TIME FOR A CHANGE

Azerbaijan announced transition to a new economic development strategy. While the program is still in development, it is possible to see the framework of future reforms from the statements of economists working in the government. We can say with confidence that the expected changes in economic policy will be significant and ensure a qualitatively new level of development in all sectors of the national economy.

Basis of the new strategy

The first statements about the new economic model implemented in Azerbaijan, its uniqueness and the essence targeting the needs of the national economy were made about five years ago. However, by proclaiming the use of market tools of governance at the beginning of the path to independence, Azerbaijan did not abandon the methods set back in the Soviet planned economy. Dozens of various state programs adopted over the years are a clear evidence of this. On the one hand, they made it possible to clearly define the goals, set a timetable for their implementation, on the other hand, it helped monitor the accomplishments.

Today the largest state program concerns the socio-economic development of the regions. This year the government started the implementation of the fourth program, which, like in the previous three program, is designed for a five-year period. Thanks to these programs, ₼70 billion was invested in the regions of Azerbaijan. The current program, as noted by Azerbaijani President Ilham Aliyev, is by and large based on letters and memos received from the regions. “We have included in the state program and solve the problems that worry people. But sometimes there are many mistakes and shortcomings in the implementation of these projects. We must eliminate these problems,” president said.

In fact, the state programs covered certain sectors of the economy. However, since 2016, the program approach has smoothly changed to road maps, which are also a set of itemised target plan designed for specific deadlines. But control is clearer and reporting on implementation is available to the public. As part of the road maps, large-scale reforms are being implemented in almost all areas of the country's socio-economic life.

The entire foundation of reforms necessitated the development of a new economic development strategy, which President I. Aliyev recently announced at a meeting of the Cabinet of Ministers: “We are currently working on a new development strategy for our economy. The process has begun. Leading international experts and scientists will be involved in this process to make our new development strategy successful. The work done so far has created an excellent basis for this.”

It is worth mentioning that the implementation of economic reforms is also supported by the leading world financial institutions, which are ready to provide advice. “This work will involve specialists working in international financial bodies. Thus, we must successfully complete the implementation of existing roadmaps, develop and submit a new program covering the years 2021-2025,” President Aliyev said.

Innovative approach

So why is the new economic strategy important today and what does it mean? It was announced within the above-mentioned road maps that 2017 and 2018 are the years of recovery after the post-crisis phenomena and shocks experienced as a result of a sharp decline in oil prices and the devaluation of the manat. In the future, the goal of the government is to achieve stable economic growth, increase the competitiveness of the economy and its integration into the world economy, particularly strengthening the non-oil private sector and expanding the export opportunities of manufacturing enterprises.

Key statistical indicators for the first quarter of 2019 confirm the positive progress. Thus, in the same period Azerbaijan increased its GDP by 3%, which was the highest indicator in the last few years. At the same time, industrial production increased by 4.4% and by 15.6% in the non-oil sector.

All these factors urge for the transition to a qualitatively new stage of economic development, preparation for which has been going on for several years. In particular, the main goals of infrastructure development, energy and gas supply throughout the country are almost fully met, which is not only an extremely important social task, but also the basis for business ventures.

According to the head of the Centre for Economic Reforms and Communications, Vusal Gasimly, in the next year we will see the implementation of an action plan under 11 road maps, as well as of the development concept called 'Azerbaijan 2020: A Look into the Future' approved by President Aliyev in late 2012. In addition, the extensive Industrial Development in Azerbaijan (2015-2020) and the State Program for the Long-Term Development of Azerbaijan launched back in 2012 were designed to be implemented by 2020. In other words, 2020 should be the final year for a number of target plans. It is therefore natural that in 2020 there will be announced the beginning of the next stage of Azerbaijan's economic development, which, in addition to improving the results achieved, will imply radically new solutions in a number of areas, especially the “problem” sectors of the economy.

According to V. Gasymly, given the terms and conditions set in the 4th industrial revolution, specialisation of economic areas, transition from sector-specific to innovative commodity-oriented economic development is more important than diversification. In essence, the idea is to focus on investing in enterprises that produce products or are part of the production chain specifically demanded by both internal and external markets. This approach is most effective from a trade and financial point of view, rather than spreading capital for the development of all sectors of the economy. Therefore, a new assessment of the export potential of Azerbaijan will be carried out. Real names and volume of products interesting to foreign buyers have been identified already.

From rate regulation to inflation targeting

Perhaps the most interesting changes are expected in monetary policy. As promised by the head of the Central Bank of Azerbaijan, Elman Rustamov, these changes will start this year. It is going to be a transition from exchange rate management to inflation targeting (target management). Under the regime, a quantitative inflation target is set and announced, for which the central bank is responsible. Usually, within the framework of the inflation-targeting regime, the impact of monetary policy on the economy is achieved through discount rates announced by CBA. Decisions are made primarily based on the forecast of economic development and inflation dynamics. At the same time, an important element of this regime is the practice of regular public announcements about the decisions taken by the central bank, which ensures accountability and informational openness of the bank. The initiative is quite new for the global economy (it is used for about 30 years), but every year more and more countries are joining it, both developed and developing, seeing the obvious effects of such management.

The CBA has also been studying this approach for some time, but the devaluation wave and the post-crisis destabilization of the financial market have forced the Central Bank to postpone these plans. However, the stability of both manat and inflation processes recorded in the past two years has enabled the regulator to return to this idea. Recall that the annual inflation rate in Azerbaijan decreased from 12.4% in 2016 to 2.3% in 2018 and the rate of manat remained virtually unchanged.

According to E. Rustamov, for the time being both “anchors” of the economy, exchange rate and inflation management, will be conducted in parallel. “In the world economy, the stability of state budget is an element of preserving exchange rate stability, and today the stability of manat is the main anchor of Azerbaijan’s economy, inflation expectations depend on it. However, the economy necessarily needs alternative anchors; otherwise, stability will depend on only one factor. The inflation forecast can be such an alternative, and the business should be oriented towards it,” believes Rustamov. He noted that under the condition of stability in the national economy, regulation of the influence of external factors on it, the adoption of new budget rules, it is possible to begin using the inflation targeting regime already in the second half of this year.

In short, the national economy of Azerbaijan is going to see a rather interesting, qualitatively new period of its development, which will increase its efficiency and bring it closer to the standards of the developed economies.