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Azerbaijan to continue reforms to enhance the role of business in the non-oil sector

Author:

15.07.2018

The main tasks of the Azerbaijani government for the coming months, as underlined by President Ilham Aliyev during the Cabinet meeting on the results of social and economic development in the first half of 2018, are the deepening of economic reforms, ensuring maximum transparency in financial sector, increasing activity of entrepreneurs. “We must make sure that the national economy becomes a long-term and stable economy to further reduce dependence on oil and gas and to continue the development of the non-oil sector,” President said.

 

Full transparency

President Aliyev noted that it is required to deepen transparency in the non-oil sector to invest more large foreign investments. “The main reason for the inadequate level of foreign investment in this sector is an opaque environment. It is also necessary to take additional regulatory measures,” President said.

Both the tax and customs systems undergo reforms particularly in these areas in order to improve the level of their activities to international standards. “All state institutions, as well as entrepreneurs should know that the tax and customs systems provide full transparency, create equal conditions to put an end to unhealthy competition. Entrepreneurs should absolutely clearly know the rules of work. They are very simple: to observe the laws, pay taxes in full, not to engage in smuggling, and not to damage the economy of the country,” said Aliyev.

Entrepreneurs should also answer in equal manner – the objective of the expected fiscal measures is to put an end to tax evasion. So, it is planned to decrease most of the ‘popular’ tax rates to make it easier for entrepreneurs to pay them than fines. “Every entrepreneur must fully pay taxes, no other payments other than tax. I address to both government agencies and entrepreneurs. If such facts occur, they must immediately inform the Presidential Administration and the relevant agencies directly, as we must continue and complete the policy of full recovery in this area,” said Mr. Aliyev.

According to him, in this regard, the fight against corruption and bribery will be strengthened considering international experience in this area.

 

Contradictory inflation rates

Main macroeconomic data for the first half of 2018, and the revision of the state budget, as well as a three-fold decrease in the Central Bank's discount rate, in theory, should already act as sufficient incentives for growth in business activity.

According to statistical data for six months of 2018, GDP growth was 1.3%, while the non-oil sector grew by 2%, and non-oil industry by 8.8%. This proves that “investments in the non-oil sector and state support to entrepreneurs bear fruits”. At the same time, the growth in agriculture was 7.6%.

Perhaps, inflation is the most interesting macroeconomic indicator of this year. Over the past months, it was only 3%, while as early as 2017 the average annual inflation in Azerbaijan was at the level of 12.9%. The government and the Central Bank predicted that inflation rate will be lower this year down to a single-digit indicator but such a low indicator surprised them as well. Either way, the chairman of the Central Bank (CBA) Elman Rustamov said that in the autumn the CBA is likely to revise the inflation forecast.

“The observed decline in prices is seasonal. At the end of the summer season, prices for certain goods will return to previous indicators. I think that by the results of nine months of this year we will be able to revise the inflation forecast for 2018,” said Mr. Rustamov indicating that the main task of CBA is “to keep inflation rate at a single-digit level.”

Earlier this year, the Central Bank and the Ministry of Economy of Azerbaijan expected average annual inflation rate in Azerbaijan in 2018 be 6-8% and 6.1%, respectively.

In fact, if the excessively low growth rates of consumer price index is a good indicator for the population, then, according to economic theory, it is a signal about a possible slowdown in business activities, which in the long term may cause problems in the economic growth of the country. Indeed, it is inflation that encourages companies not to accumulate funds in anticipation of rising prices and profitable conditions for production, but to invest them in the economy.

To stimulate business activity, CBA also reduced interest rates three times in 2018. The last time in June, it fell from 11% to 10%, while the lower threshold of the percentage corridor was kept at 8%, and the upper one from 14% was reduced to 12%. Recall that at the beginning of the year the discount rate was 15%.

As reasons for this decision, the CBA called the increase of foreign exchange reserves, stimulation of economic growth due to an increase in state investments, maintaining positive dynamics of the balance of payments, etc. Moreover, E. Rustamov reported that the CBA plans to continue reducing the discount rate. “If we take into account the current level of inflation, and if this indicator continues until the end of the year, the comfort zone of the discount rate will be 8%. But if inflation in the second half of the year reaches the forecasted figure of 6-8%, and this is possible given that the last quarter of the year, the price increase is activated, then the comfort zone can grow,” Mr. Rustamov said.

In Azerbaijan, the reduction of the CBA interest rate is a signal to the participants of the financial market to reduce interest rates for various operations, primarily loans. Low interest, in turn, attracts entrepreneurs and encourages their businesses. True, while the desired effect cannot be achieved, banks are still cautious about revising their interest rates, as the credit boom of previous years is quite expensive for them in the form of an impressive portfolio of bad debts. “Reducing interest rates on loans is a complex process, and a number of other measures are required,” the head of CBA believes.

 

Stable manat

Another important factor hampering the business activity of both banks and business is the devaluation expectations. It is well known that the crisis in the foreign exchange market in any country in the world, even if it is short-term, continues to negatively affect the overall situation in the economy for some time after the onset of stabilization. The point here is, rather, the restoration of confidence in the financial and business environment for the resumption of previous activity. All these factors are observed in Azerbaijan, where the banking and private sectors, after two devaluations in 2015, are still wary of the forecasts in the foreign exchange market, despite the fact that the manat has not jumped almost for the second year already. However, at every meeting between the head of the Central Bank and representatives of the media, he invariably asks about the possibility of reducing the national currency rate, and he patiently explains that there are no fundamental reasons for this, which, as a rule, means external factors such as oil prices, sharp changes in economies of partner countries, etc.

Currently, the average annual oil price is $70, which is 30% more than in the same period of 2017. “High oil prices led to the growth of the country's strategic currency reserves and the CBA's foreign exchange reserves by more than $2 billion. The growth of foreign exchange reserves in the domestic market shows that the supply exceeds demand. Accordingly, devaluation of manat is out of the question when in the currency market the supply exceeds the demand by more than $2 billion,” E. Rustamov said during his last press conference.

At the same time, Elman Rustamov believes that the increase in transfers from the State Oil Fund (SOFAZ) to the state budget will not affect the currency market under the updated state budget for 2018. According to the amendments recently approved by President Ilham Aliyev, the expected increase of SOFAZ transfers (₼1.75 billion) will increase its budget to almost ₼11 billion. According to E. Rustamov, a certain part of investment spending is carried out in foreign currency, as well as transfers of the Oil Fund. Therefore, there will be no pressure on the market. The amendments envisage an increase in the revenue and expenditure of the state budget for a little more than ₼2 billion.

Today the Azerbaijani economy has all important components for stable and favourable growth of investments from large, medium, and small businesses. We just need to wait until the end of this year to get to know new macroeconomic indicators that reflect an adequate response of entrepreneurship.



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