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Azerbaijan 2015 | ECONOMY | VIP INTERVIEW

TBY talks to Raja Almarzoqi, Advisor to Middle East and Central Asia Department & Mission Chief for Azerbaijan at the IMF, on what makes the economy tick in Azerbaijan and areas of growth.

What areas of Azerbaijan's economy have seen the most growth, and which sectors have the most potential in 2015?

We have seen that the non-oil industries, specifically the construction and service sectors, have continued to support overall growth at a rate above 6% over 2014. Despite some restraint, they remain the main contributors to this relatively good performance and continue to benefit from heavy public capital spending. On the other hand, the oil sector has disappointed, with growth below expectations on the back of falling crude production and exports. We see similar trends for 2015. The agro-industry, IT, and tourism sectors are seen by the authorities as promising for increasing diversification and creating jobs.

What will be the impact of the First European Games in 2015 on Azerbaijan's economic position, both in terms of investment opportunities and national spending?

We have not assessed the Games' impact on investment opportunities, but we are aware of the authorities' plans to spend $1.6 billion in 2015 on sports infrastructure, as well as preparations and organizational work for hosting these games in Baku, as announced in the context of the approval of the 2015 budget.

“The IMF sees investment in public infrastructure as key to accelerating growth."

The IMF recently announced that investment in public infrastructure in the Middle East, North Africa, and the Caucasus is increasingly important. How would you assess Azerbaijan's current investment in public infrastructure?

Indeed, the IMF sees investment in public infrastructure as key to accelerating growth in both the near and long term. This topic is gaining increasing attention not only in the MENA region and the Caucasus and Central Asia (CCA), but also across the globe, as evidenced in the discussions during the 2014 IMF/World Bank Annual Meetings. For oil exporters in the MENA and CCA countries, this is particularly important, because oil revenues could finance spending. While recognizing that investment in public infrastructure is essential for growth, the IMF has stressed that its impact depends on the efficiency and choice of priorities in public investment. According to the recent IMF report, the Making the Most of Public Investment in MENA and CCA Oil-Exporting Countries, even after their high levels of investment spending over the past decade amid high oil prices, oil exporting countries still face infrastructure gaps. The study highlights that strong institutions and better management of projects are crucial to making the most of public investment. This entails greater scrutiny of public investment (for example appraisal information, competitive procurement, and bidding statistics). Modifications to the framework for managing public investment could also help improve its productivity, particularly by strengthening medium-term budget frameworks and the appraisal and selection of investment projects. During our visit to Azerbaijan in late October, we welcomed the ongoing public expenditure and financial accountability assessment (PEFA) update and commended the authorities on the improvements set out in the preliminary findings of this report. We think this update should pave the way for further improvements in the efficiency of public spending in the country.

Diversifying the economy and encouraging the growth of SMEs have been highlighted as necessities for Azerbaijan. How would you assess national efforts to stimulate growth in this way and improve the business climate?

The economy has not been diversified away from oil yet, and the main driver of growth is government spending, mostly financed by oil revenue. Although the share of the non-oil sector has increased lately, its growth, too, heavily depends on oil-sector growth and government expenditure. One way to help diversify the economy is to improve the business environment; the government has done a sterling job of tackling corruption at the lower levels but will need to broaden the coverage of anti-corruption programs to higher levels. Another form of diversification is helping SMEs that are essential for growth; they offer considerable potential for job creation. According to cross–country studies by the OECD and IFC on this topic, SMEs contribute much less to growth in Azerbaijan than they do in other countries—their share in GDP remains in single digits, well below the average of more than 50% in a sample of advanced economies, and below the Asian average of 30–40%. SMEs in Azerbaijan continue to face high costs associated with entry and exit procedures, contract enforcement, government inspections, and property rights. Insufficient access to finance is also an issue; more than half of SMEs in Azerbaijan lack access to financing. The government is making efforts in this area. The successful implementation of a one-stop-shop for registration, along with steps to create a credit bureau, could help to relieve some of these constraints. Developing a vibrant, competitive SME sector will also require lowering barriers to competition and trade, improving governance, and fighting corruption.

What reforms and changes are necessary to ensure a continuation of macro-economic development in Azerbaijan?

As mentioned earlier, continued expansion of the non-oil sector is essential to ensure sustainable growth and generate adequate employment, particularly in light of the volatility of oil prices. Additionally, reducing fiscal vulnerabilities is key to fostering non-oil private sector activity. So we welcomed last year's progress toward fiscal sustainability and have encouraged the authorities to continue reducing the non-oil fiscal deficit in the 2015 budget. With oil prices now lower than assumed in the budget, some reduction in the originally planned spending should be considered. The new oil price environment also heightens the need for reforms of the business environment and governance. The government's commitment to reaching a more sustainable fiscal position has heightened the importance of these reforms.

© The Business Year - March 2015