IN CASE OF EMERGENCY

The COVID-19 pandemic and the quarantine measures were such a dramatic and widespread shock for the global economy that one cannot expect a way out of the deep recession perhaps in the next couple of years. With negative GDP dynamics and the need to restore most sectors of the economy, many countries of the world exhausted domestic resources and increase public borrowing. Paradoxically, sometimes they borrow from each other. But they mostly prefer borrowing from international financial institutions (IFIs).

Azerbaijan is going to continue the fight against COVID-19 exclusively on its own. Borrowing from IFIs will take place only for important economic projects.

Stalemate

According to the World Bank’s review Prospects for the World Economy published in June, in 2020 world GDP will decrease by 5.2%, which is the maximum indicator since the Second World War. At the same time, a decrease in per capita GDP is expected to affect the largest share of countries since 1870. Economic activity in developed countries is likely to drop by 7% amid serious shocks affecting local supply and demand, trade and finance. The global per capita income is expected to fall by 3.6%, which will plunge millions of people into extreme poverty.

In principle, this was expected, since the pandemic has driven the global economy to almost completely idle. At the same time, the revenues in a number of economic sectors such as tourism and aviation are unlikely to be restored to the same level even after the complete removal of quarantine measures. Finally, many governments have undertaken partial or full compensation to the population for the loss of permanent income and the solution of other social problems. In other words, there is a violation of the main rule of maintaining the balance in the economy - the ratio of expenses to income. And what is the expected way in such a situation? Borrowing!

The size of world debt even before the pandemic had grown extremely largely. According to the Institute of International Finance (IIF), last year the global debt reached a record $255 trillion. This indicator includes borrowing not only at the state level, but also of banks, non-financial corporations and households. But the fact is clear: at the moment, world debt is 40%, i.e. almost doubled and exceeded the indicator recorded at the 2008 financial crisis.

Moreover, according to IIF, the debt of world governments has grown the most - by $4.3 trillion (In 2007-2019, the debt almost doubled from $35 trillion to $70 trillion).

Amid the spread of the coronavirus, debt naturally continues to grow. In March, the volume of gross public debt reached a record high of more than $2.1 trillion. This is twice the average monthly figure for 2017-2019 ($0.9 trillion).

According to IIF estimates, if net government borrowing doubles the level of 2019 and the global economy declines by 3%, global debt could reach 342% of global GDP.

Recently, the US announced that its external debt reached a record high of $26 trillion mainly due to actions taken to combat the coronavirus. Since May 5, the US state debt increased by $1 trillion.

Government debts in several European countries are also breaking records, seriously affecting general economic situation in the eurozone. With such a critical situation in developed countries, it is easy to imagine the collapse of the emerging economies, which are very dependent on foreign borrowing. Indeed, in parallel with the problems due to the pandemic, one has to continue to pay debt bills.

Since the very beginning of the coronavirus crisis, all the leading international financial institutions (IFIs) announced assistance programs for poor countries. So, the G20 countries agreed to cancel debt payments for a large group of poor countries from May to the end of the year. This decision includes the payment of debts to the G7 governments from the G20 countries. This means that the poor states can mobilise their funds to fight the virus, and not spend them on paying off debts, at least in the next few months.

The World Bank agreed to cancel the debt of 76 countries - members of the International Development Association, and the International Monetary Fund exempted 25 of the poorest countries from debt and issued urgent loans to 16 countries for a total of $3.8 billion, expressing readiness to also open credit lines for $100 billion.

By the way, in a number of post-Soviet countries that are heavily dependent on external loans, the IMF decision caused great dissatisfaction. IMF included in the list only Tajikistan, although the situation in countries such as Ukraine, Georgia, Armenia is also difficult. According to experts, Armenia will have to go for additional external borrowing of at least $0.5 billion. Before the pandemic, the level of Armenian public debt already exceeded 50% of GDP. In Georgia, this ratio also close to the 60% limit set at the legislative level.

It is clear that such a borrowing trend is extremely undesirable for any state at any time. However, the pandemic and the following recession further aggravate the situation, as the return of these debts can delay many economic plans of governments for a long time and delay the recovery from the crisis.

Azerbaijani pragmatism

The situation in Azerbaijan is interesting. Unfortunately, the national economy could not avoid the recession according to the results of the last five months. For the first time in many years, the economy went negative - the decline in GDP in January-May was 1.7%, while the non-oil sector showed a decline of 2.1%. “We expected that after four months the economy will show a recession due to coronavirus. However, at the end of this period, GDP growth reached only 0.2%. But according to the results of five months, the decline was predicted and reached 1.7%,” Azerbaijani President Ilham Aliyev said. At the same time, the growth of industrial production in the non-oil sector reached 14%, the agro-industrial sector - 3.6%, inflation below 3%.

President added that the government will spend over $2 billion to support the population and the economy, and stressed once again that in the context of the spread of coronavirus in Azerbaijan, the main task was to ensure the health of the population.

Is Azerbaijan going to ask for funding to combat COVID-19? Definitely not. “According to IFIs, more than 150 countries requested IFIs for financial assistance in the fight against coronavirus. However, Azerbaijan is not among them. We don’t ask anyone for help, we don’t want loans,” Ilham Aliyev said.

As before the pandemic, the country will borrow funds only for the implementation of high-tech projects on favourable terms.

For many years, Azerbaijan has been one of the best developing countries in terms of external borrowing. During the global financial crisis of 2008, the government began to pursue a very conservative borrowing policy. Azerbaijan has taken one of the leading positions in the post-Soviet space in terms of total external debt in relation to GDP over the past decade. Moreover, the indicators of Azerbaijan remained one of the best among the Central and Eastern European countries.

Even before the pandemic, experts from WB, IMF, ADB and several other IFIs noted that the current state of Azerbaijan’s external debt allowed the country to increase it slightly. As of January 1, 2020, the total public debt (16.9 billion manats) is slightly more than 20% of Azerbaijan's GDP. At the same time, external borrowing in the structure of the public debt amounted to 91.6%. However, in compliance with the Medium-term and Long-Term Government Debt Management Strategy approved by President Aliyev on August 24, 2018, the government was instructed to reduce the level of external borrowing to 10% of GDP in the coming years. By 2025, this figure should be 12% of GDP.

Moreover, the situation in Azerbaijan with public debt servicing is quite satisfactory. Last year, the state budget allocated 6.2% for these purposes, which is several times less than the established limit of 15%. By the way, unlike the neighbouring countries, the state debt limit in Azerbaijan is set at 30% in relation to GDP.

Cooperation will continue

According to the Minister of Finance of Azerbaijan, Samir Sharifov, some adjustments will have to be made to the strategy of managing the public debt after conducting a study in this area. “We will prepare our proposals and submit them to the government, and then to the president,” Mr. Sharifov said.

Azerbaijan will not borrow from external resources to fight the coronavirus and continue to provide the necessary social package during quarantine. However, cooperation with IFIs for the further recovery and development of the economy amid the pandemic and the low oil prices is relevant. IFIs’ loans are attractive not only because of low interest rates and long repayment periods. First of all, they create better conditions for the technical implementation of projects and provide transparent control over the expenditure of borrowed funds. This is especially true for large-scale and capital-intensive infrastructure projects, such as the construction of power plants, power lines, pipelines, roads, canals, etc.

That was the topic of negotiations between the European Bank for Reconstruction and Development (EBRD), Asian Development Bank (ADB) and President Ilham Aliyev held during the pandemic.

EBRD expressed its readiness to actively lend projects in the public and private sectors of Azerbaijan. “In particular, in the next few weeks we will provide 20 million euros for 5 projects. In addition, there is an agreement with the Central Bank of Azerbaijan on swap operations in the amount of $50 million,” Suma Chakrabarti, head of the bank, said during a video conference.

According to him, compared to 2019, when the volume of EBRD investments in Azerbaijan was low (17 million euros), then in 2020 the bank is ready to invest more than $250 million to the country. Of these, $150 million is an investment in the Green City project. “In addition, we are ready to invest 100-200 million euros in projects to improve the power network of Azerbaijan. We are also ready to finance projects in renewable energy sources, privatization of state-owned companies. We are ready to implement a pilot irrigation project, provide technical assistance to commercial banks in Azerbaijan, and are ready to work with small and medium-sized businesses to diversify the economy,” EBRD noted.

President I. Aliyev expressed Azerbaijan’s interest in financing jointly with the EBRD projects to improve the irrigation system in agriculture, and stressed the country's readiness to discuss with the EBRD the de-commercialisation of state-owned companies, including their partial privatisation.

Another international bank with which Azerbaijan has 20 years of experience of cooperation, ADB, is also ready to support the diversification of the economy and its recovery after the pandemic, said the head of the bank, Masatsugu Asakawa.

For our country, the main point in the further borrowing from ADB are projects in agriculture. Thus, Azerbaijan plans to borrow from ADB (about $100 million) to improve the irrigation system in the Nakhchivan Autonomous Republic. Moreover, Ilham Aliyev suggested that ADB consider participating in financing projects to improve the irrigation system throughout Azerbaijan. “We have water losses of 40-50% and this is very worrying. In order to solve the problem, a special commission has been created in Azerbaijan, which analyses and within a few months will provide information on areas that need investment. In addition, we plan to adopt the State Program for the Development of Irrigation Systems,” president said.

Azerbaijan has made every effort to accelerate the development of the agro-industrial complex, and a pandemic, quarantine, closure of borders and the suspension of the export of several food products by some countries have made this process a priority.

Anyway, all these negotiations prove once again that the principles of urgency and strategic priority of projects will continue to dominate the policy of attracting and distributing external borrowing. In this context, one should not expect a serious increase in the external debt of Azerbaijan during the post-pandemic period, as such a careful selection of projects and creditors will simply prevent the government from reaching the alarm point.