14 November 2018

Wednesday, 04:44

CURRENCY

THE INCUBATOR OF REFORMS

Azerbaijan improves the business environment and investment attractiveness

Author:

15.04.2017

Ilham ALIYEV, President of Azerbaijan: "Azerbaijan is taking very serious steps to improve the business climate. I confirm that the entrepreneurs embrace this process with great enthusiasm".

 

The government is implementing large-scale economic reforms under the leadership of President Ilham Aliyev to prevent the negative impact of the global economic crisis and the drastic drop in energy prices on Azerbaijan. This process involves a set of comprehensive measures to accelerate the development of non-oil sector, demonopolise the national economy, improve the business environment, protect the domestic market and interests of local producers, encourage investments, export, etc. Certain steps have already been taken, including the reduction in the number of licenses, suspension of business checks, simplification of customs procedures, issuance of investment documents providing the investors access to various benefits, establishment of free trade zones, industrial and agricultural parks and zones, improvement of concessional lending to entrepreneurs, etc.

All these measures are also reflected in relevant reports and ratings of international organizations. In particular, the World Bank’s (WB) annual survey and IFC’s flagship publication "Doing Business 2017: Equal Opportunity for All" have ranked Azerbaijan the 65th of 190 countries with favourable business environment. According to reported data for mid-2016, over the past year, Azerbaijan has successfully implemented three reforms: connection to the power supply system, taxation and international trade. These measures have contributed to simplification of business management and increased investment attractiveness of the country. Azerbaijan has high ratings on the following indicators: registration of enterprises - 5th, registration of property – 22nd, protection of investors – 32nd, taxation – 40th, enforcement of contracts - 44th.

As we know, large investors seriously consider the ratings published in "Doing Business" when making decisions about their investments. This is a very important factor for Azerbaijan at the current stage of development. High international ratings promote the inflow of foreign investments into the national economy. With continuous implementation of reforms, we can expect substantial improvement of Azerbaijan's position in "Doing Business".

Apparently, the development of Strategic Roadmaps for the National Economy and Main Sectors of the Economy is the most ambitious step systemising the directions of reforms and concrete measures for the economic development. This set of documents is a combined effort of specialists from the Centre for Analysis of Economic Reforms and Communications and the renowned consulting group McKinsey & Co. These roadmaps include economic development strategy and action plan for 2016-2020 as well as long-term projects for the period until 2025 and target vision for the period after 2025.

The primary goal of the government in the roadmap is to maintain the stability of financial system and reduce the transfers from the State Oil Fund. It also provides for large-scale campaign on privatisation of state assets in accordance with a new bill "On the privatization of state property" to be adopted soon. One of the economic priorities will be the development of national agriculture. Thus, it is planned to create an agricultural insurance fund, as well as special agricultural incubators in each of the economic regions.

The roadmap also supports the development of metals industry and machine building, which will reduce the import of components for agricultural machinery, drilling equipment, and products of steel industry. Therefore, a modern metallurgical complex is being created in Sumgait as a collaborative effort of national and Italian companies and will consists of five different plants. The overall volume of investments in the construction of this complex is more than €1.2 billion.

The tourism sector will be another significant component of the national economy in the future. According to the Strategic Roadmap, the government encourages investments in the development of health, winter, environmental and other types of tourism in the country. The simplification of the visa regime with a number of countries, propaganda of Azerbaijan's tourism opportunities through holding such large-scale sports and cultural events as Eurovision, the First European Games, and Formula-1 races have significantly increased the interest of foreign tourists to Azerbaijan. The situation is reflected in the reports of international organizations. In particular, according to the forecasts of the World Tourism and Travel Council (WTTC), the number of tourists visiting Azerbaijan will reach 4.3 million by 2027 compared to 2.8 million in 2016, and their spending will double in a decade reaching ₼9.2 billion.

The development of the transport sector is crucial for Azerbaijan. Strategic railway links connecting Europe with Asia via Azerbaijan will shorten the time of cargo transportation from 30 to 15 days. Another important transport project is the North-South railway corridor, which will provide for uninterrupted shipment of goods from Russia and Northern Europe to India and the Gulf countries. Azerbaijan is an active participant and investor of both strategic projects. The ongoing construction of an international sea trade port (the largest in the Caspian Sea) is yet another contribution to the transport infrastructure. Thus, in March 2017, the Baku International Sea Trade Port received the first cargo shipped from the port of Kuryk in Kazakhstan. Until now, transit cargo transportations from Kazakhstan to Azerbaijan have been carried out from the port of Aktau. But the limited cargo handling capacity of the Aktau port, as well as unfavorable geographic conditions (direct impact of winds) were affecting the profitability of cargo operations negatively. Thus, the launch of the Kuryk ferry complex is vital for Azerbaijan. Moreover, the route from Kuryk to Baku takes 18 hours compared to 22 hours from Aktau. The role of the Kuryk ferry complex will significantly increase in the future after the construction of berths for Ro-Ro and Ro-Pax vessels. In addition, the Coordination Council for Transit Freight Transport established under the presidential order in Azerbaijan will contribute to optimising tariffs as well as improving border and customs procedures, which should increase the volume of transit traffic. The Council has already decided to reduce the tariffs for transit cargo transportation by large-capacity TIR vehicles to the ports of Kazakhstan and Turkmenistan by about 40%.

Another important governmental support comes from a large package of amendments and additions to the national Tax Code recently adopted by the parliament. The primary goal is to create more favourable conditions for business development, to increase the level of mutual trust between business entities and tax authorities, to increase cashless operations, to regulate money turnover, to stimulate the development of various fields of activity, to attract investments and new technologies, to stimulate exports and create a transparent accounting system. The Code has 201 changes including 115 new, 83 amended and 3 cancelled articles. In order to encourage investment in the Tax Code, the recent amendments provide fiscal incentives to entrepreneurs. In particular, investors acting as legal entities and individual entrepreneurs will be issued a certificate of investment promotion. The holder of such a certificate will benefit from a 50% income tax relief for seven years and full exemption from payment of property and land taxes for the same period.

Amendments to the Law "On Customs Tariffs" also exempts the entrepreneurs from paying customs duties on imported equipment for business development in priority industries for the period of seven years.

The government is also taking measures to support the agro-industrial complex. As we know, the farmers have been exempt from all types of taxes since 2001, except the land tax. The total amount of tax incentives in the agricultural sector of Azerbaijan since their introduction amounts to ₼3 billion. Since January 2016, the enterprises importing and selling grain products, including the production and sale of flour, have been exempted from VAT. The annual amount of tax benefits in this sphere of business is ₼50 million. Such tax incentives allow farmers to use savings in production. Equally important to improving the profitability of agricultural arm of the economy and the development of its individual areas are subsidies provided to farmers since 1997, which have constantly increased ever since, encouraging farmers to work effectively. Farmers have privileges when buying agricultural machinery, irrigation systems, fuel, fertilizers, seeds, grants to produce grain, cotton, tobacco, silkworm cocoons, etc. According to the Ministry of Agriculture of Azerbaijan, a 40% discount on the purchase of machinery has provided agricultural producers with savings of more than ₼60 million. The farmers engaged in animal husbandry are also subsidized: the government will pay ₼100 for each calf born through artificial insemination.

However, the strategy of developing the non-oil sector is aimed at not only meeting domestic needs but encouraging the national exports as well. Thus, the presidential orders provide for organizing export missions of Azerbaijan abroad, the study of foreign markets and marketing activities, promoting the Made in Azerbaijan brand in foreign markets, as well as certification and patenting of local companies operating overseas. To encourage the private sector to produce export-oriented products, a special mechanism has been set up to refund 3% of the customs value of exported goods from the state budget according to the list approved by the Cabinet of Ministers.

The establishment of ABAD centres, as ordered by President Ilham Aliyev, is crucial for the development of small and medium-sized enterprises (SMEs) in Azerbaijan. They will help to implement projects to support family farms and SMEs, which will be financed through a fund created specifically for this purpose. The ABAD centres will provide necessary assistance in preparing business plans, marketing, product design and branding, product certification through "a single window" principle, as well as the sales and shipment of finished products.

In fact, all these measures to support the private sector require macroeconomic stability. Therefore, the Financial Stability Council established under another presidential decree is developing a plan for stabilizing the national economy and switching to a model of economic growth, including structural and social reforms.

The World Bank (WB) is helping Azerbaijan to stabilize the situation on the financial market and prepare a medium-term fiscal framework. Thus, the international financial institute offers five main recommendations on i) the monetary policy and transition to a flexible exchange rate (already implemented), ii) stabilization of the financial sector (including the banking sector), iii) sustainable budget planning through maintaining a balance between oil and non-oil revenues, iv) transparent and fair distribution of income to avoid the main burden of declined national income affecting the most vulnerable layers of the population, and, finally, v) the government's focus on creating jobs and reforms to improve the competitiveness and access of businesses to financial resources. At the same time, WB recommends that the government of Azerbaijan consider adequately the unprotected strata of the population while implementing the reforms aimed at ensuring macroeconomic stability in the country.

Thus, despite the impact of negative processes in the global economy, Azerbaijan's economy is strengthening its sustainability through diversification, improvement of business and investment environment, development of entrepreneurship, and flexible reforms that meet the requirements of modern challenges.



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