URGENT REFORMS

For many years, Azerbaijan has been leading various prestigious ratings and reports thanks to economic reforms. According to Doing Business 2020 published by the World Bank, the country is in the top twenty reformer countries showing good progress on several indicators: 9th place on "Opening a business", 1st place on "Getting loans" (compared to 22nd in 2019), 59th place on "Obtaining building permits" (compared to 61st).

However, the reforms are still very slow to effectively influence the growth indicators of the real economy. In other words, there are obstacles impeding the accomplishment of the reforms. Thus, the objective of the latest decisions and goals set by President Ilham Aliyev is to eliminate these obstacles.

Problem 1: Insufficient returns

For many years, the state has undertaken a series of measures such as state programs, constant improvement of the legislative base, provision of preferences and many more to develop the non-oil sector of the national economy in order to reduce its dependence on mineral resources. In certain years, thanks to double-digit economic growth indicator Azerbaijan has been among the world leaders. It is clear that such indicators are effective in the short term, and not a single economy in the world can boast of a high level of growth in the long term. In Azerbaijan, this indicator has been observed at the peak of the implementation of large oil and gas and transit projects. Today, however, the real problem is not the decline of the GDP growth indicator (3%), which is a pretty decent figure especially if the growth is stable. The serious concern is the situation in the non-oil sector of economy, which is the government's driving force to set long-term goals of economic development.

"Why is the overall growth in the non-oil sector not very high? We provide benefits, pay subsidies, purchase equipment, implement infrastructure projects, the level of government investment spending is quite high. All of these factors should lead to higher growth rates. However, we don't see this," President Ilham Aliyev voiced his concern at the economic meeting held in a completely new format.

President’s question is not rhetorical. Answer to this question reveals the deepest problems in the Azerbaijani economy. It seems that the state takes all the necessary measures to support the private sector, business, but does not get an adequate response.

What does prevent entrepreneurs from going forward and getting involved in the development of on-oil GDP more actively? Of course, it is money because doing any business requires investing the available funds, earning income and investing part of this income into the business again.

Problems begin right from the first stage. "During nine months of this year, the Entrepreneurship Development Fund provided ₼130 million. Additional ₼170 million will be provided by the end of the year. However, this money is not enough to fund entrepreneurship, since the banking sector does not have sufficient funding," Shahin Mustafayev, Minister of Economy (incumbent Vice Prime Minister) said at the meeting with President Aliyev.

Problem 2: Reluctant lending to the real sector

Why are banks reluctant to lend to business, although this is their main mission per se? As for state support, there are no complaints again. Banks operate freely having the most convenient conditions to attract resources, for example, through the Deposit Insurance Fund, the Central Bank steadily reduces the discount rate (from 9.75% in February to 7.75%).

Then why do the banks still prefer risky consumer lending to business lending? After all, it was consumer lending that led 12 banks to bankruptcy over the past four years. "I have already said that consumer loans prevail in our portfolio, and this was one of the reasons of the crisis in the banking sector. I am told that the trends are growing again, loans are provided not for the real sector of the economy but for consumption, for the purchase of consumer goods. If this continues, in a few years we may again encounter negative problems," President I. Aliyev said.

Apparently, the existing problem indicates that it is time for reforms in the banking sector, and more specifically, it is time to change the business model of banks in order to interest them in lending to the real sector. It is important to get the banks interested because, as pointed out by the CBA chairman Elman Rustamov, it’s impossible to force banks to issue loans, since they are representatives of the private sector, and direct intervention in their activities is unacceptable in a market economy. According to Rustamov, a lot of work needs to be done in this direction, primarily to eliminate the conflict of interests between the banking sector and business.

"One of the conflicting points for several years has been the simplification of the process of selling collateral, reducing the time spent on this process. Unfortunately, we still have not been able to resolve this issue. The key word today is "dialogue." We all, including the state, banks and business, should get together and discuss this issue, identify problems and solve them," E. Rustamov said.

In addition, banks also need to accelerate the resolution of their own problems, create a functional risk management system. "Weak risk management has already caused problems in the banking sector. I note at every meeting with banks that they do not have to focus on consumer lending. It is also necessary to improve banking personnel. There are improvements, but there are also ways to grow. We see a lot of liquidity in banks, but they do not use it. So, there are some problems," E. Rustamov noted.

Following the meeting with the president, the Financial Market Supervision Chamber organised a meeting with the leadership of the Association of Banks of Azerbaijan and commercial banks. It was decided that banks would review their strategic plans and submit their proposals to the regulator as soon as possible. In addition, the meeting participants recognised the relevance of holding a credit fair by banks.

Problem 3: Shadow business

However, the low level of lending to the private sector does not always depend on banks - this is often a problem of the business itself. Shadow business evading taxes and other regulatory authorities hide the real amount of income, turnover, etc. "The shadow business today has virtually no access to loans. We can see the results of the fight against the shadow economy, but, as President Aliyev noted, there are still entrepreneurs who prefer to work in the shade," E. Rustamov said.

The fight against the shadow economy has intensified over the past two years, and the comprehensive tax reform program has already begun to bring tangible results. In nine months of 2019, more than 100 thousand employment contracts were registered with 80% of them in the non-oil sector of economy. "These one hundred thousand people worked in the shadow economy. They were paid in envelopes. In some cases, they received low salaries, which did not reflect reality. This jeopardizes our economy. In addition, these people will retire in the future. What will they receive as a retirement pension? Therefore, I request our employed citizens not to get involved in such schemes," warned President Ilham Aliyev.

Obviously, the process should continue further given at least tens of thousands of people uncovered by reforms. The existing reform covers only part of the shadow business activities.

However, even these negative actions of entrepreneurs sometimes have their own objective reasons. For example, unfair competition, monopoly supported by government officials who have their own business interests in the market. "Using their privileges, they crowd out competitors and sometimes slander them. They create conditions forcing entrepreneurs either to sell their business or leave. This is unacceptable!" president said.

Mr. Aliyev emphasized that in developed countries, GDP is formed mainly due to small and medium-sized businesses, and Azerbaijan should create conditions so that "people with entrepreneurial potential can do business without facing pressure and interference from officials."

"Entrepreneurs must not be touched by "dirty hands" of such individuals. Sometimes, officials, heads of local executive authorities, especially in the regions, do not provide opportunities for entrepreneurs. They stick to them like leeches sucking their blood. We will take very strict measures and the most severe sanctions against such individuals," I. Aliyev said.

Therefore, the main objective of establishing a new Ministry of Economics, which combines the Ministry of Taxes, State Committee for Property Issues, State Agency for Antimonopoly Policy and Consumer Market Supervision, is to set a more effective state-business dialogue. From now on, monitoring of entrepreneurs' problems and their elimination is concentrated under a single superministery, which should make it possible to eliminate problems and drawbacks more effectively.

Thus, the new head of the new institution, Mikail Jabbarov, offered friendship to entrepreneurs in his first interview as Minister of Economics. "Friendship should be mutual. Our duty is to listen to the problems of businessmen and solve them. Business must ensure transparent activity, expansion of activities, and payment of taxes. Nothing more," Jabbarov said.

As President I. Aliyev said, there is no alternative to reforms, and ensuring sustainable economic development is declared as the main priority for the Azerbaijani government. "Over nine months, GDP grew by 2.5%, and in the non-oil sector - by 3.5%. I think that this is a good indicator. But it is not enough. Agriculture grew by more than 7%, non-oil industry - by 15%. These are very positive facts. However, we must achieve sustainability of this development. To achieve this, we must continue very serious reforms," President Aliyev said.

Therefore, we can assume that in the near future the economic life in Azerbaijan will go through new interesting processes, personnel and structural reforms. Both the government and population are looking forward to the landmark year of 2020, when many states programs and roadmaps should yield important results in terms of the economic development...