CURRENT FORECAST IS POSITIVE

The main objective of deep economic reforms in Azerbaijan is to achieve sustainable development regardless of the situation in the oil markets. The experience of past years has demonstrated that no matter how stable the oil prices may seem, things can change overnight, and the negative consequences for the Azerbaijani economy in this case cannot be avoided. Therefore, in the last couple of years, the government has taken a number of almost revolutionary steps with an emphasis on the development of the non-oil private sector.

Optimal climate

Influential international institutions also record the positive trends in the national economy, which undoubtedly have a positive effect on Azerbaijan's investment image. According to the World Bank's Regional Director for the South Caucasus, Mercy Tembon, over the past one-two years, Azerbaijani economy began to recover from the shocks caused by the decline in oil prices in 2016–2017 and the global economic crisis, despite the ongoing political processes in neighbouring countries and the devaluation of the manat. But the timely start of large-scale reforms made it possible to prevent the crisis and to stabilise the economy in a short time. "The government initiated major reforms. Our current outlook for Azerbaijan is positive, as we note positive growth rates and controlled inflation rates. I think that the government is taking the right steps regarding reforms in the field of taxation, finance and economic diversification, which directly affects Azerbaijan's income," Tembon said.

However, according to Deputy Prime Minister Ali Ahmadov, according to estimates of the World Bank, Azerbaijan has demonstrated over 12% of economic growth since the beginning of 2000s and is considered one of the states with accelerated development rates. "Azerbaijan is taking confident steps towards development and improvement. Global reports also confirm the high results both in the system of international relations and in terms of sustainable economic development," Mr. Ahmadov said in his speech at the forum Economic Diversification - the Role of Private Sector.

Meanwhile, the use of the potential of the non-oil sector in the economic development of Azerbaijan still cannot be considered satisfactory. Therefore, the government adopts numerous programs to stimulate the private sector in investing in the economy.

According to Deputy Economy Minister Sevinj Hasanova, given that the development of the private sector remains a priority of state policy, one of the most important tasks is to create a healthy competitive environment and develop new mechanisms to improve the optimal business climate in Azerbaijan. In this sense, increasing transparency in the economy, creation of industrial clusters, corresponding ecosystem can significantly enhance the potential of the private sector. This is the main objective of all the recent reforms.

Obviously, it is unrealistic to expect a rapid jump in a short time, but according to the government, the share of SMEs in national GDP will reach 60% after 2025.

No risk of inflation

Certainly, one of the first steps in this direction is the optimization of business taxation. According to the Chairman of the Central Bank of Azerbaijan (CBA), Elman Rustamov, taxes should stimulate private investors, as well as to make business profitable. CBA promises to implement monetary policy aimed at maintaining low inflation. "All the central banks of the world are focused on one important problem - regulating inflation. For families, this means a stable income, for investors - planning, looking into the future. From a psychological point of view, it means a positive look at the future. We intend to expand monetary reforms in this direction", E. Rustamov said.

Recently, experts are increasingly expressing doubts about the possibility of keeping inflation rate at stable levels. In the beginning of 2019, the government approved a large package of social and financial reforms, which, of course, will make the money supply "heavier". In addition to the natural financial effect, these measures also have a psychological effect on inflationary processes, which, by the way, was recorded in February — inflation in average annual terms accelerated to almost 2%. Of course, the indicator is still at a very low level, but today it is more important to know how long the growth trend will continue? Aide to the President of Azerbaijan on Economic Policy and Industry, Natig Amirov, said that in 2019, the government intends to provide over ₼2.2 billion (more than $1.3 billion) to implement social initiatives as part of the decrees signed by President Ilham Aliyev in January and February 2019.

According to Mr. Rustamov, the influence of social decrees on inflation will be insignificant. "We estimated their impact at 0.3-0.4%, while the annual inflation rate is 1.7-1.8%. So, we do not expect a significant impact on inflation," Rustamov said.

As for the costs of resolving the issue of problem loans, Rustamov indicated that most of the funds had already been set in the state budget for 2019. "Part of the funds will be emitted. To prevent the growth of inflation rate, we will use all the tools available to the Central Bank," said Rustamov.

Although the reforms are large-scale and are taken in a short time, they have been developed with careful consideration of all possible negative consequences and steps to prevent them. This is another reason for businesses to develop investment projects more actively.

Gradual stabilisation

Minister of Labour and Social Protection of Azerbaijan, Sahil Babayev, believes that the reforms have had the largest impact on the labour market and there are already positive results. So, by the end of 2018, more than 90 thousand labour contracts were concluded in Azerbaijan. By the end of February 2019, the number of labour contracts reached 53 thousand, of which 13 thousand are in the public sector, 40 thousand in the private sector. "Tax reforms will also have a positive effect on the labour market. We believe that in the coming years we will be able to significantly expand the labour market, as well as strengthen the mechanism for improving the labour legislation," minister said.

According to Babayev, the government is developing a concept to reduce shadow business activity, strengthen the social sphere and transparency of the labour market, and create a competitive environment in Azerbaijan.

In short, the government will continue large-scale reforms to develop the non-oil sector. At the same time, it is not yet ready to provide the entrepreneurs with an access to its own business functions, although experts point to the effectiveness of this step to strengthen the role of the private sector. In fact, officials have quite reasonable arguments to prove their position. Ideally, the state should perform a regulatory function, but this is not yet possible under the present conditions. Thus, according to Sahil Babayev, if the state delegates say the management of wastes to the private sector, the monthly cost of this public service for the population will increase to almost ₼100, as the construction of a single landfill is estimated at $40 million, and its maintenance costs $10 million.

Therefore, it is not difficult to imagine the social consequences of such a decision. To recoup these costs, each household would pay 30-50 euro monthly for waste management only. That is why, together with the World Bank, the government is developing a household waste management program for fifteen years, which provides for a gradual transition of this sector of the national economy from state to private sector.

The same applies to all other utilities. "The exit of the government from the process of management of public utilities will be gradual, because otherwise it can lead to a significant increase in tariffs and public spending," said Babayev.

Any economically beneficial decisions of the government should objectively take into account the social aspects of the issue, as they eventually influence the purchasing power of the population, which is the basis for the success of any business.