BUSINESS IN QUARANTIN

Apparently, private businesses suffer the most due to the deep global economic recession and the coronavirus pandemic. Many of them can practically cease operations without state support.

The package of measures taken by the Azerbaijani government to help private entrepreneurship has helped to preserve the vast majority of jobs in the private sector. However, the uncertainty over the terms of the lockdown and the need to restore the lost market position practically from scratch are a serious cause for concern for local businessmen.

Stop the declining curve

Despite the large-scale stimulus measures taken during the pandemic, the world is clearly experiencing the largest economic crisis since the Great Depression. Moreover, according to experts speaking at the Bloomberg Invest Global conference, a complete recovery of the world economy this year is out of the question. In 2021, the overall recovery process will largely depend on how quickly the decline curve can be stopped.

For example, the head of the Federal Reserve Bank of Richmond, Thomas Barkin, compared the current economic trajectory with a situation when we took the elevator down and we're going to take the steps back up.

According to the International Monetary Fund, by the end of the year, per capita income will decline in 170 countries (90% of the total). Moreover, by the end of 2021, global GDP is likely to be lower than in the same period of 2019, economists at HSBC Holdings PLC believe.

That being said, developing countries will no longer be the engine of global economic growth this year. The World Bank predicts their GDP will decline by 2.5%, the worst since the beginning of observations in 1960.

Even in the optimistic scenario, the impact of the crisis on the labour market will be impossible to overcome in 2H2020 either, according to the International Labour Organisation, which reported that the number of hours worked in 2Q2020 was 14% lower than before the outbreak of the coronavirus.

In addition, Bloomberg notes that government support, which has already reached $11 trillion, will be limited due to record levels of debt.

For Azerbaijan, the coronavirus, in addition to the complete downtime in a number of sectors of the economy, has entailed another problem - a decrease in world oil prices. This directly affects the volume of state investments, which largely support many private companies in the country. Thus, the economic balance is upset, there is a decrease in both imports and exports, and the introduced quarantine restrictions have led to breaks in the chain of "production-processing-consumption".

However, despite the obvious problems and multimillion-dollar damage (we still don’t know the exact amount) for the national economy, the situation is under control. “In 1H2020, the average oil price on world markets was $38 per barrel, although our forecasts are based on a price of $55 per barrel. This is an obvious loss, of course. But I want to say that our economy is stable even if oil prices drop to $14 per barrel, since we had created the necessary reserves in previous years,” President Ilham Aliyev said in his interview with local TV channels. He noted that "in the first half of 2020, Azerbaijan's foreign exchange reserves decreased by only $98 million, although we expected a greater decline."

President added that the coronavirus pandemic had a negative impact on the national economy, with the recession level reaching 1.7% over five months. But thanks to an effective fight against the shadow economy and increased fiscal transparency, the recovery will come quickly.

State financial support

According to the published statistical reports, during 1H2020, the surplus of the state budget of Azerbaijan has already exceeded ₼400 million. Almost a quarter of this amount came from the customs authorities, while the rest was tax revenues.

On the other hand, there is little hope that this trend continues throughout the year due to a number of tax concessions for entrepreneurs (₼114 million) adopted by parliament in May 2020. According to the Minister of Economy of Azerbaijan, Mikail Jabbarov, these state programs aim at businesses to take them out of the crisis with less losses.

As of early July, a total of 146,500 taxpayers who have suffered from the consequences of the pandemic have applied to the Ministry of Economy of Azerbaijan. The State Treasury Agency paid ₼95.6 million to 24,500 taxpayers as salaries. Also, 212,500 employees received ₼47.3 million as a payment for the second month of employment (50%). The volume of financial support for approved applications under the program of financial support for individual (micro) entrepreneurs is about ₼63.3 million.

According to Mr. Jabbarov, in general, during the quarantine period, the state provided financial assistance to 130,000 entrepreneurs. Given the funds provided for the payment of salaries to personnel, this figure reached 310,000 people.

According to government officials, there is currently no need for any additional financial assistance to support the business. Assistant to the President of Azerbaijan Shahmar Movsumov said that “at the first stages of the pandemic, we adopted a large package to support businesses. We continue to implement the measures included in the package, such as tax breaks, social security benefits, and so on. Therefore, we see no need to take additional measures to support businesses,” Movsumov said at one of the recent briefings of the Operational Headquarters under the Cabinet of Ministers.

Support with credit

Meanwhile, unlike large business entities, which to some extent provide for a certain ‘safety cushion’ in their annual budgets, small and medium-sized enterprises (SMEs) usually depend on uninterrupted income flow. Therefore, they are in the risk zone today.

The government helps to pay salaries to employees; the tax burden has dropped significantly. But many entrepreneurs are worried whether they will be able to restart businesses after the pandemic? After all, the lockdown took many by surprise - someone did not manage to sell the purchased goods, someone failed to fulfil their obligations to customers, etc.

Obviously, as soon as life and economic activity gradually returns to the former course, businessmen will need additional funds to revive the pre-pandemic volume of their businesses. The main actors in this case will be the banks, which should have already started to work seriously on expanding their loan portfolio.

According to the head of the Center for Analysis of Economic Reforms and Communications Vusal Gasimly, since the beginning of the pandemic in February 2020, the volume of loans issued by banks has been decreasing every month. In March-May, the loan portfolio decreased by 6.1% reaching ₼14.4 billion.

This negative dynamics can be prevented only with the intervention of the state, which manifested itself after the introduction of a new procedure for the provision of concessional loans at the expense of the Entrepreneurship Development Fund approved by the presidential decree of June 4, 2020.

The new rules introduce new mechanisms of concessional lending to entrepreneurship. One of them is the provision of soft loans to entrepreneurs for the purchase of equipment without collateral real estate. In other words, a preferential loan is used to purchase new equipment, which is also considered a collateral. The banks' interest rate in such cases is 7%. The new approach will make a significant contribution to further expanding the access of business entities to financial resources, support investment activity, economic growth and employment.

Another mechanism involves the restructuring of debt obligations of credit institutions to the fund, the provision of a deferral for the fulfilment of a loan obligation in case of force majeure (natural disasters, epidemics, etc.).

It is very important that the introduction of mechanisms for providing state guarantees for new loans and subsidizing interest on these loans, state financing of part of the credit interest of entrepreneurs with current credit debt has begun.

According to the terms of state guarantees for business loans and subsidizing their interest rates, the guarantee is provided for a part (up to 60%) of the new business loan portfolio in the amount of ₼500 million, and 50% of the annual interest rate of these loans is financed by the state. This mechanism applies to loans with the annual interest rate up to 15% for up to three years. The grace period for these loans is up to 12 months.

As part of the new measures, the Ministry of Economy has created an electronic credit platform for entrepreneurs (e-edf.gov.az), through which businessmen affected by the coronavirus pandemic will be able to issue loans for up to ₼3 million with a grace period of 12 months as soon as possible. Thus, entrepreneurs will be able to apply for business loans online. Their applications are simultaneously reviewed by authorised credit institutions and the Ministry of Economy, and it is possible to track the status of applications in real time. That is, the state ensures flexibility and transparency in obtaining loans.

According to V. Gasimly, the provision of state guarantees on bank loans to entrepreneurs affected by the pandemic and the subsidization of credit interest will prevent the emergence of problem loans. Thus, subsidizing interest on the current loan portfolio (₼1 billion), as well as guarantees and subsidies for new loans (₼500 million) means support for the loan portfolio of ₼1.5 billion, which is more than 10% of the current loan portfolio in Azerbaijan...

Tahir Mirkishili, chairman of the Parliamentary Committee on Economic Policy, Industry and Entrepreneurship, believes that there is a need to introduce new support mechanisms in many areas of the economy that have suffered losses. “Solving the problem of collateral, as well as paying the state half of the interest will greatly contribute to the survival of small and medium-sized enterprises and their willingness to implement new projects in the post-pandemic period,” Mirkishili said.

Meanwhile, Minister Jabbarov is rather optimistic about the restoration, assuring the journalists that this process will begin by the end of this year. “Today we see great interest in Azerbaijan's industrial parks. Interest in investment projects has remained. I think in the near future we will see the implementation of new projects by the private sector at Sumgayit Chemical Industrial Park LLC,” Mr. Jabbarov said.

It is clear that the government is trying to solve the existing and perspective problems in a non-stop mode, and does everything restore the pre-pandemic situation with private entrepreneurship in the country. Currently, ₼3 out of every ₼4 received by the state budget come from the private sector. This is a sufficient incentive for the state to seek new forms of support for entrepreneurship.