CHAMPIONS FOR EXPORT

The Azerbaijani leadership has taken a number of measures to speed up the development of the non-oil sector. This refers, first and foremost, to stimulation of the manufacture of import-substituting and export-oriented products. In particular, such measures include simplification of customs regulation, changes in the tax regime, and appeals to Azerbaijani businessmen to reduce investment activity abroad and make larger investments in the Azerbaijani economy.

Among the measures aimed at stimulating exports, President Ilham Aliyev's executive order to pay exporters three per cent of the customs value of the goods deserves special mention. This step will make the Azerbaijani products more competitive in foreign markets and generally contributes to raising the interest of manufacturers in producing export-oriented products.

In fact, we are talking about the need to create a new export potential of the country based on the non-oil sector of the economy. Suffice it to say that exports of oil, petroleum products and natural gas accounted for about 85-90 per cent of the country's exports in recent decades.

According to data of the State Customs Committee of the Republic of Azerbaijan, 7159 entities were involved in foreign trade activity at the end of 2015. However, the number of those engaged in the export of products is significantly lower than those dealing with imports. In particular, participants in foreign economic activity filed 201,909 tax returns with regard to imports and only 45,165 tax returns with regard to exports.

According to end of year data, 2,477 items of products worth 11.424bn dollars were exported in 2015, which constituted only 52 per cent of exports in 2014.

The volume of products supplied for export under item categories such as mineral fuel, oil and oil products amounted to 9.882bn dollars, or 86.5 per cent, while the rest of the list equalled 1.542bn dollars.

The non-oil sector of Azerbaijan will have to make up for the decline in hydrocarbon exports to return to the level of previous years at about 20bn dollars.

This factor, among others, also contributes to the stability of the national currency since lack of marketable commodity backing for the manat was another reason for the reduction of foreign exchange reserves of the Central Bank of Azerbaijan from 15bn dollars to 4bn dollars.

In essence, we are talking about the establishment of a new kind of production aimed, first of all, at the neighbouring countries, given the limited domestic market. The vector of the Azerbaijani exports points not only to Russia, the northern neighbour, but also in the southern direction - towards Iran, with access to the Gulf countries.

Of course, it is difficult to expect that tens or hundreds of thousands of entrepreneurs across the country would engage in foreign trade. Of interest in this respect is the experience of Kazakhstan implementing the programme "Leaders of Competitiveness - National Champions".

Based on the results of the first phase of the programme, 27 companies were selected in the food industry, mechanical engineering and the production of construction materials. They received financial support from the state in an amount of 33bn tenge (about 100m dollars).

The expected effect of implementing 105 initiatives should result for these companies in increased revenues by 170bn tenge by 2018, including a rise in exports by 35bn tenge and import substitution for a total of 66bn tenge. The social aspect - the creation of about 5,000 jobs - is also important for the rapidly growing population of Kazakhstan.

This measure, combined with export promotion, can give domestic producers a real effect.

In recent years, the Azerbaijani government has created a significant base in the form of industrial parks and districts, where entrepreneurs are provided with the necessary production infrastructure, coupled with significant tax benefits.

This year, the government will continue the intensive work to organize production at the Sumqayit Chemical Industrial Park (SCIP), the Balaxani, Mingacevir and Qaradag industrial parks, as well as efforts to create an industrial district in Neftcala.

In particular, SCIP residents are exempt from paying property, land and income taxes as well as VAT on imported equipment for seven years. There are already five residents registered in this park, who are ready to invest up to 1bn dollars in the production of chemical and metallurgical products, double-glazed windows, facade panels, etc.

However, it remains to be seen to what extent other countries are willing to accept Azerbaijani products. Russia has declared its readiness to accept agricultural products from Azerbaijan because of the sanctions regime with the EU, Turkey and Ukraine. But Azerbaijani products are unlikely to be welcome in other countries, either.

One should not forget that Azerbaijan is one of the few countries in the post-Soviet space, which is not a party to the World Trade Organization. Joining the WTO can be fraught with negative consequences for domestic producers, as the organization advocates the philosophy of free trade and requires non-incentive programmes. In this case, restrictive measures may be applied in foreign markets to the produce of Azerbaijan as a non-WTO member.

Accordingly, we should radically revise our position in negotiations on Azerbaijan's accession to the WTO.

As a first step, the Azerbaijani government can carry out, like in Kazakhstan, a kind of competition among companies that are ready to become national champions, as well as provide the necessary assistance in attracting foreign investment and increasing production for export. After that, these companies will be able to pull, as a locomotive, the entire non-oil sector of the country. However, other companies, which can substitute imported products largely due to local production, should not be left out.

In such circumstances, the state budget is going to receive a significant income in the form of tax payments and the country's ability to control inflation and prevent growing unemployment will be greatly enhanced.