Hurriyet Daily News: Azerbaijan passes global crisis test

Hurriyet Daily News

Sunday, May 8, 2011

ELSHAN ABDULAZIMOV

For the last few years, the Azerbaijan government has implemented wide-ranging reforms to improve economic sustainability. The result of the macroeconomic reforms has been a more than threefold growth in the economy. On the backdrop of ongoing tense situation in the world, 2010, as in previous years, was successful for Azerbaijan.

The country's GDP grew by 5 percent; the average annual inflation was kept at a manageable level, at 5.7 percent. The country ensured the dynamic development of the non-oil sector and its real growth rate exceeded the rate of overall growth, the figure hit 6.2 percent in non-oil industry. Azerbaijan ranked first among Commonwealth of Independent States, or CIS, in the Global Competitiveness Report 2010–2011 prepared by the World Economic Forum. In terms of macroeconomic stability, the country rocketed 14 places to the 13th spot among 139 countries. Standard & Poor’s raised Azerbaijan’s rating to “positive” from “stable” for 2009-2010, while Fitch Ratings upgraded the country to investment grade for the first time.

The global crisis had a negative impact on Azerbaijan’s fiscal outcome in 2009, with a drop of about 30 percent in total budget revenues. Faced with this complicated outlook, the government focused on the following fiscal policy priorities in 2010: conservative budget assumptions to avoid negative revenue surprises, a prudent implementation of a stimulus package to support the economy and cuts in non-priority spending coupled with a focus on social spending supported by drawdown from State Oil Fund of Azerbaijan, or SOFAZ, balances.

The macroeconomic indicators show that anti-crisis measures and policies yield positive result. The government has met all the above targets in 2010 and the economy has withstood the effects of the global crisis well. As a result of this, poverty and per capita income indicators have continued to improve over 2010 in line with the government’s long-term objectives. Inflation has fallen from its 2008 peak and should remain under control in the next few years, as domestic demand and credit growth stabilize. On the other hand, successful exchange rate interventions from the Central Bank have stabilized the manat (Azerbaijan currency) and protected household balance sheets. Prudent fiscal management and the recovery in oil prices have contributed to an improved overall fiscal surplus in 2010 and support the 2011 budget target.

Improving the business environment

By most measurements, Azerbaijan’s business environment is one of the strongest and most reliable in the Eastern Europe and Central Asia region. According to a recent document from the Heritage-Foundation: “Openness to a global trade, relatively moderate taxation, streamlined business process, and improved public sector management has aided the transition to a market-based system.”

However, the government continues to work on key structural reforms to ensure that the labor market, financial system, tax regime and transportation network remain business-friendly and remaining red-tape is eliminated.

Openness and friendliness towards foreign investment is one of the keys to develop the non-oil sector and promote economic diversification in medium-term. With that in mind, the government has streamlined the procedures and costs involved in starting a foreign business. Opening a business is easier (7 steps) and faster (11 days) in Azerbaijan than in most comparable countries. According to the World Bank, Azerbaijan ranks 15 out of 183 countries for ease of opening new businesses.

Ease at registering properties, enforcing contracts and protecting investors are also highlighted by the International Finance Corporation business enterprise survey. The tax code, tax rates and computerized tax data systems make the tax system another favorable point to attract foreign direct investment, or FDI Skilled labor force, transportation and overall infrastructure are strengths vis a vis the region.

The efforts to provide the macroeconomic stability and business conditions necessary to attract FDI in the non-oil sector are paying off, as non-oil FDI is increasing and guarantees future exports and GDP away from the hydrocarbons sectors. The steady increase in foreign exchange reserves in 2010 reflects the continued confidence of foreign direct investors in Azerbaijan, with FDI inflows outperforming expectations again and these trends are expected to continue in 2011.

Elshan Abdulazimov is Economic and Commercial Attache at the Embassy of the Republic of Azerbaijan in Turkey.

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