European games give way to economic problems

During June the government was concerned about holding the 1^st European Games in Azerbaijan worthily. It has actually managed to do that. But one should suppose that the society will be notified about the incomes, which the country has received from then Games. It is interesting to understand what is really left behind to the country’s economy from this bright sports holiday. These are several modern sports facilities, acquired managerial experience of holding great sports events, improved transport infrastructure in the capital (new buses and train cars, express train to Sumgait city, new road junctions, and promise to build the electric train to the Baku airport) and even growth of number of trash bins on the city streets. But not everything has been made: introduction of plastic payment cards for the urban transport has been postponed till indefinite period.

Great sports event has slowed down solution of some serious economic problems of the country. One should expect that the problems will look more evident.

Not everything so bad for the current crisis times. The growth of economy by 5.3% or industrial sector by 3.7% are not bad indexes, if one remembers that the growth is directly connected with a sharp decline of deflator. If early this year International Monetary Fund (IMF) had pessimistic forecasts of growth of economy in 2015: 0.6% for a real GDP growth and 3.5% for growth of non-oil GDP. However, after the visit in June, IMF has increased the forecast of growth of Azerbaijani economy up to 1.8%, including growth of the non-oil sector up to 6.5%. Although early this year the inflation rate in Azerbaijan was forecast to have two digits, now it is estimated to be 8.5%.

The budget forecasts for this year are based on the oil price of $90.00 per barrel. The question is why it was remained the same, while in the neighboring oil producing countries this forecast was immediately reduced to $50.00 per barrel as soon as it was clear that the world oil prices went down. One can suppose that the government thought that almost half of the budget proceeds are ensured by the transfers from the Oil Fund and it will be easy to get the remaining budget revenues. Meanwhile, actual transfers to the state budget of Azerbaijan during the first five months of the year totaled 6.42 billion AZN, down 19.9% against last year. The state budget’s expenses totaled 7.33 billion AZN with the reduction by 0.5%. One can suppose that they will keep on going down.

One can see now how difficult it is for SOCAR to ensure budget proceeds. From January to May 2015 SOCAR’s payments to the state budget of Azerbaijan totaled 605,042,000 AZN. Last year they totaled 822,658,000 AZN during the same period, up 26% against the same period in 2013. Therefore, from January to May 2015 SOCAR’s allocations decreased by 26.5%. Although the tax payments were reduced this year (1,825 billion AZN in 2014) to 1.5 billion AZN, there is no confidence that they will be covered.

IMF has positively assessed the fact that the budget for fiscal year 2016 is based on the oil price 0f $50.00 per barrel and recommended to extend this practice till 2019. The Fund believes that this will help limiting reductions of the Oil Fund, reduce the risk of inflation pressure after devaluation, will lead the state investments to a more stable level and strengthen the projects’ efficiency.

 From January to May 2015 the deficit of state budget of Azerbaijan totaled 905.8 million AZN (4.2% of GDP), while during the same period last year the budget indexes were executed with the proficit of 645.5 million AZN. The graph of the attachment shows that the budget index started going down since March. It is supposed that even with low oil prices, Azerbaijan will have positive payment balance, but it will go down to 5% of GDP and the budget balance will have a deficit of about 7% of GDP.

World Bank believes that Azerbaijan needs efficient management of budget crisis in the short-term, implementation of the reforms and a new model of growth based on increasing a role of the private sector in the long-term.

Finance Minister of Azerbaijan warned last month about aggravation of the financial situation in the country. But inside the economy, which lately had a cost-is-no-object approach, many negative factors have accumulated. One can just remember the recent story of the “credit oligarchs.” It could have happened only in such an economy, where money is no longer counted. The role of the law enforcement agencies, which acted as a bank collector, is very surprising. The owner of mythical Avesta has allegedly lost all his capital. For decades Azerenerji company has been subsidized by the state, but it still has accumulated huge debts to SOCAR, not mentioning the foreign credits allotted against security of the state. Suddenly Azersu company has announced its losses worth billions. Big private organizations suffering losses could be also added to this list of spenders. But the motives here could be simpler – tax evasion.

Against this background even a good project of the economy re-industrialization is taken skeptically. How can one move medium-size business aside when one creates free industrial zones? Even partnership between the state and private sector is considered in our country as partnership between the state and oligarchs. There are many issues concerning already built big  plants. After construction of  new shipbuilding plant SOCAR has ordered two vessels in Australia to deliver oilmen to the platforms to the amount of $70 million. It is simply unclear why one had to spend $470 million to build a new big plant, if it has only one order from the Shah Deniz. This was a useless and irrational dispute between Baku Steel Company and State Metallurgical Company. It seems like this is the field for competition between the state and private sector. Could this be the struggle for a limited raw material base? Or is this a collision of two oligarchic groups, which is not noticeable to the outsiders? The only happy story is the story of Nizami Piriyev, who has been set free. It seems like somebody realized that it is better let the plant to operate, instead of finally destroying it.

Among the risks for the country’s development World Bank mentioned uncertain oil prices, regional and global upheavals, incomplete program of reforms and inadequate institutional frameworks. All this is familiar just like the IMF appeals to raise efficiency of the government work, expand the corruption prevention measures, strengthen the supremacy of the law and independence of the judicial system. But there are many concrete facts in the recommendations, For instance, IMF believes that one needs to encourage private investments, because they could help alleviate unfavorable short-term effects of the budget consolidation. But IMF mentioned that this will demand the reforms to improve governance, simplify the business costs and also eliminate the barriers for competition and expensive customs procedures. One should pay attention to the fact that with general worsening of the economic situation in the country, customs proceeds in the country increased by 4.6% during five months. This shows that the customs has some “unclear” resources. How can one determine an average monthly plan of budget allocations  for the customs (approximately 140 million AZN this year). The customs is a unique  place, where it is hard to name an average tariff rate. Head of the Azerbaijani delegation at the talks on Azerbaijan’s joining WTO Mammadguliyev said that until now during joining WTO Azerbaijan has offered an average rate of initial bound tariffs (will be applied after joining the organization) at 11.7%. One can say that the customs is a golden key for the changes in the economy and in this sense this Azerbaijan’s new move towards WTO could only be welcomed.

The necessity of the structural economic reforms in majority of the oil producing countries is under discussion lately. Experience of various discussions shows that there is no clear understanding of the essence of the reforms. It seems like each country has its own, because the structural reforms must level lack of proportions in the real economy. They are always implemented by the state, when it feels that the economy is coming closer to the crisis line.

One can speak about the system of structural reforms aimed at changing the technological structure of the economy or the reforms aimed at improvement of the macro-economic environment for the economy.

For instance, one can speak about the structural reforms in the system of government. In our country Premier is the second important figure in the state hierarchy of the country. It is clear that under the presidential power the powers of the Premier are limited, but in our country he is not a technical Premier. Until certain time honest and ready to compromises Artur Rasizada suited the entire political elite. But the economic goals are getting more difficult and demand a different approach. Premier must take upon himself a serious burden. Mass media started writing about the ongoing struggle for the Premier’s position. Opposition media write citing some sources that all the story with the International Bank of Azerbaijan (IBA) is a result of struggle for the Premier’s position between the Finance Minister and head of the IBA.

The same could be said about the territorial-administrative division of the country. This problem has been repeatedly discussed in the past. The optimal decision for the country’s governing could be enlargement of the regions up to several big administrative formations. The Ministry of Economy has been building its regional policy on the basis of this scheme. The municipalities could become a serious help for the state machinery. The  officials have come to realization that the municipalities are needed. May be it is time to create the system of political competition, which will bring economic competition. This all gives grounds for thoughts to the authorities, because they have to implement structural reforms. May be they need to start from the elementary one – declaration of incomes and expenses of the officials and adoption of the Code of Competition.