AMBITIONS BASED ON REALITIES

The European Bank of Reconstruction and Development (EBRD) has published the draft of a new strategy of its activities in Azerbaijan for 2014-2017. According to Neil McKain, the head of its banking office, the objectives and tasks reflected in the document are fairly ambitious, but at the same time the bank has no doubt that these objectives can and must be met on time. The main directions of the EBRD's new strategy for Azerbaijan will be incentive for the diversification of the economy, the development of a stable financial market to support the private sector and an improvement in administration and the business environment.

Good results…

While highlighting the successes of the Azerbaijani government in various spheres, the EBRD also notes that the reforms must be continued to ensure the stable development of the national economy.

Thus, in the opinion of the banks' experts, it is clear that the non-oil sector, given sufficient support in fiscal and monetary policy, will continue to play a leading role in the Azerbaijani economy in the mid-term perspective. The rate of the country's economic growth has reduced compared with the pre-crisis period, while the rate of production of hydrocarbons has slowed down, but the period has seen a marked development in the country's non-oil sector. Whereas in 2011 GDP rose by just 0.1 per cent against a reduction in oil production volumes of 10.6 per cent, in 2012 it rose to 2.2 per cent thanks to the development of the non-oil sector at a level of 9.7 per cent. At the same time, Azerbaijan's economic growth in 2013 exceeded the expectations of the banks experts, reaching 5.8 per cent against the EBRD's forecast of 3.5 - 4 per cent. Along with the non-oil sector, the increase in oil and gas production also made its contribution to the growth in GDP. The EBRD's analysts expect the oil sector to continue its recovery in 2014.

"In recent years the Azerbaijani government has undertaken a number of big steps towards infrastructural, legal and institutional development, which should be conducive to the further development of the private sector and the non-oil economy, and therefore contribute to the fulfilment of the targets of diversification facing the country in the Concept for Development "Azerbaijan-2010: Outlook for the Future", the EBRD believes. 

The bank's experts also feel that the government has taken definite steps to improve tax administration with the aim of reducing business expenditure on the supervision of tax legislation, as well as increasing tax collection. The new Customs Code, which came into force in January 2012, includes improved provisions in various areas which are expected to bring norms into line with international standards.

The government is also continuing to improve the infrastructure and to diversify hydrocarbon export routes. And the country's Central Bank has adopted measures to strengthen the financial system. In addition, with the support of the World Bank and other international financial institutions, the North-South rail corridor linking Azerbaijan with Russia and Iran, as well as the main East-West international transport corridor, are being brought up to date.

According to the EBRD, the social sector is another sphere in which impressive results have been achieved. Azerbaijan's accelerated economic development in the past 10 years has been noted by a growth in the incomes of all groups of the population and a significant reduction in the poverty level from 49.6 per cent in 2001 to 6 per cent in 2012, the bank's analysts believe. The poverty level in the country at the end of 2013 was 5.3 per cent.

Furthermore, the bank notes that state pensions are the most effective mechanism for the reduction in poverty in Azerbaijan. "One of the basic factors in the battle against poverty is social transfers. The absence of a mechanism of social government payments would lead to a situation where the poverty level in the country would be 25 per cent. In 2010 63.2 per cent of Azerbaijani families received at least one type of social transfers," the draft strategy emphasizes. The basic pension in Azerbaijan is 100 manats, and the average 170 manats, and the replacement rate for retirement pensions is 45 per cent. The average pension in the country is 1.7 times a pensioner's living wage, whereas in 2003 it was half this figure.

The considerable successes achieved in combating poverty and unemployment in the country have also been noted by Azerbaijani President Ilham Aliyev.

"The number of people living in conditions of poverty has been reduced sharply. The level of poverty in Azerbaijan is now just over 5 per cent, i.e. it is on a par with the developed countries. We are also ahead of a number of the developed countries. Questions linked with unemployment are being resolved. Unemployment is at a very low level - 5 per cent. And in Baku, I believe, this question has been completely resolved," the head of state said.

Official unemployment, the level of which in 1999 was 12.7 per cent, was reduced in 2012 to 5 per cent, the EBRD's experts point out. "The trend towards reduction was maintained even in the years of the crisis. Real annual growth of wages was on average 13 per cent in the period from 2001 to 2008. At the same time, the high level of involvement of the work force from the poor sections of the population in the process led to a significant impact of this growth on the well-being of the people of Azerbaijan," the draft strategy says.

…and specific recommendations

Meanwhile, the bank says that increasing energy efficiency is one of the most important tasks facing the country's economy in the future. "The Azerbaijani economy, particularly in the housing sector, is one of the most energy intensive. The amount of energy consumed for one US dollar of gross domestic product (GDP) in terms of purchasing power parity is almost 1.2 times greater than the average in the 27 countries of the EU," the draft strategy states. Some achievements in this sphere leave great scope for further development from the point of view of regulatory support in the sphere of energy efficiency, and in the operating efficiency of Azerbaijani industry, says the bank, which in March 2013 allocated the first credit to one of Azerbaijan's banks as part of the Energy Efficiency Programme in the Caucasus Region.

Besides this, the Azerbaijani government has already begun work in this direction. The Ministry of Industry and Energy is currently preparing a national plan of action for energy efficiency for the period 2014-2020. In the opinion of the ministry's representatives, up to 40 per cent of the energy resources consumed in Azerbaijan could be saved; i.e. the efficiency of energy usage in the country is not at its proper level. According to the State Agency for Alternative and Reusable Sources of Energy, the overall cost of major projects in the field of alternative and reusable sources of energy in Azerbaijan involving the state is 657.5m euros.

The most capital intensive project involving the state is the creation of a wind power plant in the Caspian Sea with an overall capacity of 100mW and costing 250m euros. The state's share in this project is from 10 to 25 per cent, and the remainder will be funded by private investors. Another major project in the sphere of alternative energy is the creation of the Perekishkul wind power plant with an overall capacity of 110mW. In order to implement this project costing 165m euros it is planed to attract credit from the German Development Bank (KfW), and the state's participation will be around 10-25 per cent.

The market in efficiency technology in the energy sphere in Azerbaijan has not been sufficiently developed, the bank's analysts point out, noting that there is huge potential for development. "The regulatory frameworks could be strengthened by adopting and implementing laws which would encourage renewal energy projects," the document says. Furthermore, the EBRD's analysts believe, there could be a need for a consolidation of the existing laws affecting this sphere. 

Among other aspects of legislation to which the bank believes it is necessary to draw attention are the laws linked with secured transactions. "The further development of observance of the rights of secured lenders, the removal of ambiguities and restrictions, as well as the creation of legal support, which would be conducive to an increase in credit bureau operations, would be a serious contribution to increasing access to finances in Azerbaijan," the draft strategy states. Furthermore, the EBRD believes, the law "On insolvency and bankruptcy" of 1997 will gain from a full-scale review.   

It should be noted that this question, too, is being resolved. The Azerbaijani president has signed a Decree "On extra measures on the development of entrepreneurship", in accordance with which the country's cabinet of ministers has been instructed to prepare and present to the head of state within two months, and taking into account advanced international experience, proposals for the improvement of the law "On insolvency and bankruptcy"

But in any event the EBRD's desire to support Azerbaijan in resolving the vital economic, infrastructural and social problems expressed in the draft strategy, shows that the bank is satisfied with the level of cooperation with the government which, undoubtedly, is a very positive trend which can influence the country's investment appeal in general.