Author: Fasim ALIZADEH / Nurlana BOYUKAGAGHIZI
Preferential loans, targeted programs, tax breaks... Improving the business environment and support to private sector have always been the core of Azerbaijan’s economic policy. However, the obvious problems, especially those associated with small and medium-sized enterprises (SMEs), require constant government intervention. Today it is relevant under the existing post-oil economic policy focused on the production of competitive and import-substituting products. This is the main reason for the establishment of the SME Development Agency.
Survival in competition
SMEs are the leading component of the national economies of the developed countries, and have a significant share in the structure of GDP and exports. To ensure a harmonious development of these countries, SMEs provide up to 50% of exports and 60-70% of the GDP share.
According to official statistics, the number of businesses in Azerbaijan has grown more than four times over the past 15 years. At the same time, the share of the private sector in GDP was 80%, and employment - 75%, while the specific weight of SMEs is still much lower than in the advanced economies, and hardly reaches 5%.
According to the Strategic Road Map of Azerbaijan, it is planned to increase the share of SMEs in Azerbaijan’s GDP to 15% until 2020, and to 35% until 2025. This indicator should reach 60% only after 2025. To achieve the target indicators of SME development by 2020, it is required to attract ₼700m of investments into the national economy, which is expected to increase the production potential of the country to ₼1.3b and to ensure the opening of 34,240 new jobs.
Experts believe that these goals are quite achievable. However, it is necessary to overcome a number of nuances.
In recent years, the businesses in Azerbaijan have been demonstrating an increasing tendency to enlarge - even diversified companies prefer to develop as part of large holdings, let alone the enterprises of the same production chain because it is much easier to ‘survive’ in competition as part of a larger business. On the other hand, this factor significantly affects the development of SMEs and frightens potential entrepreneurs of being ‘crushed’ by a more powerful rival. Therefore, a state support of this business segment is necessary, and this practice is widely used in the world.
According to the Minister of Economy of Azerbaijan, Shahin Mustafayev, there are specialized institutions in a number of countries that support entrepreneurs in attracting investments, applying modern technologies, introducing advanced managerial experience and innovative mechanisms for the production of high-quality, competitive, and export-oriented products. Entrepreneurs are also provided with legal and consulting services. Thus, the experience of advanced economies shows that a ‘single window’ system that helps to provide specialised services to small and medium-sized entrepreneurs gives positive results and plays an instrumental role in ensuring the quality and availability of these services.
All these tasks in Azerbaijan are entrusted to the newly established SME Development Agency.
The agency should intensify the competitive environment, demonopolisation, harmonious and sustainable business development in the regions. It will also support SMEs in infrastructure development, attracting financial resources from local and foreign investors, and promoting access to foreign markets. Therefore, it is planned to organise events that will stimulate the participation of SMEs in public procurement and in implementing measures to actively cooperate with large businesses.
The objective is to make sure that large enterprises place orders with SMEs for the production of products and services. In particular, this will include the organization of industrial clusters around large enterprises, where SMEs will be able to launch “subsidiary” or “secondary” production lines. For example, it is possible to attract a SME chain of enterprises to the production of various plastic products for a larger company, SOCAR Polimer.
A significant increase of the tourist flow to Azerbaijan makes it possible to organize the production and sale of decorative folk art, modern packaging for agricultural products, etc. At the same time, the agency should promote the sales of the Made in Azerbaijan brand products both inside Azerbaijan and abroad.
Obviously, it will be difficult to achieve drastic changes in the situation with SMEs without adequate financial support. In other words, it is necessary to create conditions for increasing the access of SMEs to preferential loans. The National Entrepreneurship Support Fund (NESF) of the Ministry of Economy has been operating since 1992 providing preferential loans mainly to SMEs through authorized banks and non-bank credit organizations. Until 2018, the Fund has issued ₼2.1b of soft loans for projects with a total amount of ₼4.5b. This year, NESF is going to expand the volume of preferential loans going beyond the amount stipulated in the state budget for 2018 (₼170m). “We have additional financial resources. We can increase the volume of financing to ₼200m in 2018. Everything depends on agreements between banks and entrepreneurs,” said the NESF CEO, Shirzad Abdullayev, adding that the amount of preferential loans may be increased, if required.
Executive Director of the Azerbaijan Investment Company (AIC), Rovshan Najaf, noted that AIC was also involved in financing SMEs by investing ₼194m in various projects worth $1.2b. According to him, AIC funds are mainly targeting medium-sized businesses, in particular, by opening industrial districts in the regions of Azerbaijan. In 2018, it is planned to create industrial districts in Neftchala, Masalli, and Hajigabul.
However, it is clear that these resources are not enough to satisfy the needs of the businessmen, as they call the lack of financing as one of the main obstacles to business development.
Ibrahim Alishov, the CEO of Financial Markets Supervision Chamber of Azerbaijan, believes that Azerbaijani businessmen need to use new financial instruments today, and the financial sector is aimed at providing easy access to them. “Today, Azerbaijani entrepreneurs resort only to such a classic instrument as bank lending in order to expand production or increase working capital. It is time to think about alternative tools, especially since we have the necessary infrastructure,” said Alishov.
According to him, it is necessary to pay more attention to the development of the securities market so that it can meet the requirements of entrepreneurs.
“It is necessary to identify the problems of the securities market and solve them. Today, the participation of enterprises in the securities market is very limited. We need to gradually change this trend. To do this, it is necessary to improve the transparency of companies, as well as improve their corporate governance,” said I. Alishov.
He said that the Chamber is currently working to expand entrepreneurs' access to alternative financial instruments. “Derivatives can be cited as an example. True, that market in Azerbaijan is also limited - today it is only focused on forex-operations. But there are other instruments in the world - futures, options and so on, and we believe that they need to be applied in Azerbaijan and offered to the business. We are working in this direction, but business should also help us in this matter,” said Alishov.
Meanwhile, despite the existing problems, entrepreneurs both from SMEs and large businesses are optimistic about the future. Thus, according to the 2nd annual survey conducted by PwC Azerbaijan among 40 heads of local private and state companies operating in the main sectors of the economy, the level of their optimism, both globally and locally, is the highest since 2010. It grew almost double in comparison with the previous survey. “When we conducted the first survey two years ago, the mood and prospects of both global and local leaders were rather gloomy. We are encouraged to note that Azerbaijan has managed to overcome many of the challenges it faced in the economy in a short two-year period. The report for 2018 showed that 66% of executives are confident in the prospects of growth of their profits,” said Managing Partner of PwC Azerbaijan, Movlan Pashayev.
The PwC report on Azerbaijan is part of the 21st annual global survey of CEOs, which is presented at the World Economic Forum in Davos.
Most businessmen are still worried about the possible instability of the national currency rate - this factor has become the main brake on business development in previous two years. Therefore, 88% of CEOs express their fears on this matter. Another traditional concern is the likely growth of taxes on business. “83% of managers consider the risk of a lack of staff and a lack of faith in business. 75% see real risks in changing consumer behaviours and costs,” shows the survey results.
Meanwhile, the managers are confident in short and medium term prospects of growth of their business with the stabilization of economic and commodity prices. Many countries are carrying out institutional reforms and diversification. They believe that the recent crisis has led to malfunctions, but it was also the main catalyst for changes and had a positive impact on both private and public sector enterprises, forcing them to review their strategies and business models.
In a nutshell, the businesses are ready for positive changes and development but they need just some support in this endeavour.