ON FAVOURABLE CONDITIONS

One of the key objectives of the Azerbaijani government, as outlined in the Social and Economic Development Strategy for 2022-2026, is to increase the share of small and medium enterprises (SMEs) in gross domestic product (GDP) in the non-oil and gas sector to 35% and employment to 60%.

In general, over the past decades and last year, the government has adopted a wide range of documents and state programmes, introduced various incentives and banned inspections of business entities, etc. for the development of entrepreneurship. All these measures have definitely contributed to the growth of the share of private sector in the national economy, including in production and exports.  While the figures are encouraging, they are far from the potential available, as there are problems, which need to be addressed.

Trends and forecasts

The record indicator of macroeconomic results in 2022 was the volume of non-oil exports, which for the first time reached $3b, 10.3% more than in 2021. However, Nijat Hajizade, head of department at the Centre for Analysis of Economic Reforms and Communications, said at the national forum of exporters and importers that despite the growing share of non-oil exports, its content is still dominated by fruit and vegetables. "The share of agricultural products is $600 million, while that of the industrial products for farming is $190 million. Tomatoes rank as the top export produce,” Hajizade said.

Although the largest exporters of non-oil products continue to be state-owned companies like SOCAR's Marketing and Economic Operations Department (MEO), Azeraluminium, AzerGold, Azerenerji, etc., the share of private companies in the above indicator is also increasing.

According to Shahmar Movsumov, head of the Economic Affairs and Innovative Development Policy Department of the Presidential Administration, "the share of SMEs in non-oil and non-gas gas exports is more than 25%. Their role in the economy has increased significantly. 99 per cent of economic entities are SMEs. Their participation in value creation, employment and investment is growing steadily." Thus, the share of the private sector in Azerbaijan's GDP is 83.5%. Given the estimates of the Ministry of Economy, expecting the non-oil exports increase to $5b by 2027, the value of businesses in this volume will also increase.

However, with all the positive trends and forecasts, there are issues that seriously slow down the achievements and become a matter of concern for experts and officials.

For example, Tural Hajili, advisor to the chairman of the Agency for Export and Investment Promotion (AZPROMO), pointed to the fact that the cost of products produced in Azerbaijan exceeds their foreign counterparts, hence creating problems for export.

"When Azerbaijani companies inform their foreign partners on prices for their products, it turns out that they are many times more expensive than that of the counterparts. That’s why we recommend entrepreneurs to improve their work, to take steps towards digitalisation," Hajili said.

High taxes and customs duties are among the problems affecting production costs. Natig Heydarov, head of KOBIA's Business Services Department, said that their department received about 6,000 export-related enquiries from Azerbaijani entrepreneurs last year alone. "Most businessmen reported difficulties with customs procedures. Local products are usually more expensive than the imported foreign products. Although entrepreneurs attribute high prices to quality of their products," Heydarov said.

In addition, local producers are facing problems with selling their products in large retail chains. According to KOBIA chairman Orkhan Mammadov, the agency has created conditions for 24 entrepreneurs by paying part of the rent for retail space as part of the mechanism to support the access of micro and small businesses into retail chains.

Indeed, Mammadov has raised an urgent issue. Although many government agencies, including KOBIA, provide a number of support mechanisms, not all entrepreneurs, especially in regions, are aware of them.

Incentives

The government has introduced a wide range of mechanisms for the development of the private sector, from financial support to incentives. In 2022, lending to SMEs through the Entrepreneurship Development Fund (EDF) continued, including ₼146m of concessional loans, which exceeded the forecast by 4.2%. These loans helped to implement 2,726 projects, including three in the liberated territories. According to the EDF chairman Osman Khaliyev, this year the total amount of loans will increase to ₼150m.

In 2022, KOBIA provided free assistance to 1,000 SMEs to join 26 exhibitions and fairs (7 abroad, 19 in Azerbaijan).

Also, earlier this year President Ilham Aliyev attended the opening of Bakı KOB evi that is supposed to provide entrepreneurs with over 150 services through 29 public institutions and over 100 services through 20 private institutions. These include business registration, licences and permits, drafting of business plans, access to concessional financial resources, connections to housing and utilities, banking, insurance, etc.

A wide range of services related to customs and import/export operations will be provided in the international trade, development and logistics zone.

Incidentally, a set of amendments to the Customs Code and the Law on Customs Tariffs were adopted last year to develop the business environment. So, in the future the customs value of goods in Azerbaijan should be determined according to simple and fair criteria, while the customs evaluation procedures should not depend on the source of supply.

According to Shahin Baghirov, acting chairman of the State Customs Committee, "providing notifications to determine the customs value of commodities is important. Sometimes, consciously or unconsciously, the customs duty is set high. By issuing notifications, we eliminate this problem. Customs should act more as a controlling body rather than a revenue-generating institution for the state budget to prevent the illegal inflow of commodities into our country".

According to Baghirov, Azerbaijan has been issuing customs expertise reports electronically for several months now: "Expertise evaluation reports on goods are issued online. When goods enter the customs again, there will be no need for another expertise evaluation, which will reduce the time of the customs procedure.”

Another stimulating measure for private sector is the extension of moratorium on inspections of business entities, which has been in place since November 1, 2015. The moratorium will be extended for another year. According to this law, inspections can only be tax inspections and in cases where there is a threat to public life and health or national and economic security of the country. In addition, it may be necessary to conduct inspections of participants of financial markets and state supervision of construction and private medical institutions.

Plan of intentions

But perhaps the most important legal motivator for the development of entrepreneurship in Azerbaijan is the Law on Development of Micro, Small and Medium Enterprises approved by President Ilham Aliyev last December. First and foremost it will focus on creating favourable conditions for the development of business entities, increasing their competitiveness, encouraging investment and innovation activity. As expected, this should increase the share of micro, small and medium enterprises in GDP and non-resource exports.

The law promises to create equal opportunities for SMEs to participate in development programmes in priority areas of the national economy, as well as openness and transparency of state support procedures. There is also an intention to improve the mechanism for SME participation in public procurement, which is one of the key and long-standing issues between businesses and the public sector.

Another important point is that the regulatory implementation of the tax policy will stimulate entrepreneurial and investment activities in the private sector. There will be measures in place to create clusters of SMEs that will enjoy a number of tax incentives.

By the way, as part of the law, there are plans to create a unified register of micro, small and medium-sized enterprises, which is basically an electronic database on legal entities and individual entrepreneurs, providing information on services and state support measures provided to them, as well as the results of assessment of their activities.

In addition, AZPROMO expects to approve this year the National Export Strategy. "The strategy will cover the next four years and will have a positive impact on the development of exports," Tural Hajili, advisor to the agency's chairman said.

According to the Azerbaijani Minister of Economy Mikail Jabbarov, in 2023, to further support businesses, the objective is to expand the activities of the EDF with the introduction of new tools to improve the private sector. "So far our key tool has been the provision of soft loans through the EDF. The fund covers thousands of projects. But using this tool alone does not meet the contemporary demands. We will create a number of financial tools in accordance with the requirements of the national economy," Jabbarov said.

In terms of financial support, there is a plan to establish an SME Investment Fund, which will partner with business entities in various projects. Local investors can also participate in the fund with their own funds.

In short, the government is firm and optimistic about further development of the business environment in Azerbaijan. If the plan is implemented in full, the private sector will certainly be able to further strengthen its position in the statistical reports.