TRANSPARENCY, FLEXIBILITY, EFFICIENCY

Azerbaijan finished the last year, the year of deep economic reforms, with 1.4% GDP growth, 2.3% inflation and a stable rate of manat. Yet another accomplishment was the over-fulfilment of the forecast for state budget revenues, which allowed the government to fulfil its social obligations in full. "The main goal of economic reforms is to ensure complete transparency in this area, strengthen the fight against negative phenomena and accelerate the successful development of Azerbaijan," President Ilham Aliyev said at a meeting of the Cabinet of Ministers on the results of the socio-economic development of Azerbaijan in 2018 and upcoming challenges.

Positive sign

Economic results of 2018 are impressive both in terms of quantity and quality, for most of the indicators demonstrate surplus. The growth of the non-oil sector by 1.8% indicates that the main goal of Azerbaijan's economic development - reducing dependence on the oil factor – is in the focus of the government. At the same time, the growth rates are significantly higher than the general indicator in industrial production and agriculture, 9.1% and 4.6%, respectively. Given that these two sectors are fundamental in terms of the stable development of the non-oil sector, any jumps in indicator values are extremely important for the future of the national economy.

Also, the volume of capital investments in the non-oil sector last year prevailed in the total amount of investments – ₼11 of ₼17.2 billion. "This indicates that Azerbaijan is a very attractive country for investment. 25^th place in World Bank's latest report will stimulate those who want to invest in our country even more," President I. Aliyev said.

Today it is much easier to create individual production business in Azerbaijan thanks to simplified legal procedures, as well as the establishment of several industrial clusters with well-developed infrastructure and preferential taxation. The existing industrial parks already have 67 residents, 40 of which are functioning. Investments in projects implemented in industrial parks exceed ₼5 billion.

Investment promotion mechanism has seriously contributed to the development of the non-oil sector. This program includes 333 projects, 107 of which with a total value of ₼2.8 billion were implemented in 2018.

It is noteworthy that Azerbaijan is funding most of the major projects on its own instead of attracting external loans, which are welcome in technology-intensive projects only. Thanks to this policy, Azerbaijan's foreign debt decreased by almost 4% last year – from 22.8% to 19% of GDP. This figure is even more significant given the stable growth of the country's currency reserves, which last year increased by another $3 billion, reaching $45 billion. Thus, foreign exchange reserves are several times higher than external debt, which means zero expectancy of the repayment problem. "A country with the amount of external debt reaching 50% of GDP is considered economically stable. Azerbaijan's external borrowings are 19% of GDP, and I think this is a large number. I think that it should be reduced. It will be," President Aliyev said.

All these factors influenced the over-fulfilment of forecasts for state budget revenues. It is also important, according to Finance Minister Samir Sharifov, that from the non-oil sector, the state treasury received 2.4% more funds than expected, and 4.4% more than it did in the previous year 2017.

Fighting the shadow economy

Last year the change of leadership benefited the tax and customs system of the country. New heads of these structures are instructed to ensure maximum transparency of activities. Despite the scepticism of some experts, deep reforms in the fiscal system did not hinder the fulfilment of budget forecasts. "I highly appreciate the fact that the tax plan [for the last year] is delivered in full. Due to gross mistakes made by the previous leadership, entrepreneurs were forced to pay taxes for the following years, thus creating sort of a pyramid. Arbitrary practices and mismanagement were the name of the game in the tax sphere. We had to stop all this some time, and we did it," President Ilham Aliyev said.

Deeper tax reforms are planned for the current year, with major changes affecting almost all types of taxes. Again, the objective is to minimise the shadow economy and increase transparency in the fiscal sector. "We are conducting and will continue to combat the shadow economy both by administrative and institutional methods, including reforms. Tax reforms should put an end to illegal employment. I believe that thanks to the full use of compulsory medical insurance, illegal employment will be completely eliminated as a factor," Aliyev said.

Chairman of the State Customs Committee Safar Mehdiyev presented interesting statistical data. Last year, Azerbaijan’s trade turnover reached $30.9bn, while imports reached $11.5bn (increased by $2.7bn compared with 2017). However, not all imports are taxable. Almost half of this volume consisted of gold bars of the State Oil Fund and the Central Bank ($803mn), as well as equipment, mechanical installations and other goods (for $300mn) delivered to Azerbaijan on preferential terms. As explained by Mr. Mehdiyev, the increase of tax base in imports by $1.2bn was a result of "correct assessment of goods by the customs based on their real value in accordance with the law".

"As to the facts of corruption revealed in the customs, 117 officers were fired. This year, we will further strengthen the measures to combat corruption jointly with the General Prosecutor's Office and other law enforcement agencies," Safar Mehdiyev promised.

Green light to business

However, a path to full transparency is not an easy one, as customs officers have problems not only with their own employees, but also with foreign traders, who still cannot get used to revolutionary innovations in the customs system. Although all customs operations are carried out through the electronic declaration system, one of the existing problems is when foreign traders hide the real value of imported goods and vehicles. According to Safar Mehdiyev, his committee will eventually find a solution to this problem. "International experience of entities engaged in fiscal operations, including customs, shows that educating the taxpayers to abide the rules voluntarily and instilling in them a regular use of self-assessment practices are more efficient ways to ensure the fulfilment of budgetary obligations. A new regulatory act to implement this approach is already on the way," the head of the State Customs Committee said.

Thus, the Green Corridor system tailored specifically with foreign trade operations in mind will be a revolutionary turning point to ensure the instillation of the culture of voluntary abidance by rules in relations between the government and businesses, as well as the transparency of business environment. In other words, the ultimate goal of all these mechanisms is to ensure a more benign environment for entrepreneurs, which define the future of the non-oil sector in Azerbaijan. A series of innovations was launched this year in various spheres including fiscal and other type of institutions. As before, the government will continue lending to business entities on preferential terms. Last year, for example, the total amount of such loans reached ₼160m. By the way, this was possible thanks to the amount accumulated as a result of the repayment of previously allocated loans.

As for institutional changes, President I. Aliyev announced a new structural reform in the country. "We need a new management structure, which will be more flexible, more compact, more focused. New structures have been created over the years. Their effect was not that sensible when they were created. But now we can see that our management structure is considerably stretched," president said. He reminded that the reverse process is taking place in the world today - management is more compact and flexible to carry out its duties more effectively with a smaller number of employees. This is especially true for companies leading in a particular sector of economy, where they must work with maximum efficiency.

"Our reforms meet the requirements of the current macroeconomic situation, real sector of the economy, welfare of citizens, their comfortable life, including reforms related to entrepreneurship," Mr. Aliyev said.

So, the implementation of reforms is gaining momentum and should reach full capacity this year. Considering that the implementation of the new, Fourth State Program on Socioeconomic Development of the Regions, which, as a rule, determines the country's economic policy for the next five years, will begin in 2019, we can say that this year will be a kind of starting point for the new stage of economic development of Azerbaijan.