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In the short term, the measures taken by the government of Azerbaijan to promote the development of non-oil sector will help to prevent the impacts of the global crisis. The financial tools made available since previous years allows maintaining macroeconomic stability without borrowing loans from international organizations. On the other hand, the technical support and counseling provided by International Monetary Fund (IMF), World Bank, International Finance Corporation (IFC), European Bank of Reconstruction and Development (EBRD), etc. may support the government.

Jan van Bilsen, IFC Regional Manager for the South Caucasus, has recently visited Baku to discuss the steps taken to develop national non-oil sectors and to promote investments.

- How do you evaluate the efforts of the government of Azerbaijan in the areas of business environment and attracting investors to develop the private sector?

IFC is a member of the World Bank Group and the largest global development institution focused on the private sector in emerging markets. At IFC, our mission is to help create opportunities for people to escape poverty and improve their lives. Why do we focus on private sector development to achieve this goal? The private sector is critical to economic growth. Ninety percent of jobs worldwide are created by the private sector. By investing in private sector development, IFC is helping meet current challenges.

Recent developments have posed new questions and raised new issues for Azerbaijan. The economy and the currency have come under intense pressure from sliding oil prices. In the current environment of much lower oil prices, it is critical to unleash the power of the private sector.

In 2015, the private sector accounted for over 80 percent of Azerbaijan’s GDP. However, only 40 percent of domestic investment came from the private sector, of which half went to the oil sector. Hydrocarbons comprised around 90 percent of exports and the oil sector accounted for over 65 percent of FDI net inflows.

The country needs to move to a different growth model based on a diversified non-oil private sector. To achieve this, the roles of the public and private sectors need to be rebalanced, with the private sector becoming the main driver of growth and the public sector becoming a facilitator of growth. 

We are pleased to see that the government recognizes this and has accelerated efforts in this direction over the past few months. Examples include:

- Fiscal consolidation efforts, which are contributing to reduced crowding out of private investment by public capital expenditures.

- Simplifying customs clearance procedures and expanding e-government service centers, which are supporting greater corporate sector transparency and lowering the costs of doing business.

- Improvements in public construction tenders, which are expected to create a more competitive environment and improve opportunities for small and medium enterprises.

- Efforts being made to diversify the economy away from oil toward non-traditional sectors such as agriculture and tourism.

- Intensified WTO accession talks, which are a positive development as trade liberalization is expected to help economic diversification.

We also welcome the government’s continued focus on improving infrastructure and enhancing the quality of human capital.

It is essential for Azerbaijan not to lose momentum and continue with structural reforms aimed at improving competition environment.

- Azerbaijan was ranked number 63 in the World Bank Group`s "Doing Business" report, out of 189 countries. As I understand, one of the themes of your discussion here was to increase Azerbaijan’s place in the international rankings. What should the government be doing to help achieve this?

Azerbaijan has made some progress in improving its business environment, as measured by the Doing Business report. The country was ranked 63^rd out of 189 economies in the Doing Business 2016 report. To put things in perspective, according to the 2016 report, Azerbaijan is one of 24 economies globally (out of 189) that in 2014-15 implemented regulatory reforms - making it easier to do business in three or more of the 10 topics measured in the report.

Rankings are a useful tool to compare Azerbaijan with other countries. However, what also matters is good regulation. A new metric of good regulation is the distance to frontier (DTF) score, which shows how far a country is from best global regulatory practices. In the Doing Business 2016 report, Azerbaijan’s score on the DTF was 67.8 percentage points, which show a gap of just over 32 points from global best practices. Azerbaijan performed well in Starting a Business (97.75 percentage points), Registering Property and Paying Taxes (82.55 percent and 83.77 percent points respectively). But there is significant room for improvement in Getting Credit (40 percent), which measures the legal rights of borrowers and lenders with respect to secured transactions and the quality of credit information, and Resolving Insolvency (44.68 percent). Another area that could be improved is Dealing with Construction Permits (65.79 percent).

The government’s reform programs will need to focus on these aspects of regulation to ensure Azerbaijan’s business environment is comparable to the world’s best performers.

It must be noted, however, that the Doing Business report does not cover all aspects of the business environment. Regulations specific to foreign investment, for example, are not included. The same applies to macro-economic stability and labor force skills, among others. Because of this, successful reformers worldwide encourage reforms that go well beyond the Doing Business indicators and introduce deep and broad-based reforms across many aspects of the business environment. Comprehensive reforms require strong political will and a holistic approach to private sector growth. 

- What does Azerbaijan need to do to attract leading global investors to its economy?

There are several key factors that affect investors’ decision to invest in a foreign country, including political and economic stability, market size, the protection of property rights, a favorable business environment, the quality of economic infrastructure and the availability of skilled or cheap labor.

It will be essential to secure macroeconomic and financial stability going forward. Azerbaijan needs to shift its policy towards FDI-led diversification polices, and it can do so by building its value proposition for more efficient investment through a series of reforms to improve its policy, legal, regulatory and institutional framework for investment.

The value of FDI is not just about the capital it brings, but more importantly the productive knowledge that will enable local Azeri businesses to connect to the global economy.

No policy can achieve economic diversification in a short time period. There is always a need for a mix of macro policies that ensure an overarching business climate favorable to investment, and micro policies that allow firms in specific sectors to invest, take risks, innovate, improve their productivity and access key markets.

Diversification means internationalization. Azerbaijan needs to upgrade its skills, standards, institutions and coordination mechanisms to promote Azeri businesses in the international economy.

While the domestic market in Azerbaijan is relatively small, the country needs to further improve its connectivity to European and Asian markets by expanding transport connections and liberalizing trade through a network of bilateral and multilateral free trade and investment agreements.

Efforts to improve legislation on foreign investments should be directed toward the creation of a legal system consistent with international standards. Implementation is equally important.

Azerbaijan needs to continue reforms aimed at the simplification of the regulatory framework for businesses and let market mechanisms work without bureaucratic interference.

Azerbaijan will also need to prioritize public investment in economic infrastructure to enable the development of sectors with the potential to become competitive and attract FDI. For example, in agribusiness, infrastructure such as production and storage facilities and logistics are typically developed by the private sector. But private investors would be unwilling to invest in the sector without good roads and irrigation.

The development of new competitive sectors will also need an improved labor force.

Establishing a national forum will also be desirable as it will help representatives from both the public and private sectors regularly interact, discuss, and produce initiatives to boost diversification-promoting investment.

International financial institutions and development agencies play an important role in attracting FDIs in emerging markets and developing countries.

IFC, a member of the World Bank Group, in addition to its co-investments in FDI projects, provides a range of advisory services to governments, helping them attract, retain and maximize the benefits of foreign and domestic investment. The World Bank Group is ready to provide advice to Azerbaijan’s government in those areas.

- Last year, the Azerbaijan government increased its efforts to diversify the country’s economy. What can Azerbaijan gain in the future from these reforms?

Relying on the oil sector in a low oil price environment is unsustainable and Azerbaijan now faces the challenge of sustaining its impressive development progress as it goes forward in a less favorable external environment.

The ongoing oil price decline is not expected to be short-lived, and in the medium term the country needs to rebalance the roles of the public and private sectors, with the private sector becoming the main driver of growth and the public sector becoming a facilitator of growth. The government is moving in this direction, but of course, more will need to be done in the future.

Diversification efforts will help Azerbaijan create new sources of economic growth. For example, broad-based pro-private sector reforms enabled Chile, a major producer of copper, to become competitive in other sectors, like agribusiness, tourism, international transportation, and logistics services.

- How do you estimate the potential of the Azerbaijan economy?

Azerbaijan is a country blessed with rich endowments of natural resources. Over the past two decades preceding the current crisis, the country demonstrated impressive rates of economic growth, bolstered by high foreign direct investment in the oil sector and then by growing oil production and exports. The authorities used these oil revenues prudently – increasing social transfers, investing in infrastructure, and accumulating significant savings. As a result, the country has made remarkable progress in terms of reducing poverty and bringing shared prosperity to its people. Improvements in living standards have been accompanied by a significant expansion of the middle class.  

The oil and gas sector has the potential to be developed further and will continue to play an important role in Azerbaijan’s economy. There is also potential to move up the value chain in this sector by developing the chemicals and petrochemicals industries. Azerbaijan’s strategic geographical location on the crossroads between Europe and Asia positions it well for the development of tourism, transport corridors and logistical services. A favorable climate and soil quality in parts of the country provide good conditions for agribusiness development. The current environment of low oil prices and a more competitive exchange rate creates opportunities for the development of many other sectors. To unleash their potential, it is vital to create conducive conditions for private sector growth across the board, without focusing on specific sectors.

- What level of interest is there in Azeri brands in the global market?

The level of interest in local brands can be demonstrated by their success in entering export markets. Currently, the bulk of Azeri exports comprise hydrocarbons-related brands. Exports generated by non-oil sectors, which mainly include agricultural produce such as fruits and vegetables, tea, and confectionery, form a relatively small part. Whether Azerbaijan will be able to further improve the competitiveness of its non-oil exports and seize diversification opportunities will depend on the success of structural reforms aimed at creating more space for private sector development.