MODERNISATION BREAKTHROUGH

Today, most of the developing countries in the world are seeking to make a modernisation breakthrough taking into account national specificities. Such projects are successfully being implemented in Azerbaijan too, which has achieved sensible redistribution of income from exports of hydrocarbon resources to infrastructure development and diversification of the non-oil economy. Experts of the International Monetary Fund (IMF) and the World Bank (WB) opine that the level of Azerbaijan's development is already comparable with the indicators of moderately developed countries.

A proven model

A few years ago, while exploring the impact of the global economic crisis on the development of markets in post-Soviet states, a number of respected analysts of the international financial institutions (IFIs) have concluded that Azerbaijan's balanced economy diversified on a step-by-step basis is able to maintain a positive growth even in the face of shrinking production of energy resources. The country has compensated for the decline in hydrocarbon exports caused by a decrease in global oil prices by the growth of production mainly at non-primary private enterprises as well as by increasing domestic consumption. In addition, to make up for somewhat reduced volumes of foreign investments, Azerbaijan has increased investment of its own budgetary means and savings of the reserve funds, especially in infrastructure construction. Moreover, a significantly strengthened and capitalised corporate sector of Azerbaijan is now able to independently act as a large portfolio investor, successfully replacing both government agencies and large international corporations on the market. This model has proven its stability and rather high efficiency over a period of several years and has been recognised by many IFI representatives, which in the past often criticised Azerbaijan for lack of pace and depth of market reforms as well as excessive state involvement in the economy.

After achieving high rates of socio-economic development and relatively quickly passing through the transition period, Azerbaijan has come very close to a group of moderately developed countries. According to the estimates of a number of IFIs, the country's rate of economic growth is comparable to that of the most rapidly developing regions of the world. Thus, in 2013, the GDP growth rate ranged from 0.5 to 1.5 per cent across the globe, while Azerbaijan finished the year with a growth of 5.8 per cent. As regards the pace of development of the non-oil sector, which amounted to about 10 per cent, Azerbaijan can serve as an example worldwide.

"Lying at the heart of positive developments in recent years is the Azerbaijani model of energy resource management which provides an opportunity for sustainable economic growth and consistent diversification of industries of the non-oil sector," Hossein Samiei, Division Chief at the IMF's Middle East and Central Asia Department, said during the meeting of the elective group of the World Bank and International Monetary Fund in Baku.

Azerbaijan needs about three to four years to further develop and strengthen the modernisation trends so that to fully join the countries with an average level of income, Central Bank Chairman Elman Rustamov says in his turn. He argues that the poverty rate has declined in the country from 60 per cent in the early 1990s to 5.3 per cent now, which is thrice as low as the world average. Over the last decade, real incomes of the population grew annually by an average of 8.3 per cent, and Azerbaijan is among the top 25 countries in the world based on the Gini coefficient (a statistical measure of the degree of social stratification). Finally, the general level of economic development of the country makes it possible to reckon Azerbaijan among the moderately developed countries. In general, over the period from 1995 to the present day, Azerbaijan's nominal GDP per capita doubled every five years on average.

As a result, while in 1995 Azerbaijan was ranked 125th in the world in terms of the level of economic development, now it ranks 65th.

A recurring issue of growth

The only question is will Azerbaijan be able to keep the steady dynamics of development in the coming years? Judging by the forecasts of IMF and WB experts, the ever increasing investment activity of the private sector and large-scale investment in the public sector, especially infrastructure projects, will play the role of the main drives of economic growth in Azerbaijan in the next five years. In particular, according to projections of IMF analysts, the country's non-oil GDP alone will amount to 49.1bn dollars this year, increase to 55.7bn dollars in the next year and reach 79.4bn dollars in 2019, i.e. essentially equalling the current level of total GDP. Meanwhile, the total volume of the country's GDP in 2019 will reach 122.1bn dollars, surpassing a milestone of 100bn dollars already in 2017.

A WB study also confirms that a high rate of economic growth, outstripping global rates, can be maintained in the next few years. This message is contained in the World Bank's updated review entitled the Global Economic Prospects (GEP-2014). According to the GEP-2014, Azerbaijan has a potential for GDP growth by 5.7 per cent this year, 5.5 per cent in 2015, and 4.7 per cent in 2016. In turn, a global potential for economic growth is estimated at just 2.8 per cent this year, rising to 3.4 per cent in 2015 and 3.5 per cent in 2016. By way of comparison, a potential for economic growth in Europe and Central Asia is merely estimated at 2.4 per cent in 2014, i.e. more than twice as low as in Azerbaijan.

WB analysts believe that growth rates in resource-rich countries such as Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan will remain above average for the region due to still high world prices for oil and gas, reliable public investment and generous social transfers.

It is good to recall here that in order to stabilise the macroeconomic and budget indicators, the government has developed a set of measures aimed at reducing the share of state participation in investment projects in favour of private investors, and provided for a policy of economy as regards reserves accumulated in public funds.

Plans to reduce the volume of transfers from the State Oil Fund of Azerbaijan (SOFAZ) to the state budget in 2015 have also been announced: while last year they amounted to more than 11.3bn manats, or 58.2 per cent of total budget revenues, this year they are slightly more than 9.3bn manats. Based on preliminary forecasts of the government of Azerbaijan, the volume of transfers from SOFAZ to the state budget will be reduced to 6.6bn manats in 2017, according to a recent IMF report.

Aim: industrialisation

Yet, the main efforts of the government are aimed at diversification and new industrialisation of the country, primarily due to the increase of non-oil sector capacity, rather than at saving reserves and reducing their share in budget transfers. Despite the still important role of the energy sector, as envisaged by the strategic objectives of economic development up to 2020, the country plans to establish a competitive, high-tech production providing 80 per cent of GDP, with a significant increase in the share of non-oil industrial products in total exports. The special role of the non-oil sector intended to be a driving force behind the further economic development of Azerbaijan is also noted in the reports of the European Bank for Reconstruction and Development (EBRD) and the Asian Development Bank (ADB), as well as in the regional cooperation concept of the Black Sea Trade and Development Bank (BSTDB).

In particular, in keeping with the EBRD's strategy of cooperation with Azerbaijan for 2014-2017, the focus is shifted from financing major energy and infrastructure projects to supporting private sector development. "Azerbaijan has approached a new stage in the development of its economy: according to forecasts, oil production is going to decline in 2017-2018, hence the economy's dependence on accumulated hydrocarbon revenues will increase. Azerbaijan has made a substantial progress in modernising its economy but the question of further economic diversification is still very relevant. Great efforts are needed so that the country would enter a period of post-oil development with a modern and fully developed private sector," head of the EBRD's Resident Office in Baku Neil McKain said. This message clearly reveals the main lines of the new EBRD strategy: selected for implementation in the medium term are projects contributing to economic diversification, the development of a sustainable financial sector that is able to support small and medium-sized enterprises, and the implementation of agro-industrial projects enabling rapid development of rural areas.

Similar recommendations are made in an ADB report. "In Azerbaijan, there are still a lot of untapped areas where oil revenues can fund other activities. These include the recently approved state programmes for development of Baku with its suburbs and the regions, which outline new opportunities for public investment to diversify the economy," the report notes. ADB experts believe that the government will continue to support agriculture, extend the practice of subsidising and concessional lending to farmers, and implement measures to bring untilled lands into agricultural use.

Meanwhile, the BSTDB credit portfolio is almost fully committed to the development of small and medium businesses operating in the non-oil sector of Azerbaijan. Pursuant to the BSBTD's new country strategy for the period of 2015-2018, which is currently under development, non-primary productions, servicing and trading companies, and support to bank microfinance programmes will remain the focus of the bank's activity in the future.

Thus, most of the IFI experts concur that stable macroeconomic indicators along with favourable prices for oil on the world markets have allowed the government to take decisive steps to improve the system of governance and the business climate, in particular, to diversify the non-oil private sector. The latter is going to shoulder the responsibility for ensuring the country's sustainable development in the not so distant future.