A FUNDAMENTALLY NEW STAGE

Complicated as the year 2015 was for the world, economically, we can have no doubt that the situation will not stabilize soon. As a result, experts are ever more frequently speaking about the approach of a fundamentally new stage in the global economy and call on the governments to get prepared for it.

It is only natural that there is no way for these developments to leave the economy of Azerbaijan unaffected. Therefore, the government of this country will focus all its efforts in the current year on avoiding strong external and internal shocks and maintaining social stability. Fundamental structural reforms, an austerity policy for state funds, additional support for the non-oil sector development and elimination of monopolism - these are but a few of the priority steps which were the subject matter of the two meetings of the Cabinet of Ministers chaired by President Ilham Aliyev.

In particular, at issue is the preparation of an austerity income and expenditure estimate for four years including the current one. In addition, financial discipline and order will be strengthened to ensure the economical use of state funds, prevent misuse and dissipation of funds, improve the system of state administration, implement reforms in the management of state-owned companies, give added impetus to the process of state property privatization, achieve substantial consolidation of the banking system and enhance confidence in it.

Furthermore, President Ilham Aliyev identified as a priority the restoration of confidence in the national currency and the stabilization of the situation with excessive dollarization of the economy. "It has no economic basis. In Azerbaijan, there was a certain degree of excitement, which was associated with the processes taking place in other countries," said the head of state.

As part of preventive measures, he pointed to the possibility of increasing Azerbaijan's foreign debt, which currently stands at just 12 per cent of GDP. This is a rather low value, so the attraction of additional currency resources from the foreign exchange markets should not create any problem for the country.

The issuance of government loans may also be considered. "This is even done by countries that produce and export oil in much larger volumes than we do," said Aliyev.

The complete production cycle

According to President Ilham Aliyev, the government needs to immediately implement a whole range of urgent measures to stabilize the economic situation. In particular, special attention should be paid this year to attract foreign investment to the country's non-oil sector as well as the spheres aimed at the manufacture of export-oriented products. "Unfortunately, we have been unable to fully ensure food security thus far. At the moment, we cannot enter the world markets through the non-oil sector with major export commodities," Aliyev said.

The most urgent problem to date is the absence of fully integrated production of any given product. For example, even the fact that packaging materials are mostly imported from abroad greatly contributes to the increase in price of the final product. "Notwithstanding that Azerbaijan largely satisfies its needs both for building materials and food products, all of such products contain an external component as their constituent. We have to try and eliminate the external component in the coming years," the president said.

In addition, he stated the need to implement a broad privatization programme, saying that this process should be completely transparent, with the involvement of international experts. "For now, there are many non-privatized enterprises in Azerbaijan, whose activities are suspended. In some cases, such enterprises are in a dilapidated state but own large plots of land," the head of state noted.

In particular, the president also pointed to the need of creating industrial and technological parks in which it would be possible to organize a complete cycle of production. Only in this way will it be possible to offer the market new kinds of local products, providing for import substitution and influencing prices.

Within the framework of promoting local production, the parliament has adopted amendments to the Tax Code, providing for incentives for investors.

Specifically, businessmen in Azerbaijan will be provided with an investment encouragement document based on which 50 per cent of the income of an individual entrepreneur and of the earnings of a legal entity will not be taxed for seven years. Entrepreneurs are also exempt from paying property and land taxes for the same period, while the import of technological equipment will be exempt from customs duties and VAT for seven years.

It should be noted that, as of 1 January 2016, the import, manufacture and sale of wheat, flour and bread shall be exempt from paying taxes for a period of one year, which has already resulted in a decrease in the price of bread.

Control and transparency

About prices, by the way. Against the background of the objective reasons for a rise in prices of a number of commodity groups, there are instances of objectionable actions on the part of domestic producers who raise margins on their products severalfold. "We must put an end to artificial price rises and administer very strict punishments for such actions. We should not be limited to fines. Prosecution authorities should take this issue very seriously," the president said.

Not only will the activities of individual dealers be subjected to greater control. Absolute transparency in the area of customs clearance of all import-export operations and the elimination of monopolies can have a real impact on the pricing policy. Full transparency and transition to the principles of corporate governance are also required from state-owned companies that are under state monopoly. Along with this, mechanisms of social control should be developed.

In the light of recent events related to the detection of criminal activities in a number of government agencies, there is a need to scrutinize the correctness of spending of public funds in all areas of economic activity. For example, as the President rightly put it, the state should already derive benefit from the functioning of the two satellites, but this is not yet the case. "The government has allocated more than sufficient funds to this area. Audits show that these funds have been used dishonestly. We are not speaking about waste, but about a big crime," the head of state noted.

In principle, he said, the structure of state bodies should be such as to enable them to carry out responsive, flexible and very efficient policy. "Therefore, overlapping or less required state agencies should be either merged or abolished," Aliyev said.

Consolidation of banks

Further, it is necessary to create most favourable conditions for the development of local business entities. "Do not interfere in their work, on the contrary, encourage them and regularly report how much capital is invested in each region and what the source of investment is," the head of state said.

Moreover, as part of support to the development of independent business in the country, it is necessary to continue the practice of providing financial assistance to entrepreneurs by issuing preferential credits. Along with the state represented by the National Fund for Entrepreneurship Support, private commercial banks should be involved in this activity.

For the sake of fairness, it should be noted that the current situation in the banking sector is far from being bright. Today, nobody denies the fact that only the strongest will survive the battle with crisis. The most sensible option proposed in this situation is consolidation of banks and reduction in their number with simultaneous increase in their volume and opportunities. International rating agencies consider this sequence of events as appropriate, too. Thus, according to Central Bank Governor Elman Rustamov, the consolidation process can span five-seven banks in Azerbaijan. As part of anti-crisis measures for the banking sector, the country's Milli Maclis [parliament] legislatively approved the elimination of the limit on deposit insurance in banks and exempted bank deposits from income tax.

Rustamov also announced easing of requirements for the repayment of dollar-denominated loans, taking into account the devaluation of 21 December, which is an issue of vital importance for society.

He noted that the Central Bank of Azerbaijan is ready to discuss the issue of repayment of dollar loans at an exchange rate of 1.05 manats per 1 dollar and to extend this provision to cover loans of up to 5,000 dollars.

According to him, as much as 250m manats may be needed to compensate for exchange rate differences in this case.

In exchange for state support, President Aliyev urged banks to ensure the interests of the state and invest in spheres needed by the state, as well as to provide loans. Businessmen are expected to follow suit. Thus, the Ministry of Economy has prepared investment projects worth a total of 1.5bn manats, and if we step up their implementation, we may be able to fully meet our needs within one or two years.

It should be noted that Milli Maclis, within the framework of measures to counteract the export of capital, approved amendments to the law "On currency regulation". According to the amendments, a fee will be collected in Azerbaijan at a level of 20 per cent of the volume of foreign exchange remitted abroad for the purpose of direct investment, acquisition of securities, real estate and land.

In particular, a legal entity or a private individual will have to pay this fee if the dollar equivalent of the amount transferred is in excess of 50,000 dollars.

Growth in economic activity

As part of efforts to step up economic activity, the president also suggested offering businessmen the full opportunity to implement large-scale construction projects. "The construction sector must develop in an absolutely free fashion; certainly, on the condition of compliance with urban development rules. But all artificial obstacles must be removed," he added.

Addressing the business people again, Ilham Aliyev urged them to notify him in person on all cases of violation of their rights and interference in operation. "I must be regularly provided with information on how many construction projects have been implemented in each quarter, where they are being implemented and how this reflects on the labour market," he emphasized.

Another sector that should have already become profitable is tourism. Huge budget funds have been invested in the creation of the necessary infrastructure in the regions of the country; millions [of manats] have been spent annually to promote tourism opportunities, create conditions for free access to the country by tourists. What is needed now is an objective analysis of problems and urgent implementation of a set of measures to accelerate the development of this sphere.

The efficient operation of transportation corridors can bring considerable additional revenue to the state treasury. "Today, we do not use our transit potential at the appropriate level. Why? Because each of the transport structures - the Caspian shipping company, the railway, and the port - pursues its own corporate interests, while the interests of Azerbaijan suffer as a result. This must not be tolerated. Full transparency should be ensured here as well. Revenues should reach the state coffers; thanks to these revenues, we will make even more investments, create more infrastructure facilities," President Aliyev noted.

Thus, the main areas of the government's activity under deteriorating external economic factors have been specified. It should be added here that, as a priority measure, President Ilham Aliyev has identified neutralizing the possible negative impact on vulnerable groups of the population, of rising prices for essential commodities due to a lower exchange rate of the manat. With this in mind, instructions have been given to increase by 10 per cent the basic part of pensions, social benefits and salaries of all public sector employees, including teachers, doctors, scientists, police, etc. The president noted that such measures might be repeated in the future. "For the time being, we have enough resources to do it. This is a manifestation of our strong social policy," said the head of state.

Thus, while the coming year is going to be quite difficult for Azerbaijan's economy and the country as a whole, and for the entire world for that matter, it is nonetheless possible to achieve a qualitative improvement in economic conditions and actual lowering of the country's dependence on oil with the timely and correct implementation of the tasks posed. As is known, the fastest and the best development occurs in difficult times...