrants from Russia were significantly reduced. So far, budget funds can provide stable salaries, pensions and benefits, but the existing regime is unable to promise a decent future for them. For the first time, ordinary Azerbaijanis realize the reality that the authorities cannot solve their problems and understand that the prospects for their future are vague.

The situation that has arisen in the country is somewhat reminiscent of the Bolivian scenario. As you know, in Bolivia, the power of Evo Morales is remembered for socially oriented reforms. After a certain improvement in the well-being of the population living in poverty, people decided that this trend would continue, but the country's resources and its economic structure were inadequate for this task. Thus, the social basis for the change of power in Bolivia was the inability of the authorities to respond to the expectations of a better life for the population.

We can observe a similar situation on an even larger scale in Azerbaijan. After a significant part of the population has got out of poverty, the authorities are not only unable to raise the well-being of people to an even greater level, on the contrary, there is a prospect of their slide down to the poverty level of the 90s. For hundreds of thousands of people living well enough in the "well-fed" years, it is difficult to come to terms with such a prospect. Let's slightly modify the classic phrase and we get - the upper classes cannot rule in the old way, but the lower classes want to live exactly in the old way. People will insist on preserving the old, relatively high, lifestyle, which is fraught with social instability.

It is interesting that the top echelons of the authorities are well aware of the scale of the problems that have arisen, but being hostages of the formed ineffective management system for a long time, they are unable to change anything.

Previously, all social problems were solved through oil money, but now they are not. The government is currently unable to spend its fixed capital reserves from the Oil Fund and is forced to spend mainly on current oil revenues.

And here the situation is moving towards deterioration. For example, in the first half of this year, the volume of oil produced from the Azeri-Chirag-Gunashli field decreased by 7% and amounted to about 12 million tons. Thus, by the end of the year, the total production of the international consortium will not exceed 24 million tons. As SOCAR will also reduce production, in the best case it will amount to slightly more than 30 million tons.

For Azerbaijan, a 4-fold drop in oil revenues will be a double blow. The budget will be fulfilled either by cutting some costs. In addition, the devaluation of the manat is possible, but in the current situation, the authorities in every possible way avoid this measure.

The economy is not just about the budget

We proceed from the assumption that the budget can be fulfilled without the option of devaluation. But to achieve macroeconomic stability and gain loyalty from the population, it is not enough to execute the budget, since the economy consists not only of the budget. Thus, the prosperity of Azerbaijan in the past 15 years has been based on various forms of multiplication of oil revenues. A decrease in oil revenues leads to a decrease in various sources of consumption and supply.

Thus, after 2016, Azerbaijan will again be forced to sharply cut its spending, which will be accompanied by discontent at all levels.

The biggest and most intractable problem facing this crisis will be unemployment. Thus, an ineffective economy has led to the provision of jobs for the majority of the population in organizations financed from the budget. Unlike developed countries, Azerbaijan has unnecessary, repeating, economically ineffective structures and tens of thousands of meaningless jobs. Personnel representing the main contingent of large state-owned companies, educational structures, the Academy of Sciences, are engaged in economically useless work for a meager salary. It is absurd to prevent the problem with low-paid public works offered by the state. In the near future, due to the lack of real reforms, unemployment and economic decline seem inevitable.

The demands of society related to child and other benefits must be understood as a reflection of the sharp impoverishment of the bulk of the population. But the limited resources of the state to provide benefits and assistance, and most importantly, the number of those claiming benefits outnumbers the number of employees, creates a frightening picture where existing social policy programs are doomed to failure.

What to do?

Before answering this question, one important point should be taken into account: Until the authorities respect fundamental human rights and freedoms (in particular, inviolability of private property and other economic and social rights), and ensure the independence of the courts, all economic proposals and their implementation will not lead to positive changes in the country. Free elections, freedom of speech, parliamentary and civilian control over the government are the foundation of any economic reform. Since our topic includes only economic issues, we did not find it appropriate to cover the listed problems in more detail in this article.

Taking into account all of the above, in order to prevent the coming systemic crisis, it is necessary to completely abandon the system of state capitalism.

- The share of the state in the economy should be sharply reduced;

- change tax and customs legislation based on existing realities;

- integrate the country into the European market;

- carry out a mass privatization.

To this end, first of all, it is necessary to pay attention to the following measures.

1) At present, Azerbaijan is not integrated into any of the global and regional markets. The opening of customs borders and participation in any global or regional economic structure, on the one hand, will lead to a reduction in the cost of a number of industrial goods, on the other hand, it will provide an opportunity to create local production and ensure our country's participation in the global division of labor. Azerbaijan, as a producer of light industry and agriculture, has great prospects for such large markets as Russia and Europe. Excellent infrastructure, relative literacy and activeness of the population, the availability of energy sources and their relative cheapness, favorable climatic conditions create prerequisites for the development of industry and Agriculture.

In the context of the measures taken by the United States and European countries to reduce dependence on Chinese imports, Azerbaijan has every opportunity to create some light industries and their exports. But if the state intervenes in the creation of these industries, we will again observe the same picture as and in previous years. Only private business, working mobile, quickly and profitably, can turn into a locomotive of the country's economic development.

2) Carrying out tax reform, while reorienting the main direction of taxes from business to property, can lead to big changes. Property tax, along with the introduction of large funds into the budget, would be very useful to reduce the tax burden on businesses, exempt small businesses from taxes for development of production and services, as well as in terms of reducing artificially high prices for real estate. Thus, the tendency for business people to view the real estate market as the only area of ​​investment can be ended.

In general, we must take into account that, although from the outside the tax code looks very progressive, in reality it is ineffective and is built on blind copying of foreign experience. Developed without taking into account the realities of the country, the economic structure and existing requirements, in most cases the laws, Tax, Customs and Criminal Codes were adopted by the executive authorities, which must be responsible for the implementation of these laws, which is an insurmountable obstacle for business.

3) The privatization of property, banks, manufacturing enterprises and large state-owned companies that are on the state balance sheet and, due to ineffective management, have turned into a burden for the budget and a source of corruption, can contribute to the creation of medium and large businesses in the country. This will also lead to the preservation of foreign currency in the country, large sums of money invested by businessmen in low-income real estate, which, along with a decrease in unemployment and poverty, will bring large incomes to entrepreneurs.

To see how effective and useful mass privatization was, the experience of neighboring Georgia is sufficient. The privatization of state-owned monopoly companies that have become a source of corruption, the creation of an environment of free competition in their monopolies, and other liberal economic and political reforms in Georgia have led to a fourfold increase in the country's GDP. In addition, they have thoroughly undermined the roots of corruption in the state apparatus as many acts of corruption appear in the course of state property management.

The scientific institutions of the Academy of Sciences, which are a burden for the budget, do not produce any competitive products, based on the orders of the middle of the last century, should be optimized, turned into small structures, which should be financed through grants, and not only through withdrawals from the budget.

As a result of the implementation of the proposed reforms, Azerbaijan can turn into a state with a successful economy and stable society, not only independent of oil prices, but also spending its carbohydrate resources for economic prosperity. For example, only the provision of oil and gas to national industrial enterprises at preferential prices can give them a tangible advantage when competing with enterprises in countries such as Armenia, Georgia and even Turkey. The privatization of large state-owned companies will lead to the emergence of hundreds of efficient and mobile small and medium-sized businesses and the elimination of unemployment.

These and other reforms proposed by independent experts should begin immediately in order to save the state from the requirements for granting benefits to citizens from the budget and ensure the transformation of the majority of the economically active population into taxpayers.

Qaşqay İsmayil
Chairman of the Public Union FINANCE - Transparent Budget