DOMESTIC MEANS CHEAPER

Amidst the situation with falling oil prices, the development of non-oil sector is the most realistic tool to boost the economic growth. Over the years, the oil exports have laid quite a powerful foundation to bolster the non-oil sector of economy: to construct motorways, to secure the provision of electrical power and natural gas to regions, etc.

On the other hand, the improving welfare and growth of the population has made the national market even more attractive for foreign companies. However, the current situation is not the same as it was back in 90s, when the foreigners could flood the local market with cheap imported products. The local businesses are stronger and ready to produce competitive products.

Thus, the government of Azerbaijan is taking active steps to support local production. According to President Ilham Aliyev, more than 1 billion Manats have been invested in local businesses during the recent years.

The Cabinet of Ministers of Azerbaijan has made yet another step forward to protect local producers by introducing new customs tariff rates effective on November 1, 2016 on a set of imported food products and construction materials.

For the first time in more than fifteen years (since April 2001), the customs tariff rates on imported goods are increased by 15%. After the fall of oil prices, the Azerbaijani government has decided to actively intervene in the national economy, as the market mechanisms cannot contribute effectively to the growth of non-oil sectors. The economic bloc of the government takes decisions on specific sectors, namely on imported commodities, instead of making abstract changes compliant with market mechanisms.

The new import duties primarily apply to domestic products, which the local producers are capable of producing thanks to the introduction of modern facilities in recent years.

It has been decided to increase the import tariffs for the next two years in the poultry industry: $1 for every kilogram of poultry meat and $100 for a thousand of eggs. The same fee will be charged on import of meat and meat products. The import tariffs per kilogram of different types of fruits and vegetables were also increased: onions - $0.2, cucumbers and tomatoes – $0.4, nuts - $1.5; grapes - $0.4, apples, pears, quince and persimmon - $0.3. The new tariffs will also imposed on the import of construction materials including cement, bricks, ceramic plates, etc.

As can be seen from the list of products, all of them are produced in abundance in the country and there are several ongoing projects to further expand the production. The National Fund for Entrepreneurship Support (NFES) under the auspices of the Ministry of Economy has already provided 95.8 million AZN of preferential loans for the local businesses to establish 32 modern greenhouses in the villages of Baku. Through the support of local businesses, the government supports not only the national currency but it also creates new jobs, solves economic and social problems.

It is also possible that the list of imported goods is extended significantly after a certain period to help further protect domestic production.

During the recent meeting of the Cabinet of Ministers to discuss the results of socioeconomic development in nine months of 2016 and the expected challenges, President Aliyev instructed to reduce the import of goods and components used in the production of domestic products.

A relevant instruction was given to create a flexible and operational system for the implementation of safeguarding mechanisms to protect the local market. “As soon as we reach a 100% guaranteed domestic production, the customs duties must immediately be increased. All bureaucratic obstacles leading to the loss of funds and concerning the obtaining of various approvals must be eliminated”, underlined the President.

The list of imported goods, to which the increased duties will be applied in the next few years, is expected to expand significantly given the upcoming large-scale scope of works on the establishment of domestic production in several branches of non-oil sector.

Primarily, the government will continue the works on the 100% availability of food products, since the food security of the country is essential. Each year we spend considerable funds to purchase 1 million tons of grain. Now, the task is to improve the yield so as to secure 100% availability of domestic grain, which currently is 65%.

Domestic livestock breeding is another sector expecting fundamental reforms. The objective is to reduce the number of cattle from 2 million to 500-600 thousand. The increase in production of meat and milk will be achieved through the delivery of pedigree meat and dairy breeds. 50-60 thousand heads of breeding cattle will be enough to increase the production of butter and dairy products from 80% to a 100% self-sufficiency level.

The transfer to the stable nursing system in cattle-breeding industry will help free the pastures for crop husbandry and use the lands more efficiently. The vacated areas will likely be used for technical crops.

The President Aliyev has particularly stressed the need to expand the tobacco plantations.

“Certainly, the fewer of our citizens are smoking, the better. This will improve their health and the family budget. But the development of tobacco industry will create opportunities for us. This year we will produce twice as much tobacco than in the past. But, of course, we cannot be satisfied with 2,500 tons. We must increase the production of dry tobacco to 10 thousand tons in the short term. We do not have serious problems with the export of dry tobacco. There are countries that want to buy it. We need to export more and to increase the production of cigarettes in Azerbaijan. Not to make our citizens smoke more but to reduce the import”, said Aliyev, noting that the cigarettes are one of the main items of imports.

Another imported product is the raw sugar. According to the President, although there is a large sugar refinery in the country, it still works on imported raw materials worth of $100 million annually.

To reduce the proportion of imported components and the currency spending, it is expected to plant sugar beets on an additional area of ​​up to 40-50 thousand hectares.

The incentives are provided for a number of other traditional agricultural industries such as viniculture, tea growing, cultivation of hazelnuts, almonds, olives, which in the first years of independence were left without proper attention, even though this production has a huge export potential. Back in the times of USSR, the Azerbaijani wines and tea were very famous in not only the Union but also beyond it.

The government plans to reduce the imports in other equally important areas. This mainly concerns the organization of production of pharmaceuticals in the Balakhani and Pirallahi industrial parks. At present, the country is 100% dependent on imports of pharmaceuticals spending considerable amounts of foreign currency. During the first phase of production, it is planned to manufacture more than 100 types of pharmaceuticals, which will significantly reduce the imports into the country.

The social housing is another project launched in Azerbaijan. The business community is tasked to ensure maximum provision of building materials to construction sites. That is, along with the success achieved in the production of construction materials such as cement, concrete, asbestos, and bricks, we can expect a breakthrough in the iron and steel industries in the near future, given the plans to construct a new metallurgical complex in Azerbaijan. It is expected that the total production cycle will be available in the country: from the extraction of iron ore in the mining and processing complex in Dashkesen to finished quality product due to the construction of several new plants.

By the way, this concerns both import and export tariffs. For example, the government of Azerbaijan has also set export duties on fur and leather products in the range of $150-500 per thousand kilograms. This measure also aims at preventing the exports of raw leather in order to develop the domestic production of leather goods.

It should be noted that the new tariffs are to not only protect local producers but also significantly boost the state budget. Thus, the State Customs Committee of Azerbaijan (SCC) is tasked to increase custom duties by 390 million manats (by 21.5% compared to 2016), or to get 2.2 billion manats in 2017.

We want to point out that the new regulations are not about banning the delivery of foreign products but protecting local producers. This means that the fans of soft drinks and mineral water from Georgia or Russia will pay a higher price, and the state revenues will increase significantly. Undoubtedly, this will increase the competitiveness of Azerbaijani products on the market compared to imported goods.

The Georgian business community has predicted the outcomes of import tariffs increased by the Azerbaijani government to protect certain domestic goods. According to the head of the Association of Poultry Farmers and Kumisi Company Zurab Uchumbegashvili, Azerbaijani government's decision will have a negative impact on companies that export to Azerbaijan. According to him, the Georgian companies engaged in poultry industry export merely 7-8% of their products to Azerbaijan, but even this means much for them. “Unlike Georgia, Azerbaijan stimulates local production and protects the producers. Therefore, Azerbaijan does not import meat or chicken. The government decided to support local producers and imposed high import tariffs, and it is a very correct decision”, he said.

The founder of the mineral water producer Nabeghlavi Avtandil Svimonishvili touched another aspect of higher import duties. He believes that their increase can lead to an increase in smuggling in order to avoid paying taxes.

In addition, given the rise in prices of imported products, some people including unfair manufacturers may seize the opportunity to increase the prices of their products. Therefore, the nationals of Azerbaijan must have firm guarantees that the government will review any price increase in the consumer market as soon as possible to identify any possible cartels or monopolies.

However, the government of Azerbaijan, anticipating a possible scenario in the consumer market, has warned the local business community. “We cannot allow artificial increase in prices, and this will be controlled very strictly. The public scrutiny and the control by public authorities must be even stronger, as we cannot allow some corrupt people, the speculators to artificially inflate the prices making the people suffer”, said President Aliyev.

In this regard, the State Service for Antimonopoly Policy and Consumer Protection under the Ministry of Economy will be mainly responsible for regulating the relationship between producers and consumers.

It is necessary to intensify the activities of the Centre for Inspection of Consumer Goods under the Ministry of Economy, as well as to change the existing policies concerning the protection of consumer rights through strengthening control mechanisms over the prices and the quality of the products.

In many countries, the governments have a policy for the protection of the consumer market through increased customs duties. But the effectiveness of these steps will depend on how local businesses can use the two-year benefits not only to expand the production, but also to produce quality products at reasonable prices. Otherwise, the foreign products (mainly smuggled) will dominate the domestic market.