“No reforms, no investors”


ILH

With the Azerbaijani economy in dire straits amid falling oil prices, the country is facing an uncertain future. Last year’s transition to the floating currency regime set off panic among citizens, while this year brought the possibility of an emergency bailout from global lenders. To add salt to injury, Standard & Poor’s downgraded Azerbaijan’s credit rating to speculative or “junk,” citing absence of sustained investment, plunging oil prices and lack of transparency in decision-making among key factors.

To shed some light on the increasingly complicated economic situation, Meydan TV spoke with economist Gubad Ibadoglu, the head of the Movement for Democracy and Prosperity.

Both Finance Minister Samir Sharifov and President Ilham Aliyev denied The Financial Times report that Azerbaijan was negotiating a four billion loan from the International Monetary Fund (IMF) and the World Bank (WB). As you were the first to share the news on your Facebook page, we would like to hear your commentary.

I do think that they are currently negotiating. It may be that the subject matter is not the emergency aid package though. The subject matter could possibly be the financing of strategically important projects for Azerbaijan. Secondly, the nature of denials was not unequivocal. In his denial, the Finance Minister mentioned one billion. I mean it is possible that they asked for less than 4 billion in aid. I doubt The Financial Times would publish uncorroborated information. It is very likely that they received this information from a reliable source. I myself have additional information about the fact that the Finance Ministry of Azerbaijan has entered into negotiations with the World Bank and the International Monetary Fund. Obviously, I don’t have information as to how much money they are asking for. Perhaps the amount hasn’t been negotiated yet.

However, the question is still there; what other topics can be discussed with the World Bank and the International Monetary Fund?! Both international financial institutions are managed from the same center, and their main goal is to provide financial and technical assistance to countries. These institutions are not investors but lenders. Moreover, the World Bank is not the World Trade Organization to debate the reforms Azerbaijan has to undergo. The World Bank and the Azerbaijani government have so far had warm relations as a part of the funds of the State Oil Fund is managed by this bank. It just seems a little illogical to take such a big loan while we still have some reserves of our own.

Is there a need for a loan?

Yes, there is a need. However, Azerbaijan needs investment in order to fulfill its strategic obligations. The matter of fact is that the loan is needed for the construction of a pipeline and the opening of the Eurasian Transport Corridor. The government is currently negotiating these issues and not only with the World Bank and the International Monetary Fund but also with the Asian Development Bank, and the European Reconstruction and Development Bank. However, international financial institutions give loans under certain conditions, so the government must first be satisfied with these conditions. When these institutions give loans, they do so under certain conditions including reforms, transparency and other issues. The second issue is that international rating agencies will have to re-evaluate Azerbaijan’s investment rating. The low credit rating will raise the interest on government loans. Apparently, they rush into negotiations so that they could get a long-term loan with a lower interest before the international rating agencies publish their reports on rating re-evaluation.

Once again what I am saying is that the country is in need of foreign investment and credit resources. In order to get it, the government has been negotiating with Saudi Arabia and has even been working in that direction in China. However, due to the decline in the Chinese economy as well as a drop in oil prices that hurt Saudi Arabia, the government hasn’t been able to achieve any results yet. Countries like China and Saudi Arabia do not give loans under conditions of transparency and accountability, and they certainly don’t demand any reforms. The government aims to approach institutions that won’t put them in a spotlight. Since under the current conditions, the government hasn’t received any positive feedback from the above-mentioned countries, they had to approach the WB and the IMF as they have investment obligations.

After this information was published, the main narrative circulating in media outlets and social media has been that Azerbaijan would be better off without loans. The main reason is that the countries that have done so haven’t been successful.

The IMF has a pretty experienced program support. However, we need to consider the fact that they have interests and conditions of their own. Considering the national economic interests of Azerbaijan, cooperation with the IMF could be called feasible. The situation is getting increasingly complicated, and the authorities have no idea of what is coming next. The economy has a domino effect and at some point, we will run out of possibilities. In that case, cooperation with the IMF would become inevitable. In many countries, the transition has been successful due to a loan from the IMF, although some other countries failed. Therefore, it is important to take into account local conditions. If you adopt the IMF’s footsteps in other countries in Azerbaijan, it will definitely fail. However, it is possible to come up with an optimal solution to get us out of the crisis by listening to the IMF’s suggestions carefully and tailor them in a rational and most applicable manner to meet the specific conditions in Azerbaijan.  We, as the Movement for Democracy and Prosperity, have already prepared a package proposal with key urgent economic reforms; it includes 64 steps in eight directions.  The full text of the document was released on January 31. It may help us prevent this crisis and, overall, help with the situation.

The president reiterated the importance of attracting foreign investment at the January 26 conference as well as before. However, Transparency International has recently declared Azerbaijan the “champion of corruption” in the Caucasus in their latest report. Also, Standard & Poor’s downgraded Azerbaijan’s credit rating to speculative or “junk.” Will foreign investors be interested in Azerbaijan after all these?

In general, a lot more needs to be done to improve the investment climate in the country. The government brought a large privatization project back to the agenda in order to attract international investors. This is also quite a sensitive issue as the public sector does not have much of a weight with its GDP mainly concentrated in the private sector. Most of the current state-owned enterprises either operate at a loss or have their own obligations in front of international credit unions. These institutions are mainly serving the public. We are now talking about „Azenerji“ , „Azersu“, „Azeristiliktehcizat  JSC“,  „Azerisıq“,  „Azerigas“, “Aztelecom”, “Azerpocht” and the sea, air, rail transport. Although their privatization seems attractive at first glance, considering the previous privatization experience and the current investment climate, international organizations will not be interested. As these institutions’ privatization might increase the prices of their services, the latter step will create additional social tensions. Today services provided by “Azersu” and “Azerenerji” are relatively inexpensive if we keep in mind their operational costs. One of the conditions new foreign investors will have is to increase the price of these services. I see financial markets as yet another direction in privatization, the banking and insurance sector in particular.

 

However, in order to attract investors, a number of reforms need to happen. In any case, very few opportunities are there for foreign investors in the non-hydrocarbon sector. The reasons are the monopoly and inefficient and non-productive operations of the government’s supervisory and regulatory bodies.

Frankly speaking, no reforms, no investors, and moreover, even current ones are expected to leave under today’s circumstances. Right now both the capital and investors are leaving the country. The reason is that the real value of the national currency is not clear yet. The value of the national currency is still regulated by the Central Bank. However, on December 21, the Central Bank announced its decision to hold an auction where based on demand and supply, the value of manat would be determined.

Unfortunately, the real exchange rate of manat is still unknown to investors and consumers. This uncertainty is exactly why neither foreign investors nor local consumers will invest in local economy. The fact that the manat’s real value is still unclear exacerbates the matter. The timing when Transparency International named Azerbaijan “the champion in corruption” in the Caucasus and the Standard and Poor’s report lowered our credit rating couldn’t be worse. In addition, the hidden economy is on the rise in Azerbaijan, and foreign investors will be hard to attract. Regional protests are another issue foreign investors will look at. Investors are showing little interest in countries with social conflicts.

The chair of the Customs Committee, Aydin Aliyev, said that Azerbaijan was preparing to impose seasonal fees and quotas on imports. What do you think about this statement?

As a concept, it makes sense. Customs tariff regulation system should be flexible. If we are to take care of domestic market, it must be done with regards to the specifics of foreign markets. Unfortunately, so far the customs’ tariff policy hasn’t played an important role in the formation of the domestic market or regulation of import operations. This was due to the monopolies, therefore, the customs’ duties and tariff policies were of a simply nominal nature. According to the information we have, the process of applying customs duties on import operations has already begun, in that sense seasonal nature of the regulation is the right move. However, if they apply the new proposal to fit the corporate interests, we will see an immediate negative impact. In fact, this process should be regulated by the Cabinet of Ministers, with the Customs Committee being an executive party.

The issue is that the nominal prices are determined by the committee itself. I mean, when we bring goods into the country, their customs fees are determined based on a table prepared by the Customs themselves. And this is not the right approach as the table is not regularly updated. In fact, the table with customs fees must be prepared and approved by the Cabinet of Ministries and the Ministry of Finance. The fact that the Customs Committee is the one to determine customs fees and their regulation as well as application of seasonal fee procedures creates nothing but a conflict of interest. Therefore, I emphasized the importance of the Cabinet of Ministries in determining these fees. It is important to make decisions based on both calculating and monitoring of both local and foreign markets’ variables simultaneously.

The Committee chair has also talked about quotas; I believe regulating market via non-customs quotas is not a successful approach. In fact, in order to bring goods into the country, the local market needs to become more compatible.  The Committee chair’s statement made it clear that the local production has already been established and that the domestic consumption resulted in a stronger local supply which in turn is protected by the customs fees. However, I don’t even believe the President’s speech about local markets during the conference on January 26. For instance, the claim that Azerbaijan can provide 80% of its domestic consumption of dairy products and 90% of meat and poultry is simply false. You know, when these kinds of claims turn out to be inaccurate, import-export policies applied in the country won’t work. Therefore, the first thing to do is to clarify the actual numbers. As consumers, we are able to easily identify which products are locally made and which ones are imported. For instance, I don’t see much of a potential in locally produced butter as the ones we import are less expensive and of a superior quality. In this regard, I simply do not believe the 80% number mentioned above. In this case, the flexible application of import duties must be done before the season by the Ministry of Economic Development, together with local experts who monitor, investigate and evaluate the real situation.

Aydin Aliyev’s remarks made it clear that he was against of merging the Committee with another Ministry.

In this case, it is important from what perspective we are looking at the situation. If the goal is to optimize management costs and reduce non-productive activities, then we need to do it. Since the role of the Customs Committee and the Ministry of Taxes in determining the state budget allocations is only increasing. Perhaps, five years ago, there was no need to talk about the importance of these institutions. Now that the oil prices are so low that I wouldn’t want any of these institutions to lose their freedom and merge into one another. Today their role in filling out the state budget is increasing. These difficulties in the transitional period only deepen the economic crisis.

How would you comment on the claim of the committee chair that the brokers are not monopolists?

In fact, the concept of brokers is a common practice and is applied in all developed countries. Every working hour of entrepreneurs costs a lot, they choose to use services of brokers in order to handle customs operations and thus reduce their own operational costs. In normal countries, people who are in business of import-export use these services. However, we used this concept in a wrong way enhancing monopoly. I mean application was wrong.

Do you think Finance Minister Samir Sharifov’s remarks that no dollar loans would be written off have any grounds?

From a free market prospective, the minister has a valid point there. However, in state of an emergency in the market, the government has to protect its citizens. At the end of the day, Azerbaijani citizens suffer the most. Under current circumstances paying off citizens’ loans puts additional obligations on the government. The best solution considering our situation would be to introduce credit breaks. Credit breaks could be somewhere from 3 to 5 years. However, certain changes in the legislation are also necessary. Although there is a legal ground for companies to declare bankruptcy, there is nothing like this for citizens under the current legislation. If a court confirms the fact that as an individual I am not able to pay off my loan, a certain payment plan should be worked out to allow me to do so during a credit break. The head of the Central Bank said that 250 million is required to pay off loans up to 5 thousand. However, the Central Bank wasted this money within just a week. I mean the amount is not too big; however, the government is more concerned with consequences of this decision. They think that if they decide to fund this group, then people with over 5 thousand in loans will become the next on the agenda. Due to these concerns the authorities are not really into paying off citizens’ loans. If not for the extra ordinary circumstances, we could have understood the government. However, why should people who have dollar loans lose so much money over night?! If they don’t have the ability to pay, this could end up destroying the whole banking sector. In general, most of the countries do not give loans in dollars to those companies or individuals whose income is in another currency. Unfortunately, the opposite happened in Azerbaijan and the Central Bank and the Ministry of Finance simply watched from a side.

The head of the Central Bank claimed that loan forgiveness programs will undermine the economy. Do you think he makes a valid point?

No, I don’t think so. If the bank’s accounting and statistics have been compiled properly, the Central Bank could easily adjust the process without financial violations.

Some government officials have recently claimed that the oil prices were likely to increase in the second half of the year or next year. If it really happened, how would it affect price hikes or the economic crisis?

I don’t think it will have a serious impact on price increase. However, these statements are not without physiological or financial impact. If indeed oil prices increase by the second half of the year, it will have a tremendously positive impact and our economy is in much need of it now. However, if we are talking from mid and long-term perspectives, then the salvation of the Azerbaijani economy is not in the hands of the oil industry as the oil production has reduced and its costs increased in recent years. In that sense the increase in oil prices will not result in a significant increase in profits as well. However, the claims that the oil prices will go up in the second half of the year are nothing but a theory. There is plenty of evidence that suggests the exact opposite. Let’s hope there will be favorable conditions to pull the country out of the crisis, as it mainly affects people, and drags them into poverty abyss.