The government is losing the race with time

Year 2015 became a really difficult for the economy. This is not only because of devaluation, which has happened in many countries. It appeared that our economic system cannot flexibly react to the current challenges. It has not built long-term strategies (except for the oil and gas industry, which is caused by the character of the market), though this is the only way to cope with the problems of the future.

For a long time stable decline of oil prices seemed to be a misunderstanding. For this reason this year’s budget was based on the forecast oil price of $90.00 per barrel. Even with  the current low prices ($41.00-42.00) it still has a clear tendency to further decline. Is the economy ready to force major?  The state still has some money to support the economy, but it has to look for the alternative solutions for the economy. For this purpose one should as minimum has a clear understanding of where the economy is now.

Looking at the neighboring countries the government has the right to believe that Azerbaijan is doing well in this difficult year. In mid-year many international financial organizations (IFO) forecasted growth of GDP by 1.5% or at best by 2%. Meanwhile, from January to October 2015 GDPR constituted 3.3% and according to the latest forecasts, European Bank for Reconstruction and Development (EBRD) estimates the economic growth this year at 3%. The economy is withstanding a serious decline, though GDP remained negative. This means that GDP per capita, which is so important for the country, is going down. The statistics shows even more interesting data. The non-oil sector (+5.3%) has been growing slower now, which means that the resources for growth at the expense of expansion of the services sector are going down. The pace of growth of the non-oil industry was twice higher (9.6%). But as a rule, it is hard to call this growth as beginning of the structural changes in the economy. During 10 months, 2015 investments into the economy dropped by 2% to 13,087,1000 AZN (internal investments – 7,484,600 AZN – 57.2% and foreign investments -5,602,500 AZN).

Reduction of money flow in the economy has changed a lot. Even visual evaluations are enough. The shopping centres are closed in Baku, many markets narrowed down (automobile market, immovable property market) and there are more news about problems the companies are facing and their bankruptcy.

The government is losing the race with time. If the current trends of development remain unchanged, the strategic currency resources of the country will be exhausted within several years. What is next? The government has taken everything upon itself, because it was confident that it has funds for implementation of any projects. Now it does not have such possibilities and it takes a long time to find credits for many industrial projects. Beginning of construction of many plants is postponed till later. The plants initially oriented only for state orders are to the disservice to the economy. They functioned with good conjuncture and lack of competition and there was absolute confidence that there will be orders. In particular, the cluster of plants, which is a part of STP Group, is going through the crisis. The worsened economic conjuncture has led to the fact that they are losing the local market and their product was not competitive for the foreign market. Nobody remembers how the export expectations were tied up to production of solar batteries. The methanol plant built in 2014 is standing idle and it is absolutely not important who is the owner and how the credits were obtained: this is absolute irresponsible that a modern plant able to product export product is standing idle. All possible industrial parks and quarters are still on the paper and then add nothing to GDP and budget. It seems that middle-size business has just emerged in the Balakhany tax-free zone. It is interesting who is going to build the pharmaceutical plant in the Sumgait industrial zone?

Even a quick look of the statistics reveals worsened financial indexes in the entire economy. It is clear that devaluation will negatively affect the financial system of the country. It occurred in February and the banks and the entire financial system still cannot restore balance.

The government keeps on staking on the new industry. In the past months the attention was focused on growth of incomes from transit and improvement of tax collection. Several good decisions have made on transit rates. The last decision of President to speed up construction of the Azerbaijani section of the North-South corridor  was rather efficient.

As far as taxes are concerned, the budget has already become tougher and it means that the Tax Ministry has to work harder. It is obvious that transfers from the State Oil Fund (SOFAZ) to the budget will continue going down and the Taxes Ministry will have to compensate the missing revenues of the budget. In case of a wide-scale budget crisis there are only two ways out: either to raise taxes, or to reduce social spending. The first one is fraught with suppression of business and the second one with open discontent of the population.

One can only regret that in the years when the government has money, it was not concerned about the social problems. The pension fund next year will have no deficit, though one third of finance comes from the budget. But the western financial institutions say the Fund will have serious problems, if the system reforms do not accelerate. According to the rumors, the state employee will have to be employed by the state service for 30 years to receive pension. The Pension Fund did not refute this statement and outflow of state employees of the pre-pension age has started immediately. The same is happening with mandatory medical insurance. The conflicts between the Ministries, possibly Finance Ministry, have blocked its introduction, though the law on mandatory medical insurance has been passed long time ago. At the end of 2016 only a pilot project will be implemented within the selected region or a certain category of population. Russia, which has more economic problems, than we do is going to introduce a wide-scale medical insurance since 2016.

The attempt to raise taxes has already been made. Deputy Minister of Taxes Natig Amirov said that the law on state budget for fiscal year 2016 passed by the parliament envisages collection of taxes worth 6,602,000,000 AZN. The Tax Ministry has been studying all possibilities of execution of the law. The stake here is on new amendments to the Tax Code, which will allow the Taxes Ministry collecting 316 million AZN (according to the preliminary estimates). The Finance Ministry has been inspired by this year’s results. With the forecast of 4,063,000,000 AZN the non-oil sector has paid 4,812,000,000 AZN to the state budget during 10 months, 2015.

The tax agencies have been constantly looking into the new areas for taxation and we wrote about that in our last issue. Now it is the turn of tutors, babysitters, gardeners, plumbers and other workers. It is very hard to tax them and control it and this makes introduction of patents for certain types of labor very urgent.

The tax agencies have been also looking into the ways to tax the sector of virtual services. It turned out to be that the country losses $23-24 million through the plastic cards, $80 million through the e-wallets, $200 million through the totalizers and over $800 million through the internet purchases. This are huge sums from the viewpoint of outflow of capital from the country. By trying to tax all that the Taxes Ministry even makes awkward steps, such as suit against Alisher Usmanov.

The government sometimes complains about criticism of its economic policy. But it actually can do a lot more. It was enough just to slightly “open up” the customs to reduce the growing import. The conditions of import and export must be simplified and equal competitive conditions will reveal efficient manufacture by themselves. The government should also not delay adoption of the Code of Competition, which is a very important anti-monopoly document. Amnesty of capital is also inevitable not only for solution of budgetary problems, but as a signal of changing of rules of the economic game. The officials involved in business are able only to build and buy, because of a good corruption margin there. They are rather interested in the process, than in creation of viable enterprises. The government is not creative. It is important to involve new business into the economy and toughen the rules of state acquisitions. It is also necessary to introduce the mechanisms of bankruptcy. In Russia over 11,000 companies have announced bankruptcy. Nothing serious has happened, because bankruptcy is  a part of the economic process.

The most important thing is start a hunt for foreign direct investments into the non-oil sector. In addition to the government, we also have such institutions as Azerbaijan Investment Company, Azpromo and the intergovernmental economic forums. One would like to believe that President has visited China to get the investments. In the past the local capital put obstacles to “strangers”, in particular, energetic Turkish capital. But closure of the Russian market for Turkey is a serious change. Most likely the Turkish capital will start looking for the niches in Azerbaijan, as our businessmen find them in Turkey. But Turkey does not have high entrance barriers and artificial customs limitations and its business is better protected by laws and courts. The same conditions must be created in Azerbaijan.

Investor is ready to take a risk, but it most of all likes clarity. General Prosecutor’s Office has made a statement about organized criminal group in the Ministry of National Security. It is not clear how fear could become an instrument of extortion and corruption in the Ministry, which goal is to safeguard security of the country and its citizens. In the eyes of an investor this is a political risk and the government should be able to clearly explain the reasons of the latest dismissals – failures of Minister that have overestimated their powers, beginning of struggle against corruption in most serious links of the state apparatus or a conflict between various economic groups in power? The society also needs answer to these questions.