REFORM LEADER

The recent events in Georgia, their negative impact on the Azerbaijani economy, the fall in oil prices on world markets and the continuing panic about a global food crisis all, doubtless, require the government to make a deeper and more detailed analysis of how the country will survive once the oil stops flowing.

May it not come quickly, but the current high level of extraction makes exhaustion of the oilfields inevitable. As a result, the present generation of economists face the problem of correctly diversifying the economic development of the country and properly investing oil revenue in order to leave a developed and economically healthy country to future generations of Azerbaijanis. Although in practice the Azerbaijani economy today is heavily dependent on oil, the reforms to improve the business climate in the country give grounds to hope that the goal will be reached.

Unprecedented surge

The recently published results of the World Bank's Doing Business 2009 survey were practically a sensation for Azerbaijan: our country moved up to 33rd from 96th last year, an unprecedented leap in the country rankings in terms of business climate in the history of the report. Moreover, the republic has been recognized as the leader in economic reform. Azerbaijan is significantly ahead of neighbouring Armenia, which slipped three points to 44th in the rankings, while last year Azerbaijan lagged 52 points behind Armenia.

The World Bank has been publishing the Doing Business report since 2004, every year adding to the list of criteria that form the basis of a country's ranking. In 2004 there were just five criteria, but the last report researched 10 areas: starting a business, dealing with construction permits, employing and dismissing workers, registering property, getting credit, protecting investors, paying taxes, customs, enforcing contracts and closing a business.

Azerbaijan significantly improved on seven out of 10 indicators in the new report. For example, last year we came 64th on business start-up, but 13th in the new report; we moved from 80th to 15th on employing and dismissing workers, from 56th to 9th on registering property, and from 26th to 12th on getting credit. The most noticeable result was on protecting investors, where Azerbaijan came 18th, although last year we were 107th!

As for the significance of these indicators for Azerbaijan, suffice it to say that Doing Business is an important document for many of the world's major investors in the micro-economy. They very much rely on it in taking decisions on where to make capital investments. It is worth bearing in mind that the report covers all areas of the economy with the exception of the oil sector. In other words, it helps to attract investment into the non-oil sector specifically, which is extremely important for Azerbaijan. In this way we are showing that we are interested in developing this sector right now, while oil and gas extraction in the country is at its peak.

This is crucial today, when foreign experts are talking about a possible fall in investment inflow against the background of tension in the region. This is the opinion of the managing partner of Baker & McKenzie in Baku, Daniel Matthews. "Everyone knows that one of the most important conditions for investors is stability in the country and the region. I don't think that investors will leave Azerbaijan today, but the events in Georgia might cause a fall in future inflows," he thinks. So Doing Business 2009 has come at just the right time.

Tackling shortcomings

The government promises to continue reforms to develop the business sector and not only in order to move higher up the rankings, though this is extremely important to the government. Specific steps are planned in the near future to improve on the three indicators on which Azerbaijan showed deterioration or remained unchanged in Doing Business 2009.

For example, Azerbaijan went up just four places - from 159th to 155th - on dealing with construction permits. The ministries for economic development and emergency situations have already prepared draft Regulations on Granting Permission to Carry Out Construction and Reconstruction Work and on Putting into Commission Constructions and Installations. The draft was submitted to the Cabinet of Ministers for consideration and has already been approved and sent to the presidential administration for their consideration. Once the document has been confirmed, the number of procedures involved in granting permission and putting into commission will be cut from 31 to 12 and the period to complete them from 207 to 124 days.

Azerbaijan's position has slightly worsened on the following indicators: customs or trading across borders - from 173rd to 174th; and closing a business - from 75th to 81st. Reforms are also planned on these points; a one-stop shop system is to be introduced for customs and the law on bankruptcy will be improved.

Meanwhile, some analysts think that a number of amendments need to be made to other laws. "When we began our work, the Civil Code passed in 1964 was still in force. The legislative base has seriously improved over the recent period, but there are still several inadequacies," Daniel Matthews, managing partner of Baker & McKenzie (Baku) told journalists. He said that the failings include difficulties in registering private property, the problem of security for bank loans and inconsistencies between the Civil Code and banking legislation. "These may seem minor, but it's important for the further development of the economy that they are tackled," Daniel Matthews said.

Life after oil

All the aforementioned reforms and drafts aim to develop the non-oil sector of the economy. Despite all the efforts to prolong the peak of hydrocarbon extraction in Azerbaijan, in a few decades a period of decline will begin and gaps in the budget will need to be filled.

Foreign experts think that this requires the development of machine-building and manufacturing as a whole and the country's banking and insurance sectors. Economic Development Minister Heydar Babayev thinks that Azerbaijan's economic future is directly linked to the service sector, including in transport, energy and tourism. "I am sure that when the time comes, Azerbaijan will be able to stop oil and gas extraction easily and reorient the main part of its economy to the service sector," he said.

However, foreign experts think that the rate of economic growth in the country will begin to fall in the next few years. The editor-in-chief of The Economist Intelligence Unit, Anna Walker, said that by 2012 the rate of GDP growth in Azerbaijan would fall from the current 15-16 per cent to 5-6 per cent, from a leap to a gradual fall in inflation. "According to official statistics, inflation in Azerbaijan this year will be 25 per cent, while unofficial figures put it higher. We are forecasting inflation of 18-20 per cent in 2009, but in 2012 it will slow to 7 per cent. These figures very much depend on the volume of oil revenue and oil prices on world markets," Anna Walker told journalists in Baku. She said that they had based their forecasts on data provided by international financial institutions. 

However, Azerbaijani experts think that a fall in GDP growth rates is entirely natural and point out that stability is what is most important for the economy. In 2006, with 35-per-cent growth, GDP per head of population was $2,469 but in 2013 it will be $12,915. GDP per head of population is one of the indicators of standard of living and economic growth. In this way, if economic growth continues in Azerbaijan at a slower rate, the key indicators will maintain their dynamism and the republic will retain top billing as regional leader in economic development.