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Before the end of the crisis, it is still far away

Before the end of the crisis, it is still far away

2017 March 29 ( Saturday )  15:26:14
Print version
Русский Azərbaycan
Turan Analytical Service

Back in 2013, Russian economists noted that the country's economy is on the fork: it is expected to linger, but there is still a chance for a new wave of growth. But from the next 2014 stagnation started in the Russian economy, from which it is now painfully coming out. The economy did not have time to reorganize. It was disappointed by the lack of structural reforms, insufficient institutional development, and weak competition. And the decline in oil prices and sanctions only accelerated the economy's movement towards stagnation.

When market reforms began on the post-Soviet space, many people believed that economic liberalization itself would lead to a reformatting of the economy and politics. This turned out to be an illusion - in the transition countries the active inclusion of the state in the economy was inevitable. The increased role of the state in the economy was also discussed during the recent financial crisis in Western liberal economies. The disputes between "statists" and "marketers" continue to this day. In Russia, they are specific - the political mood in Russia is working to strengthen the role of the state in the economy, but liberal economists are carrying out a specific economic policy.

We did not have such discussions, but the problems were similar. The inflow of foreign capital from the very beginning went mainly to the oil and gas sector, which already created a structural imbalance in the economy and limited the chances for economic diversification. With the inflow of currency, the national currency grew stronger, and this increased imports into the country. Loans were expensive and short-term, and difficult access to them prevented the development of the economy. For example, the development of infrastructure was going on at a great pace. This supported the growth of the economy, but did not lead to the expansion of exports from the country. The budget was highly dependent on foreign trade balance and hydrocarbon exports. Growth and development are different categories. Normal economic development involves improving the entire environment of the economy, its quality indicators, and the creation of new institutions. It is against the slowdown of the economy and ensures its further growth. So it's not just about oil prices.

Many of the government's current steps would have worked remarkably well in 2010-11 - then their effect would have been much stronger. Today even quite pragmatic steps of the government already seem insufficient and more profound reforms are needed.

Is it possible, nevertheless, to see signs that Azerbaijan in 2017 is starting to get out of the crisis? In January, for example, for the first time GDP growth was outlined. It increased by 0.8%. Moreover, the non-oil sector also began to grow, by 1.5%. The rate of decline in investment was slower. According to statistics, as of February 1, 2017, capital investments in the economy amounted to 954.2 million manat, which was by 2.1% less than a year earlier. For comparison, last year investments (14,903.4 million manat) fell by 26.1% year on year. Even major projects in the oil and gas sector (perhaps because a significant part of them are sold abroad) could not change the situation with the level of construction and assembly work. The volume of construction and assembly works as of February 1 was 673.4 million manat, which was 6.4% less than a year earlier (2016-27.6% yoy).

Slightly outlined changes in the economy cannot be attributed only to the growth of oil prices. Some stabilization of the financial system is connected with a number of urgent steps that the government has taken. CBA was able to increase its foreign exchange reserves for the first time - in two months they grew by 1%. Tax deductions by SOCAR to the state budget of Azerbaijan in January 2017 amounted to 128 million 187 thousand manat, which is 8.9% more than in the same period last year. SOFAZ more or less successfully came out of the difficult year.

But there is another thing, in particular, the compression of the budget. In January, it is always small, but it declines for the time being. This year it is the lowest figure for the last five years (see Appendix). Budget revenues for the first month amounted to 1.244 billion manat. Of this, 544 million AZN accounted for by the Ministry of Taxes, 174 million AZN was provided by the customs, and about 40% of the remaining part of the income was transfers from the State Oil Fund.

Should we expect noticeable changes? It would be naive to believe that the departments and major monopolies take the strategic roadmap as a basis and roll up their sleeves and undertake a renewal of the economy. This requires a new institutional environment (in part this is done), understanding and acceptance of new realities. Systemic struggle against corruption is of great importance, because the latter always acts as a serious obstacle to economic reforms.

In terms of tactics the government faces the need to simultaneously seek investment and foreign markets for Azerbaijani products. International economic forums have become more meaningful. In many trips with the President a group of businessmen is sent, who, in the background of the visit, are looking for favorable opportunities for exporting their products to this country. It can be said that during the February visit of the President to Qatar, both the investments of this richest country of the world in Azerbaijan and the development of this market by Azerbaijani exporters were important. According to media reports, it was not possible to achieve large investments, although we can expect some joint projects with SOCAR, or, perhaps, investments in real estate in Azerbaijan. But two small Azerbaijani companies seem to have found a niche in this market. Azprotein agreed on the supply of meat to Qatar, and Idea reached an agreement on design work in the capital of the emirate. Even earlier, the Sausage Association found support from the government in promoting its products in the Gulf countries. All these seemingly small efforts coincide with the improvement of certification of food products. There was also a new service to control the quality of food products. And in the embassies, the position of the commercial attaché is introduced. These seemingly small steps, having taken shape, can really open new markets for Azerbaijani products.

There is a chance for large-scale changes. The economy enters the year 2017 with decisive changes in the country's tax system. Simultaneous inclusion of fiscal, regulatory and incentive mechanisms in the economy is very important. The Minister of Taxes even spoke in the spirit that if there are special tax regimes for large investors, a selective approach should be applied to small and medium-sized businesses. That is, for the first time the question was raised about different tax regimes for different categories of taxpayers.

Many economists are trying to assess the effect of last year's changes at the customs. Now, the need for so-called "mirror accounts" with countries has probably disappeared. The customs has become more transparent. But it is necessary to assess what is really happening with commodity flows, whether they are increasing in exports or imports. For example, according to the results of the year, a huge increase in the import of clothing (knitwear, clothing, hats and shoes) was recorded, more than four times as compared to 2015 - from $ 99.2 million to $ 417.2 million. But the agriculture, which was so much discussed last year, grew by only 15.3% or by $200 million to $ 1,577 million. However, economists are somewhat puzzled by such indicators. What is this - a consequence of the legalization of customs operations or has the import of these products really increased? Turan IA tries to compare the imported products with the country's need for them, and for the time being, noticeable digital contradictions are emerging. In the publications of 2006 we found interesting data (at that time such assessments were made). It turns out that Azerbaijan has submitted about 50 titles to the list of competitive goods in the CIS space, Armenia has submitted 150 titles, and Kazakhstan has submitted 250 titles. It is interesting how this list has changed in 10 years. The present exit for export is always a pressure of new production.

One of the main problems of the economy is the current high inflation. The government has set inflation for this year in the range of 7-8%, but the beginning of the year shows that it will not be easy to reach this figure. Inflation in January was already high - 2.3% compared to December and 11.9% compared to January of the previous year. The first indicator unequivocally indicates that the effect of import inflation is decreasing. Monetary inflation was high, and this explains why CBA so carefully sterilizes the money supply at deposit auctions. But now the main factor of inflation comes into play - insufficient and unhealthy competition in the economy, caused by the persistent administration of the economy and protectionism. But this is already an institutional issue, which will also have to be dealt with by the government. (To be continued)