NEW REFORM TRENDS

Three state programs launched in 2004 to ensure the socio-economic development in the regions have had a beneficial effect on the overall development of the national economy in Azerbaijan. They have made it possible to develop modern infrastructure in peripheral regions and their agricultural, industrial and logistics potentials. As well, they have played an instrumental role in overcoming the consequences of low oil prices and other negative processes that dominate the global economy today. At the conference on the results of the first year of the 4th State Program on Socio-Economic Development of Regions 2019-2023, President of Azerbaijan Ilham Aliyev outlined the urging problems and identified key priority areas for economic development.

Positive results...

In his speech, President Aliyev noted that Azerbaijan continues to remain attractive for investments ($13.5 billion), which contributed to the creation of 98,000 new jobs. Thanks to the prudent use of public funds invested only in projects of strategic importance, Azerbaijan's foreign exchange reserves increased by $6.4 billion, hence reaching $52 billion in January 2020. Macroeconomic situation is also quite stable: inflation was only 2.5%, and household income rose by 7.4%, that is, almost three times higher than the annual price increase.

Last year the government realised a number of infrastructure projects, including for electric power production. The generating capacities of increased by an additional 800 MW thanks to the new Shimal-2 terminal (50%) and the restoration of the lost capacities of power plants (50%). Today Azerenerji's reserves reach 1,000 MW, making Azerbaijan an exporter of electricity (about $65 million) last year.

At the same time, the gasification continues in the regions of Azerbaijan (96%, which is one of the highest rates in the world).

Significant accomplishments were recorded in irrigation: approximately 80,000 hectares of land plots were supplied with water with more than 300 sub-artesian wells drilled. Last year 1,300 km of roads were constructed (16,700 km of roads in total over fifteen years). Azerbaijan holds the 27th place in the world ahead of many developed countries by the quality of its roads infrastructure. In 2019, the construction of ring railway line in the suburbs of Baku, as well as the upgrade of the railway infrastructure to increase the speed of north- and southbound trains continued as part of the projects implemented in the railway sector.

"Summing up the implementation of projects within the 4th State Program for the Development of Regions, we can say that the tasks set for 2019 were mainly solved. However, there are certain lags in some areas, which require special care to resolve these issues this year," President Aliyev said.

... and remaining problems

The problems identified by the president can be analysed in several groups. The most urgent challenges for the current year are the fight against unaccounted turnover, shadow economy, corruption and bureaucratic arbitrariness, as well as the prudent use of state funds in infrastructure projects. It is also necessary to review the state investment policy and to encourage entrepreneurs to more active involvement in production and processing sectors.

"We demand entrepreneurs to be conscientious, not to evade fiscal obligations and not to pay extra to any other institution or person in addition to taxes. Quite often, it is the bureaucratic practices and red tape that impede the development of entrepreneurship in Azerbaijan. Should someone demand something from you unreasonably, do not hesitate to let such facts known immediately to my administration, the Cabinet of Ministers, and central executive bodies," President Aliyev said.

On the other hand, entrepreneurs have to also fulfil their obligations by declaring the real volumes of the manufactured or imported products. It is also required to prevent business collusion with corrupt officials who turn a blind eye to tax evasion, double-entry bookkeeping, as well as the manipulation of VAT and commodity groups, etc.

In a word, businesses need to do take their business out of the shadows completely. Given the unprecedented level of violations in this area, tax and customs authorities introduced major reforms last year by amending the fiscal legislation. These measures helped to collect over ₼1 billion in excess of the 2019 forecast. They continue this year too: in January, tax authorities collected ₼120 million more than forecasted, and customs authorities - ₼40 million.

"Previously, this money went into someone’s pockets, leaving our citizens deprived of these funds. We must end with the shadow economy. Government agencies have set a transition period, since it would be wrong to immediately take extremely tough measures. But we cannot extend this period of indulgency infinitely. This year the whole economy should go out of the shadows with all entrepreneurs paying taxes. No one will be given leeway, nor will there be 'untouchable' entrepreneurs and officials," president said.

President instructed the Cabinet of Ministers to tighten control over violations of the labour law, prevent the unjustified job cuts, observe the norms of an 8-hour working day, and most importantly, ensure the conclusion of labour contracts, which are supposed to ensure the payment of pensions, medical insurance, etc. Unfortunately, further progress in this area is expected, as payments to a considerable part of employees remains unaccounted with no social insurance taxes paid.

To reduce unemployment, the government is implementing an array of social projects, which create paid public jobs for almost 40,000 people. "Unfortunately, we have recorded a number of violations in several regions, where the government officials appropriated the funds for opening jobs for the poor. Violators are held responsible and will be punished should they commits such shameful acts again," Ilham Aliyev said and instructed the Ministry of Labour and Social Protection to register all jobs for social projects and exercise strict control over the spending of state funds.

More control

It is also planned to revise scrupulously the areas of state concessional funding of businesses and the assessment of the effectiveness of relevant projects. More than ₼2b was provided to entrepreneurs on preferential terms, and this process will continue this year (₼200 million). However, according to President Aliyev, it is necessary to tighten control over the targeted spending of these loans, as well as to review business projects, since analysis shows that an excessively large amount of money is often spent to create each job.

At the same time, it is proposed to shift the vector of investment policy from large projects to soft loans mainly targeting the needs of small and medium-sized businesses (SMEs). The gross domestic product of developed countries is largely formed by SMEs, and Azerbaijan should move in this direction too.

As for the implementation of large projects, the government will pay special attention to the development of agricultural parks to ensure food security and expand export-oriented production. Work is well under way to complete the construction of 51 agricultural parks to ensure the production, processing, packaging and logistics of agricultural products. Thus, 22 agricultural parks have been created in the regions with yet another 11 planned to be created in the near future. "I was told though that the creation of agricultural parks was delayed in some places or the works stopped at all. That is why I instruct the ministries of economy and agriculture to analyse the situation and to handle the situation. If entrepreneurs do not use the land plots planned for agricultural parks, they must return them or transfer them to those who can work on them," Ilham Aliyev said.

It is necessary to focus the development of industrial production in Azerbaijan on the processing sector through strengthening government support, increasing the volume of soft loans, as well as stimulating the business to invest into the sector. The main goal is to increase the share of processed and packaged fruit and vegetable products with a higher level of benefit, primarily to increase export profitability. For example, in 2019, the export of vegetables reached $243 million with 80% of this amount coming from tomatoes. However, it would be possible to increase the profit of exporters with modern plants available for the production of ketchup, tomato paste, etc.

The cotton industry also faces a similar challenge. With 46% growth rate and export volumes reaching $158 million last year, the industry could get many times more had 50% of the cotton been processed in textile and sewing factories and then exported. However, this requires overcoming the inertia and passivity of the business.

President also noted the growth in exports of hazelnuts and wines, as well as the growing production of silkworm cocoons. This was largely possible due to the efforts of the government put into creating hazelnut orchards (coverage increased from 30 to 80 hectares), planting mulberry trees, opening wine and trade houses abroad, financing advertising campaigns, business participation in trade missions, exhibitions and etc. Unfortunately, entrepreneurs show low investment activity in this direction.

It is also planned to develop the processing sector and increase the share of finished products in the industrial sphere. "Last year, we launched SOCAR Polymer, which makes it possible to export polymer raw materials to different countries, where it is used to produce finished products sold to us," Ilham Aliyev said. That is why, president continued, it is necessary to ensure state support to develop industrial clusters in Azerbaijan to localise the production of final polymer products, thereby preventing the leakage of funds abroad.

The government believes that a speedy solution to all these problems will encourage the socio-economic development in regions and the private sector, thus attracting foreign investment for the implementation of new initiatives in the production sector.