29 March 2024

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THE VALUE CHAIN

Azerbaijani economy faces the challenge of developing non-oil exports in 2020

Author:

01.02.2020

The array of structural and economic reforms undertaken in Azerbaijan in 2019 have adjusted the goals and challenges of 2020. In general, the goal of reforms was to ensure tangible results of the tasks set by the government to diversify the economy, to increase lending to the real sector, and to develop profitable sectors. In this context, the government is developing a new plan to harness the country's huge potential for non-oil exports.

 

Ratings only

According to the forecasts of international rating agencies, the average annual GDP growth in Azerbaijan for 2020-2021 will exceed 2% due to the increase in gas production under international contracts and the development of the non-oil sector. According to Fitch Ratings, GDP growth in 2019 was 2.4% compared to 1.4% in the previous year. This was possible mainly due to the non-oil sector (3.5% growth). "We predict that growth will stabilise at 2.2% in 2020-21," the agency said in a statement.

S&P Global Ratings is a little more optimistic, predicting the average annual GDP growth of Azerbaijan in 2020-2023 at the level of 2.3%.

Remarkably, both agencies decided to keep the long-term country rating of Azerbaijan at the level of BB+, while maintaining the forecast "stable". Is it good? Not entirely, given that the government has repeatedly expressed dissatisfaction with the "mean" approach of rating agencies in assessing the economic potential of Azerbaijan. "We do not agree with this rating. I believe that our actions after the devaluation of the national currency in 2015, the progress made in improving the banking sector, were not adequately assessed by rating agencies," Finance Minister Samir Sharifov said last year. In his opinion, the country rating should be increased to BBB-.

That was exactly the situation until January 2016, when with the collapse of oil prices and the devaluation of the manat, the situation in the Azerbaijani economy really caused concerns. However, oil prices increased, and the government was able to rectify the situation to carry out reforms.

What are rating agencies waiting for? One of the reports states that the diversification of the Azerbaijani economy will take place at a limited pace. This will be followed by moderate economic growth at relatively low oil prices. This is a subjective approach, given that the same reports feature very good correlations between the growth of the non-oil and oil sectors of the Azerbaijani economy.

The approach of the analysts of Gazprombank JSC was more objective. Their reports are very popular among investors from the CIS countries. "In 2019, Azerbaijan did a great job to diversify the economy and to reduce its dependence on the oil and gas sector. At the same time, measures in this direction require further elaboration," Gazprombank said.

The share of non-oil GDP at the end of 2019 reached 54%, while the growth rate of this sector accelerated to 3.5%. "It is important to note that in 2019 it was the non-oil sector that made it possible to accelerate the growth of the Azerbaijani economy to 2.2%, while the oil GDP increased by 0.2%. In addition, investments in the non-oil sector increased by 23% in 2019 and by 1.9% in the oil sector," Gazprombank’s review of the economy of Azerbaijan said.

At the same time, Gazprombank believes that the structure of Azerbaijani exports requires further diversification. "According to the State Customs Committee of Azerbaijan, the share of the oil and gas component in the export structure remains high - 90% according to the results of 2019, including the export of crude oil (76%)," the bank notes.

 

Cluster production

The non-oil sector as a whole is developing and growing, but its share in Azerbaijan's export balance is still small. This is a serious problem. If it is not resolved as soon as possible, then ultimately the non-oil sector may lose the hard-earned interest in the country's GDP.

This caused the major discontent of the authorities regarding the implementation of previously adopted programs and reforms. Ensuring real growth in non-oil exports is one of the most important tasks set by President Ilham Aliyev before the renewed composition of the economic bloc of the government.

At the end of 2019, non-oil exports of Azerbaijan exceeded $1.9 billion. According to government estimates, this figure should exceed $3 billion by 2024.

According to the action plan developed for the execution of instructions given by the president during the meeting on the results of 2019, the Ministry of Economy of Azerbaijan will prepare a new non-oil export strategy by July 2020.

Apparently, the government is set to develop a new approach regarding the distribution of state investments, as well as the organisation of production and export of products.

According to Economy Minister Mikail Jabbarov, the government is considering increasing non-oil exports by creating various clusters. "In particular, this concerns the creation of agricultural and agrarian clusters, as well as a cluster of large, small and medium-sized businesses around the petrochemical industry, investments in this area and successful results achieved in this field," M. Jabbarov said.

The Minister believes that there is also a need to analyse the possibility of creating clusters of tourism, entertainment infrastructure, transport and trade logistics. "This will diversify the geography of exports and expand the export of services," M. Jabbarov said.

In principle, the idea of ​​cluster development of individual production areas is not new for Azerbaijan. But in this case, the government will focus on providing an additional value chain, that is, support for the processing industry by the state, represented by the National Fund for Entrepreneurship Support, the banking sector and private investors.

For example, Azerbaijan had a record crop of raw cotton last year. However, is our economy ready to accept and process these products? Unfortunately, it is not. We need a new production chain: processing enterprises, weaving plants for the production of textile and other products such as ready-made clothes. Naturally, the end product of such a chain, subject to qualitative parameters, is much more profitable for the economy than the initial raw materials, let alone the number of social problems that can be solved by creating additional jobs in new enterprises.

We should note, however, that the quality of products does not always guarantee its commercial success. Marketing policies and the correct analysis of market needs play a more significant role in this case. "Experience shows the private sector lacks knowledge and skills even when we access the foreign markets with high-quality products. That is why the state will prepare and propose mechanisms for necessary assistance to the private sector," M. Jabbarov noted.

The Ministry of Economy will continue to promote the Made in Azerbaijan brand. "I think it is necessary to verify the quality of products manufactured under the Made in Azerbaijan brand. We should bring to the foreign markets only quality products, which meet all standards," the minister said.

In addition, the Ministry of Economy plans to revise the number and format of mechanisms for promoting non-oil exports, directing support mechanisms to improve the quality of businesses and the education of entrepreneurs in order to facilitate access to foreign markets.

 

Investments

The government has set a goal to support the development of specific production chains to be able to export the final products. Another important issue is the increase in the share of investments in fixed assets, which in 2019 reached 23.2% of GDP. "Our goal is to bring this indicator to at least 25% of GDP and maintain it above this level. It is important therefore to create conditions to attract foreign investment. It is necessary to create conditions for entering our market, as well as the markets of third countries. This is important for both local and foreign investors. We are currently preparing draft trade agreements on both free trade and special trade regimes," M. Jabbarov said.

Serious changes are expected in the distribution of public investments. The main idea of ​​the state investment program for 2020 approved by President Ilham Aliyev is a correct assessment of the volume of resources with the volume of existing and initiated projects, increasing the efficiency of state investments for the coming years. "Our investment program along with the implementation of infrastructure projects should support the real sector of the economy. In particular, it is necessary to analyse the impact of these infrastructure projects on the real sector. For example, we should be able to assess the positive impact of the new infrastructure on the real sector of the economy in a particular area," president said.

Last year, the share of investments in the non-oil sector in the total volume of investments increased from 65.2% in 2018 to 69.7% in 2019. However, for more substantial growth, it is necessary to take into account the challenges that foreign markets pose to Azerbaijani producers. In other words, Azerbaijani producers should be able to access these markets with more modern products in terms of quality and price parameters. This, in turn, requires technology. "We see a solution to this issue in attracting foreign investors, private investors, investors possessing these technologies, which will provide the government with an even more supportive role in this," M. Jabbarov said.

In a word, the main challenge to the economy of Azerbaijan in 2020 is the monetisation of reforms, that is, the transformation of numerous development programs, "road maps" and action plans into real budget revenues. Of course, this process is unlikely to materialise within one year, but it is important that the process has already started.



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