Institutional changes are needed to make Azerbaijan attractive for foreign investors

Recently, there have been reports that the Microsoft office in our country is about to close. And although the company denied this news, this is not the first time we  face the fact that such large companies leave Azerbaijan. At one time, such companies as Shell, Samsung, Nestle left the country.

Why is Azerbaijan unattractive for foreign companies?

Economist Farid Mehralizadeh answers ASTNA questions

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Question: There are reports that a Microsoft office is about to close in our country. Although the company denied this news, this is not the first time when large companies leave Azerbaijan. Why are large international and influential companies leaving the Azerbaijani market?

Answer: Unfortunately, the number of large, international, world famous and influential companies operating in Azerbaijan is not that great. In this regard, I think that the reasons  are  similar to the reasons   why companies of this type do not show much interest in the country. First of all, it is important to have a competitive environment in the country. The country cannot be attractive to foreign investors when there are opportunities for administrative intervention in the market, when the number of companies owning large shares is small, when they call for the rule of law, property rights and independence of the judiciary, naturally. At the same time, I think that multinational companies are not always willing to reckon with governments. They want to operate without any administrative interference. The factors we mentioned are the main institutional reasons why global companies do not show interest in the country.

As for economic reasons, it should be taken into account that there is a serious resource dependence in the Azerbaijani economy. Slightly more than 90% of the country's export earnings come from oil and gas products. The limited development of other industries in the country also affects the interest of global companies related to these areas. Therefore, almost three-quarters of foreign investment in Azerbaijan over the past 20 years is associated with the energy sector. A small number of developing industries in the country reduces the interest of companies operating in these less developed industries in the country.

Question: However, it has been officially stated more than once that we are interested in the arrival of foreign investors in Azerbaijan. But why is Azerbaijan unattractive for these companies?

Answer: As already mentioned, institutional factors such as competitive environment, rule of law are the main reasons. On the other hand, at present, one of the main directions of the economic policy of many countries is to encourage foreign investors. In this regard, there is serious competition between developing countries. To open new jobs, create added value, different countries use various mechanisms to attract foreign companies to the country. These mechanisms include instruments ranging from low taxes to granting citizenship. In this regard, customs and tax rates play an important role among the main instruments.

A report recently published by the World Trade Organization noted that Azerbaijan is one of the countries with the highest average customs duties in the region. For example, in Georgia, about 90% of imported products are exempt from customs duties. With this in mind, we should note that the tax and customs policies of other countries may also be more beneficial to foreign companies, which may affect their investment decisions. At the same time, many countries in the region have preferential trade agreements with the European Union and other countries with large economies. Azerbaijan also lags behind many countries in this respect. Such preferential trade with Turkey's closest ally covers a limited number of goods. Given all this, along with institutional changes aimed at turning Azerbaijan into an attractive country for foreign investors, I consider it important to review tax and customs policies and create incentive mechanisms.

Question: But, after all, there are large companies that work here ...

Answer: Of course, foreign companies operate in Azerbaijan. The share of these companies is especially high in the energy sector. But, I believe, one cannot be content with the energy sector alone. it is necessary to increase the number of companies with foreign capital in other industries as well. It should be noted that this type of company not only invests in the country and creates new jobs, but also brings their experience to Azerbaijan. And this, along with economic value, can help the country in the training of specialized personnel.

Question: What steps do you think the government should take to ensure that investors come to the country or that those who are in Azerbaijan do not leave the country?

Answer: The liberalization of tax and customs policy, and the use of incentive mechanisms, the development of capital markets in the country, the introduction of mechanisms for protecting foreign investment, and ensuring participation in management and decision-making are very important. It can be said that a large number of changes are made to the Tax Code every year in Azerbaijan. However, these decisions are in most cases taken behind closed doors, and until the last moment the public remains unaware of the essence of the new changes. Although changes in the Tax Code can have a serious impact on business activities in the country. In Azerbaijan,  wide participation in the adoption of these decisions  is not ensured,  and also information about the planned changes is at a low level. Therefore, I believe that in order for business entities to function better, along with improving the competitive environment in the country, when making new decisions, it is also necessary to include interest groups in the process.

 Question: How long will it take? Is the government interested in this?

Answer: In fact, the implementation of these changes does not require much time. If there is political will in connection with the liberalization of the country's economy, it is possible within a few years to create both a legislative framework and the organization of practical aspects of activity. We see an increase in government activity in this direction, especially during periods of falling energy prices.

But, unfortunately, this activity is unstable. However, I believe that although energy prices are currently at a level that allows meeting budgetary obligations, this situation may change in the coming years. In particular, the actualization of the energy transition poses serious challenges for economies dependent on traditional energy resources. For an adequate response to these challenges, the diversification of the country's economy is very important. To achieve this, an important role is played by investment in the country by foreign investors. Therefore, there is a serious need to act in this direction now, without waiting for the decline in energy revenues.