Effective demand support is an important condition for effective business support

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- Rovshan bey, the economic situation created by the coronavirus pandemic in the world is not heartwarming. Are the steps taken by the countries of the world to save their economy and social security of their citizens adequate?

- Theoretically, the crisis poses a greater risk to those with enormous wealth and less risk to those with smaller wealth. Those who have nothing can feel relaxed - there is no risk to them at all. In this regard, it is necessary to look at the size of the government support package in the world from this criterion - the giant economies hope to get out of the situation with huge support, medium-sized economies with medium support, and small economies with small support.

Of course, there may be a counter-argument: any economy can survive with fewer resources because it is more sustainable and healthy. This argument could be valid for previous crises. But now, when the whole economy is stagnant and economic relations with the world are equally limited for everyone, such an argument does not work and we have to stand on the previous criterion.

The form and composition of the support package and the delivery mechanisms reflect the level of perfection of the economy. For example, in countries with developed stock and securities markets, the bulk of government support is directed to the acquisition of assets (debt securities, equity securities) by central banks. Thanks to a very accurate record of the unemployed and the poor and a labor market where at least 95% of the population is legal, governments can allocate direct social assistance to those in need without much difficulty. Transparency of the economy, minimal tax evasion, maximum transparency of turnover immediately identifies those who need tax breaks.

In more primitive economic systems, aid is based on simple schemes.

- Minister of Economy Mikayil Jabbarov also announced the amount of the government's support package for the crisis - ₼ 2.5 billion. It is interesting that earlier, it was about ₼ 1 billion. But now we are talking about ₼ 2.5 billion. Is the source of this the state budget? In general, can this amount be considered sufficient?

It was announced that the support is multifaceted:

1. 304,000 employees will receive 70-100% compensation for lost wages due to the activities of the enterprises they employ;
2. Tax breaks (full and partial tax exemption) and tax strikes (deferral of tax payments) will be provided to businesses in the areas covered by the risk of crisis;
3. There will be state support for interest on loans previously taken by the business, as well as loans to be taken in the future, as well as a state guarantee for 60% of new loans;
4. Social mortgages will be supported to sustain the construction sector as one of the main drivers of the economy;
5. There will be direct social support to citizens, discounts on utilities.

- How adequate are these proposals to the situation?

- It is necessary to say one reality: in any crisis, the government's task is not to compensate for all the losses of households and businesses (including banks).

First of all, the government's number one task is to create an economic environment and system that allows the economy to emerge from any crisis with minimal losses. Especially if the economy remains highly dependent on natural resources, if there is no transparent and participatory management based on efficient public spending, then the economy's immunity to any global crisis is low. Contrary to what some of our economist colleagues say, although the size of foreign exchange reserves is a very important term for maintaining macroeconomic stability, in countries like ours, it strengthens the immunity of political power rather than the economy.

- But we are living in a period of crisis as a result of the state of emergency. Are the published proposals adequate for the current situation?

- In this reality, the government's number one task is to prevent the disruption of the economic cycle through regulatory levers and resources it has as much as possible, to prevent the crisis from crossing the country's national security borders.

In order to prevent the disruption of the economic cycle, the mechanisms supporting the proposal are coming forward - tax breaks for business, support for business loans, etc. are therefore activated. Supporting business is also indirectly supporting demand - because businesses receive raw materials and supplies from each other to make their final products and services available.

The second group of measures to prevent the disruption of the economic cycle is to support demand directly through households - in particular, to support households whose consumption reaches 70-75% of GDP, which is the main source of economic growth, becomes the number one priority for the government in times of crisis. Compensation for their lost income, expanding the scope and financial capacity of social programs in accordance with the depth of the crisis, become the main task of the government in this direction. Supporting households is also a matter of social security - the social consequences of acute poverty can have very serious political consequences.

When I say national security, I mean more food security now - support for both the agricultural sector and the food import chain must be such that, even in the most critical and protracted crisis, society's demand for basic necessities, albeit at a minimum level, can be met without significant price increases.

- Which areas will be most affected by this crisis?

- The service sectors most affected by this crisis are tourism, catering, and transport. These sectors are at 100% risk - completely deprived of income due to inactivity. From this point of view, complete exemption from expenses (property and land), benefits and simplified tax exemptions, tax holidays are the right approach for them, regardless of income. The same approach needs to be applied to a small number of paralyzed clothing and textile and beverage industries. But the most important issue here is the right choice of forms of support, as well as the extent to which the scale of support can maintain the economic cycle in these areas. This will depend on the accuracy of the economic calculations and justifications. We will have to wait because the necessary economic indicators (real turnovers in the declared areas of support, real value added created by them, and real employment scale) are not open to us - for example, at the end of the year, was it to maintain at least targeted economic growth in these areas? In general, what are the economic indicators targeted in return for this support - to prevent economic contraction, or to maintain economic growth at least close to pre-crisis levels? Of course, the officially announced support package must contain justifications.

- Wouldn't it be better to allocate the funds allocated to the construction sector to the socially oriented areas that need it the most?

- No one can deny the multiplier effect of construction, in this regard, I would not argue for the expansion of budget support for social mortgages. But the multiplier effect targeted by budget investments depends on two important conditions: the efficient and transparent use of those costs. In particular, access to these costs through procurement should be completely unhindered for all businesses, especially small and medium-sized businesses. Although the use of large budget expenditures through small economic groups in times of crisis plays a role in providing employment in the short term, the concentration of high profits and large savings eventually becomes a macroeconomic risk. Because when these fees are distributed more among subjects and economic groups, they are directed to additional business and consumption through more channels. It is a reality that as savings are concentrated in fewer boxes and cash registers, they will soon become a more reliable asset. The second important term is that budget investments should support local production, which is largely import substituting. For example, if more than half of the cost of all materials used in budget-funded homes is local, this means a huge gain and a high multiplier effect. No, if more than half of the components and raw materials for domestic production are imported, on the contrary, we are opening an additional pressure channel for the exchange rate by financing a foreign entrepreneur. It also means a low multiplicative effect at a high cost.

- And the last two points. One of the 9 programs will support a business loan portfolio worth ₼ 1 billion. And these are new loans that will revive the banking sector and have a positive impact on the financing of the real sector of the economy. What is the essence of this?

- We are lucky that our economy is not an economy with a high level of credit burden. For example, the median ratio of household debt to GDP in the world is 15%, in developed countries, it is 40-50% and sometimes higher. It is only 9% in Azerbaijan. Similarly, there are countries where the share of business loans in GDP is more than 100%, but in our country, it is around 9%. In our country, households borrow almost more than businesses. It is not just a matter of avoiding risk - it shows the potential of the financial system, the state of business, and households. In fact, this underdeveloped situation comes to the aid of the government in times of crisis - in the present case, providing interest rate support for loans of this size is not a concern for the government in terms of fiscal burden. In general, our problem is not related to the limited use of loans in the economy – it is due to the extremely low monetary multiplier, which characterizes the strength and effect of credit issuance (M3 is equal to 2.1 at the base of the monetary aggregate). In this context, the stimulation of new loans is true as a mechanism, but time will tell how effective it will be in neutralizing the effects of the crisis on the economy.

But it is also clear that credit support is also intended to protect newly recovered banks - if loans are not repaid, the quality of banks' assets and their fragile financial position will deteriorate again.

- Specifically, will the package of proposals of the Minister of Economy be useful?

- It is now meaningless to discuss the approaches to the choice of forms of business support (both tax and credit). In this case, the important points voiced by independent experts on social networks are taken into account. Just one point I mentioned above - efficient and transparent spending of funds, in particular, expenditures that require a procurement mechanism in addition to direct assistance within the package must be used in an environment that is accessible to all businesses as much as possible. The services provided by the support package account for about 5-6% of national income and 10-12% of total employment. In this regard, it will be important to stimulate demand by expanding consumption (at least to keep it stable) rather than influencing the crisis by supporting business and supply. Keep in mind that even in a country like ours, where consumer spending accounts for 60% of GDP, the main source of economic growth is households. Especially in times of crisis when government and business have limited opportunities to invest. This factor is related to the social package, which has not been announced yet.

The "black economy" and incorrect statistics make it impossible to support demand in Azerbaijan. On the one hand, there is no information on large-scale illegal employment and real incomes in this segment. The crisis does not recognize the formal and informal economy - it strikes both. But when needed, the first receives support, the second remains helpless. Now only a third of our workforce is legal. This means that at least half of consumer spending is generated by this socio-demographic group and effective support for demand is one of the most important conditions for effective business support.