Dense October

Density of events in October was very high. It is hard even to distinguish one significant issue for the country. The parliament passed the budget for fiscal year 2016. The sentiments of the month were to a degree influenced by the pre-election struggle for the parliament seats, though the election results were manly predetermined. Minister of National Security Eldar Mahmudov has been suddenly dismissed from his position on October 17, 2015. Social apathy and concerns in the society have made the government taking the measures to block the economic crisis. Never before the president has issued so many decrees to bring the economy in correspondence with the current reality.

The week-long discussions of the budget in parliament went smoothly. The discussions have not become a subject of a heating debate between the deputies of the old parliament and candidates to the new parliament, as in other countries. On October 20, 2015 the budget was passed with insignificant amendments. The Finance Ministry has decided to revise the economic forecasts towards reduction. Finance Minister Samir Sharifov said that if earlier the government envisaged GDP growth of 4.4% in 2016, now it is expected to be within 3.3%. But many international institutions also expect it to be 2%. In any case the Finance Ministry has worked out two more budget scenarios - one–optimistic (based on oil price of $60.00 per barrel) and a pessimistic one (with oil price at $40.00 per barrel).

The fact that the economic crisis has coincided with the beginning of implementation of new big projects in the oil and gas industry has become a problem for the government. It cannot quit the projects, but the country does not have enough resources for their implementation. Just recently we found out that the government requests another $7 billion from the foreign creditors to cover half of its share in the Southern Gas Corridor project. However, in several years to come only oil industry will support the investment process in the economy. Huge investments are expected into the Shah Deniz Phase 2 project from the partners – foreign oil companies – till as minimum 2019.

The time of the cost-is-no-approach economy has come to the end. Azerbaijan was a net creditor in 2013 (the ratio of creditor to borrower for the central government + 1.4%), but it will remain the borrowing country till as minimum 2017. Between 2000 and 2011 this index was in average +4.8% ( see Attachment). Reduction of the financial flows, which is noticed everywhere, has immediately revealed weak sides of the economy. The State Statistical Committee is forced to state that during three quarters of the year the country has lost 30,000 jobs. The employment indexes in the country, even if they could be easily statistically manipulated, are getting worse. The private sector has started optimizing its costs as well, which means that people will lose their jobs. Employees of big state enterprises more often protest at non-payment of wages. The government should take measures to curb inflation, especially in the food products sector. Some international financial organizations (IFO) estimate the food products inflation at 7.8% by the end of the year.

What is the real condition of economy today? Reduction of the budget is not the worst thing today. Considering that funds transferred from the State Oil Fund (SOFAZ) have been first of all invested and embezzled by the officials, one can say that the budget was reduced down to its “natural” size.  The social costs remained almost the same, as before. But this is no longer budget that is designed for growth. The reduction of investment costs of the budget means losing of jobs. The worst thing is that the payment balance of the country has going down and affects the exchange rate policy. In 2011 this index totaled $17 billion, in 2014 - $10 billion and during this year positive balance of the current operations will go down to $2 billion. This is first of all connected with reduction of a positive balance in commerce.

From January to September, 2019 total foreign trade turnover went down by 35.72% ($15,348,500,000), of which $8,769,900,000 is a specific weight of export and $6,578,500,000 is import. This means that import came close to export. Reduction of oil production and oil prices have affected Azerbaijan’s foreign trade turnover with the European Union member-states. Export positions have been affected most of all (-42.91%) to $5,282,800,000, while import reduction was less – 11.62% to $1,968,500,000. Extrapolation of the current tendencies by some analysts previously showed that annulling of the foreign trade balance could happen by 2023 (see Attachment). It looks that this process could be accelerated. One of the ways to balance the payment balance is to increase capital flows into the economy.

During 9 months, 2015 export of Azerbaijani products went down by half. Reduction of prices for raw materials and consumer products plays an important role here. Since early year export of tea outside of the country (-44.3%), sugar (-2.2%) and vegetable oils (-22.4%) manufactured by Azersun Holding has gone down. Export of alcohol beverages and soft drinks reduced by 22% ($19.1 million). Since early year vegetables and fruit export totaled $162.4 million, down 3.5% against the same period in 2014. The hopes that Azerbaijani agricultural products could be exported to Russia did not come true. Only export of chemical products has went up significantly (+37.8%, $72.2 million). In other words, devaluation has not improved export positions of the country. This is natural, because the economy failed to re-adjust to development of the non-oil sector, though pace of growth of the non-oil industry was higher, than growth of the entire non-oil sector.

The announced re-industrialization of the economy – construction of new enterprises and creation of industrial and technological parks – is a bit late. Launching of many new enterprises is postponed till 2018-2019. What has happened with the methanol plant is unacceptable – here we have a plant, but lack raw material, which is gas, for methanol production.

The main financial reservoir of the economy, which is the Oil Fund, is getting smaller. During 9 months, 2015 its incomes totaled 6,397,100,000 AZN, while expenses – 8,041,200,000 AZN. This means that SOFAZ budget has a deficit of 853.7 million AZN against the proficit of 2,090,700,000 AZN during the same period last year. In October 2015 currency resources of CBA went down by 180 million AZN.

Meanwhile, during a quarter there was economic growth by 3.7% with reduction of GDP in money terms by 8.5%.(see Attachment) There is one consolation hear that we still occupy a good place in all kinds of international ratings. The IMF forecasts appeared to be even more optimistic than the government’s. In particular, according to the IMF’s forecast, this year GDP will total about $64 billion (57.1 billion AZN according to the government’s forecast), in 2016 - $63.6 billion (the government’s forecast -57.7 billion AZN). During the past three years Azerbaijan has moved up by 23 points in the welfare rating leaving behind many CIS member-states. We have preserved positions in the Doing Business ratings, to which many foreign investors orient themselves. Three reforms from June 2014 till June 2015 were considered to be country’s success – launching of business (7th place against 12th earlier), receiving permit for construction (114th against 150th earlier) and protection of rights of the minority shareholders (36th against 51st). The situation with registration of property or accessibility of credits has gotten worse some. Many ratings show the state of affairs for year 2014, when the situation in the economy was pretty good.

The government realizes that one should switch to the non-oil sector as soon as possible. It would have been very important not only constantly build, but also correct operation of the current institutions. When there were the first attempts of re-industrialization, it seemed that Azerbaijan Investment Company (AIC) will join the game. But AIC, which was meant to stimulate investments, worked poorly and only with famous and successful companies. 70% of credits of the National Fund for Entrepreneurship Support have been spent for the turnover capita of big companies and holdings. They are reliable borrowers, but the small- and medium-size business had only crumbles left, though the Fund was initially credits for small business support. In both cases we talk about organizations with big assets. One should also restore balance in the banking sector, which was seriously damaged by the devaluation of manat in February and crisis in IBA. IBA has recently started allotting credits to the consumers and the gap between real economy and banking system was getting wider.

The presidential decrees in October show the government’s concern. Converting of Azerbaijan Investment Fund into the open-type JSC is an attempt to reanimate the housing market and the construction sector. The new laws to simplify property registration are aimed at the same goal. According to the statistics, construction and commerce remain the main sources of growth of the non-oil sector. When the country had high oil revenues (it seemed to be everlasting), transit incomes were not a focus of attention of the government. But now one has to calculate every penny and the transit potential should be fully used. The strategic transit projects are slowly moving towards their completion and the government has decided to establish the Coordination Centre for Cargo Transportation Rates. This could help to push the transit transportations when Baku-Tbilisi-Kars railway starts to work.  Business is not only under financial, but also under administrative pressure. This explains why President has announced a two-year ban on business checkups. The attempts are taken to reduce number of licenses. One can say that the economic agencies with different interests and positions are trying to pull the rope to their side. This is actually a health process, which helps finding optimal decision during the crisis.

It is interesting that business clearly understands that its efforts are doomed to failure without the country’s development. The way out is to continue re-industrialization. The country needs to strengthen the institutions by developing old institutions and creating new ones. One should look for comparative advantages of economy in export by creating several key directions of export of products. All countries seek now foreign investments and Azerbaijan is not exception here. The National capital still blocks appearance of big investors. The investors are not eager to the country, because supremacy of law is not guaranteed here, property is not protected and competitive environment is not created.

When the system itself is conservative, it does not welcome economic liberalization. But sometimes economy forces its own imperatives. Majority of the small and medium-size business are rather weak, but during the times of crisis their energy could help to overcome the crisis faster. They, but not big established capital, need support. The struggle against corruption whether it is successful or not is needed, because corruption becomes a real obstacle on the path of economic development. One should wait for the next efficient steps of the authorities.