Author: Nurlana GULIYEVA
In just a few weeks, an unprecedented stagnation in the global economy that followed the introduction of lockdown in most countries of the world, coupled with an unexpectedly sharp drop in oil prices, resulted in a severe economic crisis, which, according to leading international financial institutions, can take many years.
More than 150 countries asked the International Monetary Fund and the World Bank for help, various political and economic associations allocate multibillion dollar funds to support governments, governments have to use reserves accumulated for years... Yet, the forecasts for the foreseeable future of the global economy are very pessimistic because no one knows how long the pandemic and its problems will last.
Azerbaijani economy has not experienced the impact of such a level of powerful negative shocks. But unlike in previous years, today it is more prepared to repel these shocks and can very well withstand the crisis thanks to a whole package of measures to reduce government spending, support businesses, banks and the development of more popular economic sectors today.
The must changes
Azerbaijani economy loses more than one hundred million manats every day due to restrictions introduced to effectively fight the spread of coronavirus. “We are constantly calculating the losses that we experience due to coronavirus. Amounts are very large. It is difficult to calculate the losses of the informal economy, but in general, each and every day we lose approximately ₼120-150 million,” Minister of Economy Mikail Jabbarov said.
The only logical step in this situation is an adequate reduction of expenditures of the state budget, which was also indicated by President Ilham Aliyev during a video conference on socio-economic results of the first quarter of 2020. “Sometimes the current expenses are inflated. Unfortunately, these costs are inflated by state organizations and state-owned companies. We must be very careful in this case. Additional steps must be taken to ensure full transparency in this area. At the same time, I instruct the government to find new sources of income,” President said.
Had not for the pandemic, the year began for the economy of Azerbaijan on a very positive note. There was a trend of over-executing the state budget: in 2019, the budget received more than ₼1 billion over the forecast, while just in the first quarter of 2020, the budget income reached more than ₼300 million. It had a surplus of ₼2.6 billion, ₼1.8 billion of which was the transfers from SOFAZ.
GDP was growing too by almost 3% in the first two months, while in the non-oil sector this indicator reached to about 7%. Only because of the negative factors recorded in March, the overall Q1 indicator slipped to 1.1% as a whole and 3% in the non-oil sector.
The problem is that it is not known how long these factors will prevail. Definitely the government will have to reduce spending and change macroeconomic parameters.
Most likely, non-strategic and non-urgent projects will be put on hold. As President Ilham Aliyev said, public investment activities should pursue two main objectives: the impact of state-funded projects on employment and the real sector of the economy.
According to the Executive Director of the Center for Analysis of Economic Reforms and Communications, Vusal Gasimli, an analysis of GDP by the expenditure method indicates that throughout the current year, the expenditures of households and state institutions, as well as net exports, will tend to decrease. On the other hand, due to falling oil prices, revenues from the oil sector and 20 sectors of the non-oil sector, the most affected by the pandemic, will decrease.
At the same time, all countries of the region, except Azerbaijan, Russia and Kazakhstan, are trying to balance the state budget for 2020 by increasing the external public debt and revising the budget deficit. However, fighting the crisis through external borrowing is a rather expensive measure. “Unlike the regional countries, Azerbaijan did not opt for external borrowing or devaluation to fight the crisis, but relied solely on own resources,” Gasimov said.
By the way, achieving stability of the manat in the new conditions is a very difficult task. According to the CEO of the Central Bank, Elman Rustamov, amid falling oil prices and quarantine, there was an agitation, especially among the cash owners, problems with dollarization, as well as very serious peak requirements. However, as a result of timely measures, the situation has already returned to normal. “The decline in economic demand in the world, in general, the demand in the economy does not provide an opportunity for a sharp increase in oil prices. But we believe that by the end of the year we will be able to maintain stability in the foreign exchange market,” E. Rustamov added.
Help and support package
Azerbaijan faced the pandemic and oil crises under conditions of macroeconomic stability, which enabled the government to provide a solution to unexpected problems.
It should be noted that under the current budget legislation, the government allocated ₼1.35 billion to the fight against coronavirus. A lion’s share of these funds is paid to those working in the areas most affected by the pandemic (more than 300 thousand people). At the same time, large funds were provided to ensure the financial situation of about 300 thousand micro-business entities, with the salaries of public sector employees paid in full, although the vast majority (about 1 million people) of the population is not working.
In addition, President Ilham Aliyev instructed the government to pay ₼190 each month as social assistance to 600,000 people within a two-month period. This category includes representatives of the poor, people who have lost their jobs due to coronavirus, and even informally employed.
In addition to social measures, the state is also committed to introduce a huge economic package providing for a series of tax, banking and other business benefits.
According to Minister of Economy, Mikail Jabbarov, the adopted amendments to the Tax Code will provide a number of benefits and tax breaks until January 1, 2021 to economic areas directly affected by the pandemic. These include full tax benefits on property and land, 75% discount on profit and income, as well as a 50-percent discount on the amount of simplified tax for local public catering and passenger transportation companies.
The second step is a 50-percent tax exemption for micro-business entities on simplified tax. In other words, the simplified tax rate will be reduced from 2% to 1% from January 1, 2020 to January 1, 2021. Also, until September 1, 2020, tax holidays will be provided for the calculation and payment of taxes for the I and II quarters of the current year.
Another significant amendment will apply to all business entities, which means the deduction from taxable income of all expenses incurred in connection with the necessary preventive, including disinfection, measures implemented by taxpayers to prevent the epidemic, protect the life and health of the population, before the end of this year. Certainly, all previous decrees of the president on VAT exemption on imports of certain types of products necessary for food and medical needs of the population remain in force.
Entrepreneurs will also enjoy benefits on deductions for social insurance: social insurance rates in the construction and trade sectors are significantly reduced. In addition, the benefits will cover the activities of individuals using land suitable for agriculture.
As an additional bonus, the Ministry of Economy promises to defer the accrual of interest on unpaid taxes, contributions for compulsory social insurance and unemployment insurance from April 1, 2020 until January 1, 2021, etc.
As a result, this entire package of measures will cost the state a very impressive amount - ₼2.5 billion instead of ₼1 billion calculated earlier. “This economic package will exceed ₼3 billion or maybe ₼3.5 billion. Azerbaijan has mobilized all opportunities to get out of this situation with relatively small losses to protect the lives of people and to be ready for the post-pandemic period,” President Ilham Aliyev said.
Insurance for banks
In addition to state aid, the government is trying to attract the banking sector to support businesses by easing regulatory measures for bank loans. This should let the banks to soften their current loan payments, restructure them, and provide necessary delays for payback.
So, as part of regulatory support, the Central Bank plans to restructure until Sep 30, 2020 mortgage loans of individuals not engaged in entrepreneurial activity. This applies to loans that issued before March 1, 2020 through the Azerbaijan Mortgage and Credit Guarantee Fund.
Regulatory support also includes protecting the interests of entrepreneurs directly affected by the coronavirus. In particular, CBA plans to restructure entrepreneurial loans taken from state funds, and the delay will not affect the credit history until Sep 30, 2020. In addition, banks will be advised not to charge additional interest and interest on overdue loans if the delay is due to a pandemic.
In 1Q2020, credit investments in Azerbaijan grew by 2.2%. At the same time, business loans and mortgage loans showed higher rates - 3.7% and 4.2%, respectively, while consumer loans decreased by 1.9%.
So, this begs the question: will banks be able to resist the economic shocks on their own?
This issue became especially relevant after CBA issued a statement on April 27 that the board decided to appoint temporary administrators in four banks - Atabank, AGBank, NBCBank and Amrahbank. “All powers to manage banks, including the powers of the general meeting of shareholders, are transferred to the interim administrator,” CBA said. However, this was an expected step in fact. The situation in these banks has long been poor, and even E. Rustamov in his statements did not hide the fact that certain measures will be taken in relation to them in order to improve the overall market situation.
In other words, the fact that this happened right now, during the quarantine period, is just a coincidence. Rather, as experts point out, this step required approval by President Ilham Aliyev of the amendments made to the Law on Full Deposit Insurance. And as soon as the law was extended for another nine months until December 4, 2020, CBA decided to deal with the above banks, which were almost inactive anyway.
Since the beginning of 2020, the banking sector has been provided state support of ₼627 million. CBA also took a number of regulatory measures to reduce the burden on banks and increase lending opportunities during the coronavirus pandemic. Thus, CBA plans to reduce the requirements for the adequacy ratio of the total capital of system banks from 12 to 11%, and for other banks - from 10 to 9%. Also postponed are additional capital requirements for consumer loans. All these measures will be valid until January 1, 2021.
CBA also plans to reduce the risk coefficient of mortgage loans issued by banks at its own expense by April 1, 2020, from 100 to 50%. In addition, it is recommended that banks postpone dividend payment for 2019 until September 30, 2020 and not pay dividends for 2020.
However, according to the Moody’s report, the situation in the banking sector of Azerbaijan is quite satisfactory. About 50% of the banking sector's assets are in liquid instruments, including cash and cash equivalents, bank funds and investments in securities, which provide reliable protection against external shocks.
As we have repeatedly noted, the quarantine had negative implications on most sectors of the national economy. It’s a very disappointing for the non-oil economy, which has shown pretty good results up until the upsurge of the pandemic: tourism, services, production of a number of consumer goods, etc.
At the same time, agriculture has proved its viability in any critical conditions. Moreover, quarantine occurred during intensive agricultural activities and spring sowing, and the suspension of work would mean irreparable losses for the agricultural sector. Therefore, it was decided to establish joint work with the Ministry of Internal Affairs and local executive authorities and continue everything as planned. Thanks to these measures, serious problems with providing the population with agricultural products during the special quarantine regime have not been recorded.
Moreover, despite a 1% decrease of non-oil exports during the quarter, agricultural and food exports increased by 4% compared to the first quarter of 2019.
President also instructed the government to create additional support mechanisms for the agricultural sector. So, the Minister of Agriculture Inam Kerimov voiced the problem of limited access of farmers to small loans during the sowing season. “Banks in most cases require farmers to lay down their apartments in Baku to receive soft loans. However, according to the presidential decree, there is a mechanism to provide unsecured agricultural loans to farmers. I would like to convey the request of all our farmers to allocate additional financial resources for the implementation of the presidential decree,” Kerimov said.
Therefore, President Aliyev signed a decree to provide ₼30 million from his Reserve Fund for these purposes.
President also ordered to start drilling new sub-artesian wells in the regions, which should improve the quality of irrigation of agricultural lands. Indeed, one of the main problems of agriculture continues to be the severe drought observed during the growing season of winter crops. “New technologies must be introduced. As I was informed, in some places water loss reaches 40-50% despite large investments made in this area recently. However, most of the infrastructure have decayed and prevent the supply of water. In addition, these leaks lead to salinization of soil,” President Aliyev said, recalling that Azerbaijan’s water resources are not so large, the main sources of water enter the country from outside. “Therefore, every drop of water is important to us,” President emphasized.
If it is possible to use all the available opportunities, then, apparently, it is the agricultural sector that can become the saving straw that will pull the non-oil sector of the Azerbaijani economy onto the growth trend this year. And we will provide for ourselves, and we will be able to sell. Moreover, these products will always be relevant, regardless of pandemics and quarantines.