REFORMS OF THE YEAR

The word "reform" came to be the most popular one in Azerbaijan in 2019, as the government implemented a series of cardinal structural and personnel changes, as well as legal, economic and social innovations in a fairly short period.

The course of reforms was set immediately after the presidential elections in April 2018, while the active phase of economic transformation took place in 2019, culminating after a meeting of the government's economic bloc under President Ilham Aliyev in October, which launched a series of revolutionary transformations in socio-economic life. Apparently, they will continue in the coming 2020.

Undoubted success

Perhaps the most noticeable reforms of the past year were structural transformations and new appointments in the economic bloc of the government. On October 23, President Ilham Aliyev signed a decree on improving the structure of the Ministry of Economy, which now also includes the Ministry of Taxes, State Committee for Property Issues, State Agency for Antimonopoly Policy and Supervision of Consumer Market. Mikayil Jabbarov (former Minister of Taxes) was appointed the head of the new 'superministry', while the former Minister of Economics Shahin Mustafayev became the Deputy Prime Minister. By the end of 2019, President Aliyev also attached extra functions to the 'old new' Ministry of Economy.

Although such a consolidation was unexpected, it turned out later that one of the ideas was to accelerate the pace of business development in the country. Of course, it is much more convenient to do this when, within the framework of one structure, the functions of protecting the interests of businessmen in front of the fiscal authorities and increasing investment attractiveness, on the one hand, and tax collection, on the other, are concentrated.

By the way, the first thing that M. Jabbarov did in his new post was to offer friendship to entrepreneurs. However... "Friendship should be mutual. Our duty is to listen to the problems of entrepreneurs and solve them. Businesses, in return, must ensure transparency of their activities, expansion, and payment of taxes. And nothing more," he emphasised.

The fact is that at the above-mentioned meeting of the economic bloc of the government under President Ilham Aliyev, dedicated to the socio-economic development of the country for 9 months of 2019, the head of state emphasized the need to strengthen the fight against the shadow economy. And this direction, judging by the subsequent actions and statements of government husbands, will be the starting point of all further reforms to ensure sustainable economic growth.

The great return

The abolition of the Financial Markets Supervision Chamber and the reverse transfer of its functions to the Central Bank was expected. Experts have repeatedly said that the Chamber did not meet the expectations. On the other hand, instead of settling the existing problems in the banking and insurance market, the chamber added some more.

In 2019, a very important step was taken for the development of the banking sector: on February 28, President Ilham Aliyev signed a decree on additional measures to address the issue of problem loans to individuals. The decree provided for reimbursement at the expense of the state budget for the difference in the principal debt of individuals in foreign currency (up to $10,000) as a result of devaluations of the national currency in 2015. As a result of the implementation of the decree, ₼633.2 million was paid to citizens as a compensation. The decree also benefited banks by significantly simplifying their portfolio of problem loans.

In addition, in 2019, the Central Bank considered the parameters of the interest rate eight times, each time reducing it by 25 points down to 7.5%.

However, the volume of lending to the real economy by commercial banks in Azerbaijan is still unsatisfactory. President Aliyev expressed his dissatisfaction on this occasion. "In previous years, I have already said that consumer loans prevail in our portfolio, and this was one of the causes of the crisis in the banking sector. I am now informed that the trends are growing again, loans are provided not for the real sector of the economy, but for consumption, that is, for the purchase of consumer products. If this continues, then in a few years we may again encounter negative problems," President I. Aliyev said.

These problems indicate that the time has come for reforms in the banking sector, and more specifically, to change the business model of banks in order to interest them in lending to the real sector.

Recently, the head of the Central Bank, Elman Rustamov, said that the process of merging the chamber with the Central Bank has been almost completed, and in 2020 one of the main tasks of the Central Bank will be the development of the financial sector. "Financial stability will be ensured, as we will continue to take measures to complete the restructuring of the banking sector. In addition, we plan to launch projects to expand the insurance sector and increase the role of the capital market. We have ambitious plans in these areas," E. Rustamov said.

Fiscal revolution

In 2019, the government successfully tested a new budget rule, which allowed Azerbaijan to unbind budget expenditures from changes in oil prices. In other words, now the government is able to plan the expenditures based on the maximum feasibility of a particular expenditure instead of changes in oil revenues.

In addition, for the past year, entrepreneurs had to get used to new, unprecedented tax reforms of the past ten years. Since 2019, individuals with monthly salaries up to ₼8,000 have been completely exempted from income tax required to pay income tax (14%) only from the amount exceeding this amount. The changes also affected the deductions of individuals (not involved in the oil and gas sector) for compulsory social insurance. To ensure economic attractiveness, these benefits were introduced for a period of seven years.

"Tax and customs reforms, as well as the transparency measures have their effect. During the last nine months, the customs and tax authorities transferred more than ₼700 million to the budget over the plan. This once again shows our great potential," President Ilham Aliyev said in one of his speeches, emphasising that the main task is to deepen the reforms that determine the country's economic development.

The changes to the Tax Code, of course, did not end there. New amendments to the code entered into force in 2020. At the same time, some changes in tax legislation are associated with obtaining additional income to raise funds for new reforms and projects.

For example, from January 1, 2020, excise tax rates on alcoholic and tobacco products and energy drinks produced in the country are increased. A portion of the proceeds from this amount will go to finance mandatory health insurance (MHI), which will be implemented in full by 4Q2020. According to the General Director of the Tax Policy Department of the Ministry of Taxes (now under the Ministry of Economy) Samira Musayeva, this practice is accepted around the world.

In total, 162 changes were made to the code, 73 of which are amendments introducing new measures and understanding, and 89 are correctional changes. First, the objective of all these reforms is to create healthy competition by establishing an equal and transparent fiscal policy. In addition, the amendments will strengthen the supervision of risk taxpayers, the fight against tax evasion, as well as reduce the administrative and tax burden of entrepreneurs, expand the tax base.

Agriculture records

Last year, Azerbaijan also carried out a set of important reforms for the development of one of the most important areas of the non-oil sector, agriculture.

On November 19, President Ilham Aliyev signed a decree "On the application of the Law on Agricultural Insurance and the creation of Agriculture Insurance Fund." The launch of the long-awaited agricultural insurance system is expected to significantly increase the amount of bank lending and private investment in agriculture.

Agriculture Insurance Fund will be operational in the second half of 2020. At the end of last year, the Cabinet of Ministers of Azerbaijan approved a list of risks that will be covered by agricultural insurance.

However, even before the start of the insurance system, the volume of agricultural production in Azerbaijan in 2019 reached a record high of ₼7.4 billion in 11 months, which is 7.1% higher than in the same period in 2018.

Last summer, by the decree of President Ilham Aliyev, Azerbaijan also determined a new procedure for subsidising agricultural producers, according to which farmers can apply for three types of subsidies - sowing, production of agricultural products and purchase of seeds. "From January 2020, subsidies will already be provided under the new system. First, this will allow us to increase productivity, employment, improve food security, as well as our export potential in agricultural sector," Minister of Agriculture Inam Kerimov said.

From debtors to donors

In November 2019, Azerbaijan became a full and active member of the donor community by signing an agreement with the European Bank for Reconstruction and Development (EBRD). In other words, the country confirmed its intention to continue the policy of turning from a recipient of aid into a donor.

During the first Eastern Partnership summit held in London, Azerbaijan signed an agreement to join the EBRD donor community. Under the agreement, Azerbaijan will provide a grant of $2 million for European bank projects. The government has already announced plans to join the list of donor countries of the Asian Development Fund in 2020. This fund is owned by the Asian Development Bank (ADB) with the aim of funding various projects in member states.

Azerbaijan also became a donor country in another international organisation - the World Bank (WB), and more specifically, in the International Development Association (IDA), which is part of the WB group.

According to the Minister of Finance, Samir Sharifov, the state budget for 2020 includes $7 million as a donor contribution to participate in three international organisations: "$2 million for participation in the EBRD, $2 million in the ADB, and $3 million in IDA projects," minister Sharifov said.

As President Ilham Aliyev noted on this occasion, "Azerbaijan became a donor country of international financial institutions. Our very stable financial position allows us to place our financial resources outside the country, meaning that our opportunities for influence are growing."

International recognition

In 2019, international financial institutions and rating agencies also supported the reformist trend in Azerbaijan. Thus, Azerbaijan entered the top 20 reformer countries in the Doing Business 2020 rating developed by the World Bank and the International Finance Corporation. According to the Doing Business report, Azerbaijan carried out four successful reforms in May 2018-May 2019 on obtaining registration of rights to real estate, obtaining loans, protecting minority shareholders and ensuring the execution of contracts.

Azerbaijan has also improved its position in the global ranking on several indicators, including 'getting credit' (1st compared to 22^nd in 2018), 'enforcing contracts' (28th vs. 40th), 'dealing with construction permits'-(59th vs 61st), and 'international trade' (83rd vs. 84th).

In 2019, Azerbaijan also ranked 58th among 141 countries in the ranking on the Global Competitiveness Index, annually compiled by the World Economic Forum (WEF). This means the country's progress in this influential report is almost 11 points up with the following indicators playing instrumental role in Azerbaijan's advancement: 'business dynamism' (23rd), 'labour market' (21st), 'product market' (23rd), 'infrastructure' (38th), 'skills' (48th), 'public institutions' (49th), 'market size' (67th), 'ICT potential' (69th), and 'innovative potential' (68th).

However, getting these results every year will be more difficult: reforms have been carried out at almost all levels and the next task is to ensure their implementation.

Therefore, it is expected to extend in 2020 the coverage of practical application of all the innovations, amenities, benefits and innovations that the reforms of the past years have accumulated.

IN BRIEF

Important events in Azerbaijan economy in 2019

• Azerbaijani and Chinese companies concluded agreements for a total of $821 million as part of the 2nd International Forum on One Belt — One Way project.

• Board of Directors of the European Bank for Reconstruction and Development approved a new strategy for Azerbaijan designed for 2019-2024. The goal of the strategy is to promote private sector development.

• In accordance with the decree of the President of Azerbaijan, a unified electronic register G2B (government to business) created, which lists the services provided to micro, small and medium-sized enterprises.

• Asian Development Bank approved a new five-year strategy for Azerbaijan (2019-2023) providing for $900 million to be allocated to the country.

• Black Sea Trade and Development Bank placed bonds worth of ₼10 million at the Baku Stock. It is the first time that the international financial institution in Azerbaijan issued securities in the national currency, manat.

• After a three-year break, the International Monetary Fund published a report following consultations with Azerbaijan. Azerbaijan has not borrowed funds from the IMF since 2006. This cooperation was based solely on technical consultations.

• The first tanker built at the Baku Shipyard, Lachin, commissioned by the Azerbaijan Caspian Shipping Company CJSC.

• The size of the minimum wage in Azerbaijan increased to ₼250, while the minimum labour pension — up to ₼200.