MAP OF CHANGES

Azerbaijan continues a series of economic reforms to prevent the consequences of the global crisis incurred by the fall of oil prices. Moreover, as reported by the government, the reforms are grouped based on a special roadmap with a list of common objectives until 2025. While the details of the roadmap are not disclosed, we are aware that it will focus on the creation of a competitive economy instead of the energy sector. According to Ali Hasanov, Assistant to the President on Social and Political Affairs, the concrete steps to strengthen the financial system, in particular the national currency, have been identified within the overall economic strategy.

It is the situation around the national currency, which urges the government and the Central Bank to initiate a series of measures to ensure the stability of exchange rates and the dynamics of price growth.

Restraining the Manat

Devaluation expectations in Azerbaijan simmering since the early summer have reached the peak in September. The majority of banks have refused to sell dollars to the population, which was regarded by many as a signal of the upcoming fall of the manat. However, the Central Bank has been regulating the exchange rate of US dollars within 0.25%, and at the same time together with the State Oil Fund (SOFAZ) has supplied more US currency to the market than usual. Given the growing demand from the banks, both SOFAZ and Central Bank supplied $300 million instead of $50 million on September 8, and $150 million each on September 20 and 22. It is clear that such interventions cannot be permanent, and this imbalance in the market will eventually incur rapid depletion of foreign exchange reserves.

Furthermore, the fear of sharp exchange rate fluctuations has paralyzed the national banking sector: the banks avoid lending in national currency while clients are reluctant to borrow in US dollars. Besides, the bankruptcy of some banks has affected the deposit portfolio of other players in the market. It is suffice to say that at present, the dollarization of bank liabilities exceeds 80%.

However, the uncertainty of foreign exchange rates affects the national economic chain as a whole. Therefore, a two-digit inflation rate (11%) and a 3% decline in GDP during January-August were quite expected. At the end of last year, the government and the Central Bank decided to solve the problem partially through a sharp devaluation of the manat. This time, however, they will also use some other tools available internationally.

Thus, on September 14, the Central Bank increased the interest rate from 9 to 15%. According to an official statement, this decision was adopted as part of anti-inflation measures, as well as the given imbalance of payments and the trends in the currency market. This was followed by the decision to raise the interest rate from 12 to 15% on bank deposits in national currency covered by insurance. So, this move should be an impetus to increase interest rates on deposits, which in theory should expand the clientele of the banks.

On the other hand, the growth of interest rates will inevitably lead to more expensive loans. This raises concerns about the legitimacy of this move, as the volume of bad loans already reaches 1.5 billion AZN. Popular consumer loans will become unprofitable and this will affect the population's purchasing power. According to economists, however, these measures should restrain the inflation: decrease in demand for goods and services lead to slower price growth.

Meanwhile, the analysts of Sberbank Investment Research believe that the decision to raise the discount rate may well be a signal of the upcoming decision of the Central Bank of Azerbaijan to ensure freer floating rate for the manat. However, Elman Rustamov, Chairman of the Central Bank, has once again assured the journalists that CBA will try to achieve predictable rates of manat, although it is extremely difficult today. According to him, since the beginning of 2016, the average rate of manat has fallen 5%, although they had witnessed even 10% changes occasionally.

The Azerbaijani Minister of Finance Samir Sharifov is also confident that the national currency will reach fair exchange rates when the balance between the inflows and outflows of foreign currency is secured.

“This process depends on several factors. As you know, one of the main export products of Azerbaijan is oil. Accordingly, higher oil prices have a positive effect on exchange rates, that is, strengthen the national currency. Otherwise, this will put pressure on manat. Today we should try to reduce our import dependency through replacing import operations with domestic production. President Ilham Aliyev has challenged the economic structures with the creation in Azerbaijan of a production line aimed at replacing imported products. This will certainly reduce the country's import dependency and will restrain the outflow of foreign currency from the country”, said the Minister.

Mr. Sharifov added that it was required to ensure that Azerbaijan receives more foreign currency. “While keeping the oil as a traditional export product, we must try to increase the range of export products gradually and have a broader access to foreign markets. We believe that if we solve these two problems, the manat will not only stop being cheaper but will get even stronger”, said Sharifov.

The carrot-and-stick policy

The recent presidential decree banning the imports of goods and services through the agencies and organizations financed from the state budget as part of the public procurement policy effective until January 1, 2018 is based upon the above-mentioned goals of the government. This should encourage the development of entrepreneurship in Azerbaijan, improvement of business and investment environment, as well as the competitiveness.

Furthermore, President Aliyev ordered the creation of a unified database of goods produced in the country. For example, the Center for Analysis of Economic Reforms and Communications is instructed within three months to develop a trilingual ​​(Azerbaijani, Russian, English) Internet portal, which provides information on national goods and their manufacturers, as well as to carry out regular activities promoting and campaigning for such national goods on the portal.

Thus, the promotion of national products will be implemented both administratively and through advertising. Why the first presidential decree is relevant? Here is the answer... Despite significant reduction in capital costs, the construction and infrastructure works in the country, albeit in smaller quantities, are continued. However, in January-August 2016, the volume of production of construction materials in Azerbaijan decreased by 17.2% in comparison with the same period of last year. It is clear that decreasing demand urges local enterprises to reduce production volumes. Furthermore, by purchasing goods abroad, the contractors of large construction and infrastructure projects promote the outflow of significant amounts of currency from the country, which, as mentioned above, can considerably shake the staggering rate of manat. Also, according to official statistics, the volume of non-oil GDP fell by 5.8%, which is due to a decrease in production volumes of the construction sector by 32.3% during January-August 2016. In this case, the only quick way to revert the declining dynamics of growth is to ensure a complete reorientation of customers to local production.

The intention of the Azerbaijani authorities to accelerate the transition to a new economic model based on the growth of non-oil private sector still requires large structural reforms. According to Head of Azerbaijani Mission of the International Monetary Fund (IMF) Mohammad al-Gorchi, these reforms include increasing the competitiveness, simplification of procedures on starting business in Azerbaijan and the creation of conditions for the growth of investments to education and human capital. “The transition to a new economic model, to a greater extent is based on the growth of the private non-oil sector, which requires full liberalization of markets for goods, labor and production, the presence of well-functioning financial markets, as well as greater efforts to improve governance. IMF can assist Azerbaijan in improving the macroeconomic policy and its foundations, as well as the strengthening of institutions”, said al-Gorchi.

From ASAN to ABAD

For now, the government has decided not to wait for any external support and launched yet another major project aimed at helping local entrepreneurs. According to the presidential decree, a legal public entity ABAD was created under the auspices of the State Agency for Public Services and Social Innovations (ASAN Service).

“The ABAD Centers (Ailə Biznesinə Asan Dəstək - Simplified support to family businesses) are created to support the active participation of citizens in social and economic life of the country, development of small and medium-sized enterprises (SMEs), increasing the level of employment and formation of competitiveness of family businesses”, reads the text of the presidential decree.

The ABAD centers will focus on projects supporting the households and SMEs, as well as will guarantee financial support to such projects; help in preparation of business plans for households and SMEs; provide marketing, branding, design, financial and accounting services and legal assistance, simplified certification procedures (“single window”) for products, transportation and sale of such products.

The scope of functions of this new structure is quite broad and, as a priority, the center will focus on small family businesses. What will be the benefits? Firstly, family businesses is the basis of agricultural sector in many developed countries. In Azerbaijan, they often have to go through a lot of bureaucracy, since the poor legal and financial knowledge of entrepreneurs does not allow them to develop their business, to go beyond the low-cost supplier of raw materials and establish large-scale processing plant. The lack of initial capital limits the villagers’s capability to own and use land plots effectively.

Therefore, ABAD centres will solve all the problems of businesses, and they only need to work for the benefit of themselves and the economy. The credibility and trust won in a short period of activity by ASAN Service will undoubtedly help the rapid growth of the client base for ABAD. In the end, along with the settlement of economic problems, this will increase the volume of certified production of local products and result in the growth of non-oil GDP and exports and solution of a range of social problems. The villagers will be employed and be able to have a steady income, while the outflow of the working age population from the regions will decrease restraining the level of poverty. In addition, special ABAD containers will be manufactured to produce a variety of agricultural and other products in order to support low-income families. By the way, some sample containers were shown to President Ilham Aliyev at the opening of ASAN Həyat centre in Masalli.

ABAD can safely be called the most large-scale government project as part of its economic reforms. President Aliyev has earlier instructed the government to prepare a strategic roadmap for the national economy. According to Executive Director of the Center for Analysis of Economic Reforms and Communications Vusal Gasimli, the document reflects three main issues: investment promotion, access to the commodity markets, as well as the intellectual capital of the organization. In this case, the old economic basis formed by oil revenues creates a very good opportunity for the transition to a new economic model.