SUPPORTING THE IMAGE

A possible impact of the existing situation in the banking sector of Azerbaijan on the country's rating required additional measures to raise the overall economic image. In particular, it was necessary to protect the business sector from negative consequences, which should be actively developed under existing conditions. More efforts are required to accelerate the flow of foreign investment into the country and to facilitate access of private sector to financial resources.

President Ilham Aliyev has recently approved an action plan to improve the business environment and the country's position in international arena.

In general, the plan provides for the implementation of activities in 18 areas, covering not only economic, but also social aspects of Azerbaijan’s development. Since many items have already been included in other program documents, they are indicated in the plan in a sufficiently capacious and collected manner according to the targets, which makes it easier for progress tracking in the future. At the same time, the very urgent problems of the financial market are directly linked with the development of entrepreneurship. So, in order to raise the country's overall ratings, the most important measures include the increase of the capitalization of the banking sector and liquidity. These measures are envisaged in 2017-2020. A block of "banking" issues naturally included the provision of a more healthy management of the risks of banks, the application of a model of control over consolidated risks in the financial services sector, and increased transparency in bank reporting. These measures should effect real GDP by increasing its value by ₼235 million and decreasing the ratio of non-performing loans to 8%.

The World Bank experts believe that structural reforms, including those in the banking sector, will help ensure the growth of Azerbaijan's GDP. This is stated in the updated report of the bank, Global Economic Prospects. According to the report, the national economy will grow by 0.6% and 1.3% in 2018 and 2019, respectively.

Hans W. Timmer, the World Bank's Chief Economist for Europe and Central Asia, earlier stressed that it was essentially important to make sure that the banking sector remains healthy. "The biggest challenge in this area is the need to form a banking sector that will help create new jobs. The improvement of the banking sector should be supported not only by fiscal resources, but also by the relevant legislation in the field of bank restructuring and resolution," Timmer said.

Meanwhile, judging by the above-mentioned plan of measures, the Azerbaijani government prioritized the issues as follows: registration of movable property as a banking pledge, creation of private credit bureaus, active development of leasing and alternative financial instruments. All this, of course, is directly related to the business that is in urgent need of financial support amidst a sharp restriction of credit products by banks and the application of additional conditions for their borrowing. In this sense, one of the important tools will be the establishment of a Guarantee Fund for loans for small and medium-sized enterprises (SMEs). It is no secret that with the worsening of the situation in the banking sector, the SMEs suffered most of all - the banks tightened the requirements for collaterals, and most of the small entrepreneurs became unable to fulfill them. Therefore, this fund could become another important support of the state for business. In addition, the plan provides for the expansion of financial services for international trade transactions for SMEs and the promotion of foreign direct investment. As a result, according to the document, at least 25 start-up projects should begin to be implemented until 2025.

At the same time, the government will continue to support domestic investors. According to President Ilham Aliyev's decree, which approved the procedures for issuing a document on investment promotion allowing to benefit from the Tax Code and the Law on Customs Tariff. According to Economy Minister Shahin Mustafayev, the Ministry has issued documents on investment promotion (IPD) for investment projects totaling ₼1.5 bn, 46 projects have already been implemented. All this stimulates entrepreneurs to be more active. According to the minister, $800 million has been invested in five industrial parks operating in Azerbaijan, which will create 5,000 jobs. "It is expected that additional investments of $1.1 billion will be invested in subsequent stages," Mustafayev said.

The state also continues to provide financial resources to business through the National Entrepreneurship Support Fund (NESF). Through the authorized credit organizations, the Fund has granted ₼40.6 million of preferential loans since early 2017, financing investment projects of 521 entrepreneurs. According to Mustafayev, it is planned to commission 65 production, processing and infrastructure enterprises credited by the NESF in 2017.

The government also plans to improve the system of cessation of activity of companies and their bankruptcy, create a favorable environment for issuers and investors, and increase activity in the interbank money market.

Specifically, by the end of this year, the government will take further steps for budget consolidation, inflation prevention and limiting of the monetary base. It will further liberalize the currency regime. By 2019, the preparation of a strategy for managing public debt has to be completed. By 2021, the government will finish the establishment of a medium-term expenditure framework.

In addition, the government plans to complete the process of applying smart meters in the energy supply system, simplifying procedures for declaring goods and vehicles. By 2018, to apply the electronic system for returning unnecessarily listed taxes, penalties and financial sanctions, reducing the time for conducting tax audits, including income tax, up to two weeks.

Thus, almost all activities are urgent, which is quite understandable: without a preventive solution of the financial and banking crisis, any talks about the qualitative development of the business sector are pointless. Without entrepreneurship, it is impossible to improve macroeconomic statistics.

According to Deputy Minister of Economy Sahil Babayev, despite the growth in the volume of non-oil exports, oil exports continue to predominate in Azerbaijan's trade relations with its foreign trade partners. "For the first four months of 2017, non-oil exports grew by 26%, including export of agricultural products (44%) and industrial products (15%). But the export of oil and oil products still makes up 85% of the total volume of Azerbaijani exports. It is necessary to diversify our exports," added Babayev. Given that it is unrealistic to do this without a strong SME base, the government's efforts to speed up the reforms are understandable, and especially against the backdrop of declining oil revenues.

However, the government is confident that the measures implemented already yield real results. Minister Mustafayev said that in January-April 2017, the non-oil industry in the country grew by 2.8%, and agriculture by 3.2%. At the same time, during the same period, Azerbaijan’s trade volume with other countries increased by 11.5%. "During four months of this year, the currency reserves of Azerbaijan increased by $1.3 billion, reaching $39 billion. On May 1, they were 3.2 times higher than external debt," Mustafayev said.

WB experts also note that since the beginning of this year, the national economy has begun the recovery showing positive results. "Many countries, including Azerbaijan, are carrying out reforms aimed at strengthening the financial sector," writes Global Economic Prospects report. Azerbaijan accelerated structural reforms, including simplification of customs procedures and business licensing, which allows supporting the development of the private sector.

In any case, the government of Azerbaijan plans less than three years to implement the new reforms. We hope that they will be implemented as clearly as indicated in the plan in order to ensure a more optimistic direction of the national development and to be able to maintain on the trend of stable positive ratings achieved in recent years.