MAJOR STRUCTURAL REFORM DEVELOPMENTS
Regional support infrastructure for small and medium-sized enterprises (SMEs) was strengthened.
The recently established Agency for the Development of SMEs in Azerbaijan opened the first House of SMEs in early 2020. Based in the Khachmaz region in the north of the country, this platform offers and coordinates services provided by the government and by private entities in a single space. Its offer includes support in launching start-ups via the development of business and marketing plans, improvement of business knowledge, and help in obtaining registration and various licenses to access financial resources, logistics and infrastructure networks, internal and external markets and export promotion.
The authorities have partly liberalized the foreign currency operations regime.
In February 2020, the central bank extended the period for submission of customs declarations and other documents confirming imports of goods and services from 270 days to two years. Under the new rules, imports with a total cost below US$ 10,000 are exempt from notifying the currency control authorities.
The central bank has regained its financial sector supervision function.
The Financial Market Supervision Authority (FIMSA) was established in early 2016 with the onset of the banking sector crisis and tasked with the licensing, regulation and supervision of banks, the securities market, investment funds, insurance firms, credit organizations and payment systems. During its term, FIMSA implemented a number of reforms including initiating the cleaning up of the banking sector (11 banks closed in 2016), strengthening the monitoring and regulatory framework for the financial system, and setting up a credit bureau. At the end of 2019, the authorities closed FIMSA and transferred all of its functions back to the central bank. Following the transfer of power and following inspection of the banks, the central bank initially appointed temporary administrators in four banks in April 2020 and revoked their licenses shortly thereafter.
The authorities have initiated reforms to improve management of the SOEs.
Recognizing the cost of inefficient management, particularly with the budget tightening as the pandemic unfolds, in August 2020 the authorities established the Azerbaijani Investment Holding public company to manage SOEs. The establishment of the company aims to increase the efficiency and transparency of the SOEs to be placed under its umbrella. The governance and management structure of the holding as well as the list of public companies are yet to be determined.
Development of a major gas project advanced.
In November 2019, the European segment of the Southern Gas Corridor, Trans Adriatic Pipeline (TAP) was linked to the Trans-Anatolian Natural Gas Pipeline (TANAP) at the Turkish-Greek border. With TANAP becoming operational in 2018, the first gas deliveries from Azerbaijan’s Shah Deniz gas field to Europe via TAP are expected by the end of 2020. The project almost triples Azerbaijan’s annual gas production capacity.
- The economy has been hit by the twin shocks of the Covid-19 pandemic and a slump in oil prices in 2020. GDP declined by 3.9 per cent year-on-year in the first nine months of the year. Amid soaring demand for foreign exchange, transfers by the sovereign wealth fund SOFAZ to local banks via central bank auctions kept the currency stable.
- The authorities deployed a crisis response package of economic and social support. The cost of the package exceeds 4 per cent of GDP and the widening budget deficit is expected to be financed by the sovereign fund rather than by external financing.
- The crisis prompted the authorities to rethink their approach to the governance of state-owned enterprises (SOEs). The establishment of a public holding company to centrally manage SOEs aims to increase the efficiency and transparency of the state sector.
- Pursuing further governance reforms in the state sector would bring significant efficiency gains. The creation of a public company to manage SOEs is an opportunity to introduce best international corporate governance and management practices across the SOE sector.
- The shift in financial sector regulation back to the central bank is an opportunity to reinvigorate reforms. The current economic downturn will further accentuate weaknesses in the banking sector, including the regulatory framework and its supervision. Promptly addressing these drawbacks would support a faster economic recovery.
- Continued implementation of energy sector reforms is needed. The development of a sustainable and competitive energy market with a sound regulatory framework and institutions will strengthen the economy’s resilience to future shocks.