Azer Mehdiyev: Three Сrises in Azerbaijan - Pandemic, Oil Prices and Reforms

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VOA: Do you think that the government package of assistance to the unemployed and low-income population in the fight against the Corona Virus pandemic is enough?

Azer Mehdiyev: Answering your question, I can say that this is not enough. Two issues need to be considered here: firstly, the adequacy (or completeness) of the volume of assistance; secondly, to what extent the volume of assistance provided meets the necessary needs. It is extremely important to identify and include all those who have lost their jobs due to the quarantine regime, as well as other conditions created by the quarantine regime that are unemployed and do not have income (sufficient to support their families). I understand how difficult it is. The problem is that the state (public) database is too weak to make this clear. Thus, official state statistics (that is, the State Statistics Committee) claims that 4.95 million people out of 5.2 million economically active population of the country are employed, and about 250,000 are unemployed. Based on this, it is planned to provide unemployment benefits to approximately 200,000 people and create paid public jobs for another 50,000 people. The help is 190 manat per person per month - according to the minimum consumer basket approved in the country. But this is a fixed amount for one person if these people have a family and other family members are not taken into account.

According to official statistics (as of February 1, 2020), only 1,641,000 people (1/3) of the 4.9 million employed are workers, of which about 912,000 are employed in the public sector, and 729,000 are employed in private sector. Public sector workers will receive salaries. According to the government, the number of temporarily suspended jobs is estimated at 304,000 (i.e. the work of private companies, where 425,000 jobs are read, is not suspended). The government undertook to pay part of the salary that the companies were supposed to pay, provided that these people were not fired (money is transferred to employees by transferring to the companies where they work). For these purposes, 215 million manat is provided for 2 months.

Of the 4.9 million employed, just over 1.7 million are landowners. No help is expected for this category of people. It turns out that they are not affected by the pandemic (that is, they do not lose their income). This is a very controversial point.

According to official figures, more than 900,000 people are registered as individual entrepreneurs in the country, but about 300,000 of them (according to the Ministry of Economy 292,000) actually work. These entrepreneurs will be paid 80 million manat (for 2 months) for lost income.

Given the above, it remains unclear how about 1.2 million people will be employed. There are not many employers in the country (that is, the number of business owners). It turns out that so many people are busy informally. Even official statistics divide them by type of economic activity. It is clear that most of these people do not have stable jobs and stable incomes. In addition, in quarantine mode they cannot work and earn money. There is nothing in this government assistance package for this group.

The degree of assistance that can meet the needs of families is also a matter of debate. There may be different approaches and arguments. That is, on the one hand, it is important for the government to take into account its limited capabilities; on the other hand, the assistance provided should be able to satisfy the most basic foodstuffs and other basic needs of families during these temporary difficulties. This issue requires a review of the composition of the minimum consumer basket in the country.

VOA: How do you think the government should have acted in this situation?

Azer Mehdiyev: The fact is that the Azerbaijani government, in addition to the medical, social and economic problems caused by the pandemic, also faces serious economic and social problems caused by price fluctuations in the world oil market. No matter how appropriate measures and steps are to address the consequences of these two problems, they must be identified separately and then agreed upon. But the government took the path of combining these problems in advance. Thus, in the Decree of the President of the Republic of Azerbaijan dated March 19, 2020, even fluctuations in world energy markets are associated with a pandemic. However, even without a pandemic, one could expect tensions in the global oil market (due to a price war between Russia and Saudi Arabia). Impact on the economy of Azerbaijan, depending on the level of oil revenues, was inevitable. Consequently, the possible impact of the pandemic on the welfare and economy of the country should be evaluated separately, measures should be taken to minimize the negative impact of the pandemic on the population and economy of the country in order to get out of this situation with the least possible losses. At the same time, a separate program should be developed to exclude the possible impact of fluctuations in oil prices on the country's economy. In fact, after the processes of 2008 and 2014, the Azerbaijani government had to constantly update estimates of the possible impact of fluctuations in oil markets on the country's economy. But, unfortunately, even from what happened in 2015, the government does not seem to have learned enough.

It is extremely important to conduct a correct and thorough assessment in order to minimize the negative socio-economic consequences of the pandemic and minimize economic losses. As noted above, the official database of state statistics and reporting, which is currently available, makes such an assessment impossible in the short term. It is also one of the most important lessons to be learned from this pandemic.

One important issue was the development of principles for determining the impact of the pandemic on households and business support programs. Without focusing on such principles, I just want to focus on one issue. Supporting a business through households is another matter requiring a different approach. Most governments do the same. For example, in most countries of the world, governments are trying to minimize the negative social consequences by providing some assistance to all households. At the same time, the governments of these countries have pledged to fully or partially pay their employees to prevent layoffs due to the closure of enterprises. In other words, the problem of job loss was not identified with the social care of households; each of them was considered as a separate problem. In our country, the government is based on the principle that each household has at least one source of income (assistance to only one of the few unemployed at home, assistance to another family member, if the family has a social pension, exclusion of persons with land shares from any help, etc.).

VOA: As you mentioned, one of the factors that negatively affects the economic situation is a sharp drop in oil prices. How adequately does the government respond to this situation? Does the government have an anti-crisis plan?

Azer Mehdiyev: Actually, I touched on the answer to this question a little higher. The issue of reducing the dependence of the Azerbaijani economy on oil revenues has been on the agenda for many years. Following the events of 2015, strategic roadmaps covering economic reforms and economic development were also approved. However, the subsequent increase in oil prices led either to the incomplete implementation of the reforms provided for in the strategic roadmap, or to complete oblivion. The government should pursue serious economic reforms, eliminate official business, reduce corruption in the management of public finances and property, ensure an independent and fair judicial system in the country, ensure the rule of law and equality before the law, and improve the business environment. Instead of attracting investors, it is still trying to create a non-oil sector mainly at the expense of state resources. Instead of creating a fair business environment, the state has created a number of benefits and preferences for entrepreneurs, which are still mainly used by entrepreneurial officials or businessmen in the shadow of officials. Most areas of activity in the country remain monopolized by officials. The steps taken to improve the business environment mainly cover technical issues, including the application of certain concessions and preferences. Even with the creation of industrial and industrial parks and industrial districts, preference is given to the official approach and state resources. However, even without serious institutional reforms in the country, such tools will not be able to ensure the broad development of entrepreneurship. The development of the non-oil sector, especially the processing industry, requires a serious entrepreneurial approach and large investments.

In fact, the government-announced package of measures to reduce the impact of the pandemic also includes measures to reduce the negative impact of fluctuations in oil markets on the country's economy, macroeconomic stability and employment. I repeat, it is necessary to develop a separate program on this issue. The country needs serious economic and institutional reforms for the development of the non-oil sector, which is based on free and competitive entrepreneurship and meets the technological, economic and other challenges of our time. However, the measures in the package provided by the government provide for urgent measures. The measures proposed in the document are based on increasing the role of the state in the economy. Proposals for improving the management of state-owned enterprises and the implementation of measures to privatize individual state-owned enterprises were repeated for many years during each crisis and were forgotten as oil prices rose.

VOA: Can we expect sequestration of the state budget, and what expenses should the government reduce?

Azer Mehdiyev: In the current situation, sequestration of the state budget is inevitable. On the one hand, measures to reduce the economic and social impact of the pandemic create an additional social burden on the state budget. On the other hand, the introduction of additional incentives and support measures for businesses due to downtime in many areas and the loss of corporate income as a result of a pandemic, in addition to increasing the financial burden on the budget, also lead to a decrease in budget revenues. It is also unknown how long this process will last, because the extension of the quarantine regime for another month or two means an increase in the budget load. On the other hand, due to a sharp drop in oil prices, state budget revenues from the oil sector are expected to decline. Even if oil prices remain low for a long time, additional problems may arise in the second half of the year (problems with public complaints and public debt). The State Oil Fund seems to be the only source of increasing state budget revenues, and in the current situation, an additional increase in transfers from the fund to the state budget is already problematic. On the one hand, this requires a suspension of the budget rule in the legislation, which is not a good step from the point of view of effective management of public finances. On the other hand, an increase in transfers from the State Oil Fund may lead to a reduction in the fund, which has its drawbacks.

In this case, possible steps may include reducing some expenditures of the state budget, attracting additional transfers from the Fund in a small amount, or attracting additional funds to the budget in manat without increasing the transfer from the Fund in dollars. The government can also use a combination of these measures.

As for the reduction of budget expenditures, we can say that the potential for reducing the existing state budget is quite large. It is clear that the government will be able not only to reduce social expenditures of the state budget, but in the current situation, such expenditures will increase sharply. By the way, even if there were no pandemic, a long-term sharp decline in oil revenues could drive the government into a “budget trap”. In this case, this trap is quite real. The main part of the state budget expenditures that will be reduced will most likely be investment expenditures. In addition, reserve funds can be used to reduce the impact of a pandemic. However, one of the main problems in managing the state budget today is the revaluation of expenses. In other words, you can achieve significant savings in budget management by reducing costs.

Another important issue is the effective management of state-owned companies and property. It is necessary to pay more attention to such issues as the payment of dividends to state enterprises, the effective organization of relations between state enterprises and the budget, income from the leasing of state property, the competitive privatization of certain state property, increasing the transparency of public procurement.

At present, the government and society of Azerbaijan are facing a triple crisis: a crisis caused by the pandemic, a crisis caused by the falling oil prices, and a management crisis, which we can call a “crisis of reforms”. Only serious and fundamental economic and institutional reforms can lead the country out of these crises with minimal losses.

I hope that if another increase in the oil price occurs (this is not a forecast of rising oil prices), the government will no longer send reform statements to the archive.-0-