STABILIZATION AND REFORMS

This year is ending with large-scale economic events both in Azerbaijan and around the world. In general, despite the ongoing crisis in certain sectors of the economy, last year for Azerbaijan was relatively stable and reformful.

According to President Ilham Aliyev, in 2017 we witnessed the "stabilization of the Azerbaijani economy", when the non-oil sector, non-oil industrial production and agriculture grew by 2.5%, more than 3%, and 4%, respectively.

The launch of new large-scale regional and local projects will contribute to the further increase of these indicators.

The contract of the new century

One of the main economic events of the passing year was the signing on September 14 of the renewed contract for the development of the Azeri, Chirag, and Deepwater Gunashli fields, designed as an annex to the existing Contract of the Century. It is known that the oil and gas sector was, is and will remain the key source of Azerbaijani economy. In recent years, however, sharp fluctuations in global oil prices and a tangible decline in the level of oil production have caused serious concerns. Due to depletion of productive layers, production at ACG decreased from a peak of 830,000 barrels per day (bpd) in 2010 to 580,000 bpd in the first half of 2017. Further development of these fields will contribute to additional investment in the non-oil sector, and will help to accumulate significant funds for future generations. After all, less than half of all the field reserves (436 million tons) were produced in almost a quarter of a century, of which 245 million tons is Azerbaijan's share of profitable oil. More than $33 billion have been invested in the development of fields so far.

Under the new contract, it is planned to produce 500 million tons of hydrocarbons until 2050. According to BP CEO Robert Dudley, another $40 billion will be invested in the field over the next thirty-two years. It is expected that the funds will be spent on drilling new wells, repairing and updating existing ones and possibly building another production platform.

Under the new contract, the share of Azerbaijan's profitable oil will remain at a stable level of 75% of the total production. As a result, according to preliminary calculations, Azerbaijan can receive up to $200 billion. At the same time, foreign companies will pay bonuses to Azerbaijan ($3.6 billion) when the latter meets certain conditions. The first installment ($450 million) will be transferred after parliamentary ratification of the agreement and its entry into force. Another important change is the increase of SOCAR’s share from 11.65% to 25% due to a decrease in the share of other stakeholders. Under current conditions, the company is able to undertake this financial burden, which promises big profits in the future.

The iron trinity

The oil from ACG fields has secured the economic friendship of the three countries of the region: Azerbaijan, Georgia, and Turkey, which continues successfully in other sectors. The launch of the Baku-Tbilisi-Kars (BTK) railway in October 2017 opens a new page for relations at the regional level and beyond.

As the leading partner of the project, Azerbaijan has issued several long-term loans of $775 million for the completion of the Georgian part of the railway until Kars, Turkey as well as for the repair of the 153 km-long Akhalkalaki-Marabda railway in Georgia. The total cost of railway construction is estimated at $1.1 billion including the costs of the Turkish side. In parallel, Azerbaijan has invested in the renewal of its own railway from Baku to the Georgian border, which now allows for increased train speeds (by 50%, or up to 120 kpm). In addition, the Alstom and Stander locomotives and sleeping cars were purchased specifically for the Baku-Tbilisi-Kars route.

Initially, BTK will transport 6 million tons of cargo and 1 million passengers annually. By 2030, these indicators will reach 17 million tons of cargo and 3 million passengers, respectively. Currently, the cargo transportation capacity from China to Europe is more than 240 million tons per year. At least 10% of this capacity going through BTK amounts to 24 million tons. Thus, the new railway will make it possible to deliver the cargo from China to Europe in 12-15 days. In comparison, it takes 45-50 days to accomplish the same task through the South and North marine corridors. In parallel, the use of a common fare tariff, as agreed by Baku, Tbilisi and Ankara, makes the turnover of BTK even more profitable. The route is also attractive for the passengers: getting on a train in Baku will take you to Istanbul in a couple of days, and in many European capitals depending on passenger intentions. Either way, a railway ticket will cost significantly lower than a plane ticket. In other words, BTK will significantly contribute to the tourist flow along the planned route.

In addition, the new route will become an alternative to existing routes, which is very important under the current geopolitical conditions in the region.

Tourism for shopaholics

In 2017, tourism development in Azerbaijan accelerated, and the main event in this sector was the holding of two shopping festivals in Baku during April 10 – May 10 and October 15 – November 15. The idea was to support entrepreneurship, trade and the tourist sector, which was met with considerable interest in the region. Hundreds of shopping malls and restaurants of Baku have passed registration to participate in shopping festivals, and numerous shopping centers of the city offered special discounts to the guests. Trademark products of Azerbaijan and foreign brands were widely presented in temporary stores. During the shopping festivals, the guests and nationals of Azerbaijan could purchase goods (clothes, electronics, household appliances, furniture, perfumes and cosmetics) and at the same time refund the value-added tax (VAT) using the Tax Free system. So, while the participants of the first shopping festival refunded ₼1.5 million in VAT, this indicator increased up to ₼ 3.4 million during the second festival. The turnover of the festival exceeded ₼33.8 million.

Both festivals were quite successful. According to the Minister of Culture and Tourism Abulfaz Garayev, the organization of the first shopping festival cost ₼700,000 with budget revenues exceeding this amount several times and amounting to ₼5.6 million. During the second shopping festival in October, 204,686 tourists visited Azerbaijan, which is 13% higher than the same period of 2016.

Another significant tourism reform of the past year was the development of the ASAN Viza system, through which foreigners and stateless persons who come to Azerbaijan are able to receive electronic visas. As a result of all these measures, as noted earlier by President Ilham Aliyev, the number of tourists in Azerbaijan increased by 20% during ten months of 2017 and by 24% for the entire period of 2017.

Financial and banking expectations

Stable national currency plays an instrumental part in the development of trade of any country. Azerbaijani manat and banking sector however, has gone through several waves of devaluation in previous years. The aftermath of shocks in the national banking sector of Azerbaijan to some extent remained in 2017 as well. Banking indicators continued to fall, and according to data for ten months of last year, the assets of banks decreased by 17%, the loan portfolio by 25%, deposits in manats by 12%.

The problems of the financial market began in 2015-2016 due to the fall in oil prices, devaluating manat in 2015 by twice. As a result, the banks lost 60% of their capital. Currently, there are only thirty operating banks in Azerbaijan versus forty-three banks in 2015. Incidentally, the license of one of the oldest local banks DemirBank was revoked just recently, on December 23, 2017.

In fact, both the state and regulator injected ₼834 million in 2017into the banking sector to increase the share capital of troubled banks as part of the support measures. Thus, the total capitalization of banks exceeds ₼3 billion, and the capital adequacy ratio of the national banking system exceeded 13% with a minimum requirement of 10%.

Market regulators claim that last year it was possible to prevent a significant outflow of household deposits from the banking system. During the ten months of 2016 public bank deposits decreased by 22%, while the decline in 2017 was 2.4%.

Another weak link of the sector is the International Bank of Azerbaijan (IBA), which reduced the market share of its assets from 41% to 27%.

Meanwhile, the amount of free funds in the banking system reaches ₼6.5 billion, 70% of which is at the disposal of financially sound banks. But these funds are not used for lending. Therefore, it is proposed to create a new system for the protection of creditors. In particular, the Credit Guarantee Fund will be established in Azerbaijan in the near future. The institute of financial ombudsman has operated since September 2017 and helps to regulate disputes on contracts for $2,000. In addition, it is required to apply measures for de-dollarization of the banking sector.

Banks advocate for an even distribution of liquidity in the national banking sector. It is therefore, proposed to develop the interbank foreign exchange market. Incidentally, relevant decisions have already been made in this direction - the commission (interchange fee), which the credit organizations servicing bank cards pay each other in the process of making transactions was reduced last year.

Export goods

In 2017, the promotion of the Made in Azerbaijan brand intensified. Various programs were adopted for the development of the agrarian sector, the second largest component of the Azerbaijani economy after the oil and gas industry.

According to the new roadmap for the development of agriculture, the state channelizes the main flow of its funds to the development of several industries that are of the greatest export value. In particular, production of technical crops such as cotton, tobacco, and silk yarn is increasing. Viticulture, winemaking, tea growing and beekeeping are intensively developing. High export potential for hazelnuts, as well as production of almonds and olives.

Thanks to the promotion of the Made in Azerbaijan brand, it was possible to increase total exports by more than 50% in 2017.

Opening of trade missions and chambers in foreign countries, where Azerbaijani businessmen have a chance to occupy their own niche, should contribute to the export of Azerbaijani products. In 2017, export missions were sent to Russia, Kazakhstan, Saudi Arabia, Europe, Qatar, Kazakhstan, Germany, Afghanistan and Pakistan. The missions organized national stands of products, where the state covers all the costs involved in the delivery of products and the participation of one representative.

In 2017, the government presented the Digital Commercial Hub (DCH) of Azerbaijan, which provides an opportunity for both the local and foreign entrepreneurs to engage in foreign economic activities in Azerbaijan. This initiative opens the country to the world economy and helps to attract foreign investment. The hub is operated through Azexport.az, where non-residents can use electronic wallets and signature for transactions. Azerbaijani SMEs will be able to create virtual stores, where they can offer their products. 

In fact, the government will continue intensifying its support to the development of Azerbaijan’s export potential in 2018 and, perhaps, the success will be even more evident, as in all other spheres of the national economy.