Vugar Bayramov: “It is impossible to feel the effectiveness of reforms without personnel and structural transformations”
Large-scale structural and personnel reforms have been launched in Azerbaijan - the authorities decided to strengthen the economic bloc by making the non-oil sector a priority. By President Ilham Aliyev’s order, the young and energetic Mikayil Jabbarov, who previously headed the Ministry of Taxes, was appointed the new head of the Ministry of Economy. The re-structured Ministry of Economy includes the Ministry of Taxes, the State Committee for Property Issues, the State Agency for Antimonopoly Policy and Consumer Market Control. Besides, the president appointed Ali Asadov as prime minister, while Shakhin Mustafayev, the ex-minister of economy, became the deputy prime minister. Vestnik Kavkaza discussed with the head of the Center for Economic and Social Development, Vugar Bayramov, what the reforms may come, as well as problems and challenges the new reformers face.
- How do you evaluate the latest structural reforms in the government? Was it an unexpected strengthening of the Ministry of Economy?
- Structural reforms were needed. Back in 2012, our center addressed the government with a package of proposals - we suggested to carry out structural reforms by grouping them functionally, in particular, to unite the Ministry of Taxes and the State Customs Committee with the Ministry of Finance. It would be appropriate to combine entities that implement fiscal policy to ensure the more efficient work of these bodies. Among other things, it would be appropriate to turn the Antimonopoly Agency into a separate independent body. Although the main function of this agency is to counteract the monopoly on the market, it should also monitor the activities of the Ministry of Economy given that the structure of the ministry includes quite a lot of different enterprises; it is also responsible for the creation of industrial cities.
It is impossible to feel the effectiveness of reforms without personnel and structural changes. The population has great expectations in terms of increasing household incomes and social status. The attractiveness of the country also depends on reforms. To implement these plans, it is necessary to continue the policy of engaging new personnel. That, in turn, will lead to more effective implementation of reforms.
- Speaking about tax reforms, the president noted that as a result of achieving transparency in this area, for the first time in the history of Azerbaijan, the target sum was exceeded by 350 mln manat. How do you evaluate the prospects in this area after a designation of the Ministry of Taxes as a subordinate body of the Ministry of Economy?
-Over the past year, very successful reforms have been implemented in the tax system. As the president noted, few people believed that the tax system would regain public confidence. But, in the last two years, it became obvious that the reforms are paying off and budget revenues are increasing; over 100 thousand new labor contracts were signed. The changes in the tax code have led to a reduction in the tax burden, and it is very important in the fight against illegal labor and shadow economy. I think the main reason for merging the Ministry of Taxes with the Ministry of Economy is to enable the new Minister of Economy, Mikayil Jabbarov, to continue tax reforms. This is a rational approach.
I believe that customs duties should also be transferred here, as there are still problems in this area. For example, the State Customs Committee uses the so-called statistical assessment. Thus, an entrepreneur provides customs with an invoice, which indicates the cost of the goods for 10,000 dollars, for example, but the customs do not agree with the document and the businessman is accused of lowering the price of the goods. Meanwhile, the Committee estimates the cost of goods as 14,000 dollars. As a result, the entrepreneur is forced to pay VAT from 14,000 dollars. Today, there is a need for single management in the field of VAT payments. We think that customs tax collections should also be transferred to the Ministry of Economy.
In general, we are seeing increased transparency in taxation. We conduct surveys among entrepreneurs, taxpayers, and everyone recognizes that the situation with taxation is completely different from the one before 2017.
-How will the situation in the property sphere change after the Committee on Property Issues merge with the Ministry of Economy?
-In recent years, certain reforms have also been carried out in this area - the Space of Property Services has been created, but there is a need to expand electronic services. I think that the merging of the committee with the Ministry of Economy will lead to even greater transparency in the electronic services and create favorable conditions for citizens in getting the property services.
-In your opinion, reforms in what other areas can increase revenues to the country's budget?
-To increase efficiency in the water management system, it is necessary to create a Water Resources Agency that would manage freshwater resources. This will increase the efficiency and transparency of the budget revenues in this sphere. We also consider it appropriate to privatize enterprises managing the public utilities. For a long time, one of the most discussed topics in society is heating during the winter season. Although a lot of money has been allocated from the budget, in winter, there are still problems with the heating system. This means that utilities should be managed by a separate structure. Involving the private companies in the utility sector will provide an opportunity to save money and lead to more transparent spending of funds and the provision of better housing and municipal services to the population.
-Much has been said about the tariff liberalization in air transportation. How acute is this issue on the reform agenda today?
-Given the high tariffs, to increase efficiency in air transportation, there is a need for further privatization of AZAL. At the first stage, 49 percent of the company’s shares can be privatized, and 51 percent will be owned by the state. Compared with neighboring countries, especially Georgia, our tariffs result in high costs of air transportation which affects the flow of foreign tourists to the country. Therefore, we offer the gradual privatization of AZAL.
-How relevant is the struggle against shady business?
-The President spoke about the need to combat the shadow economy. Although its volume has declined in recent years, its share is still significant in the GDP. This year, the fight against illegal labor has worked well. So, the legalization of more than 100 thousand employment contracts should be considered as a successful result in the fight against the shadow economy. As the president noted, it is necessary to minimize the interference of officials in the economy and strengthen the fight against the monopolies.
Our studies show that the prices of some imported products are inflated precisely because of the monopoly. Sometimes it turns out that the price of some products is higher than in the global market. For example, the price of oranges in comparison with neighboring Georgia is 2-4 times higher; it is even higher than in Brussels. In the EU capital, the price of 1 kg oranges is 2.1 euros, in Azerbaijan - 2.4. The import of some products is still monopolized, and this leads to high prices in the domestic market. At the same time, there is a need to expand free competition. For over 10 years, the parliament has been discussing the adoption of a Competition Code. There is a need to protect competition because the development of entrepreneurship depends on it.
-Do the ongoing reforms increase Azerbaijan’s chances to enter the WTO? The relevant negotiations have been going on for many years. In your opinion, what will be the benefits of joining this organization?
-This process needs to be forced. Among the CIS countries, only Belarus, Turkmenistan and Azerbaijan are not members of the WTO. Russia, Kazakhstan, Tajikistan have already become the organization’s members. This is important, first of all, for Azerbaijan to be able to deliver its products to new markets, especially to the EU countries with 500 mln consumers. The WTO membership is also important in the struggle against the monopoly and liberalization and transparency of foreign trade relations. The WTO membership negotiations have been ongoing for 22 years. We hope that after new personnel and structural reforms, Azerbaijan will soon join this organization. This is a priority for the development of the non-oil sector.
-The President also spoke about agriculture that has developed significantly in recent years. In this area, the development potential is much higher, given the unused agricultural lands ...
-The potential of Azerbaijan in the agricultural sector is huge. If in previous years there was no transparency in leasing services, over the past two years, transparency has been gained in leasing and providing loans to farmers. Subsidies have also developed. But it is necessary to achieve high productivity in the agricultural sector, especially considering that our non-oil sector exports amount to 1.8 bln dollars and half of this amount - 900 mln dollars- accounts for agricultural products. Moreover, approximately 90 percent of agricultural exports account for the Russian market. But in other countries (with a territory similar to ours), for example, in the Netherlands, imports of agricultural products is less than 1 bln, and exports are about 97 bln dollars. This means the efficient use of land. Approaches in the agricultural sector should become more innovative. It should be noted that the reasons for not using agricultural land differ. Some farming areas are owned by certain officials, and many of them are not used at all. The President of Azerbaijan constantly bringing this issue. He gave specific instructions for the use of land for agricultural purposes.
On the other hand, there is a need for specialization in the agricultural sector. If we develop a cotton growing and allocate significant lands for this, we need to assess how much this will affect livestock production and whether farmer territories will decrease. It is necessary to find a balanced approach to the distribution of agricultural territories for different needs.
-What is the situation in the banking sector today? Did you manage to regain confidence in banks after the recent crisis? How is the problem with bad loans resolved?
-There is some nuance here. The positive development is that over the past two years, systematic steps have been taken to improve the banking sector. Today, the bank assets are higher than liabilities. The difference is about 5 bln dollars. This is very important in terms of bank liquidity. But in the banking sector, the traditional problems remain. Some of them were noted by President Ilham Aliyev at the last meeting.
The problem is that banks are still interested in consumer lending. Banks need to be encouraged to open a loan portfolio for the real sector. However, in the loan portfolio of the banking sector, which is 13.560 bln manat, the share of loans for the agriculture and processing industry is 501 mln manat. This is 3.6 percent of the total loan portfolio. Loans to industry and production amount to 862 mln manat, which equals 6.2 percent of the total loan portfolio. This suggests that the total share of lending to all four real sectors of the economy does not reach 10 percent. That is, for every 100 manats of credit allocated by banks, the real sector of the economy does not receive even 10 manats. Meanwhile, 6.91 bln manat of the loan portfolio was allocated for the development of households, these are consumer loans which make up 44 percent of the loan portfolio.
Taking into account microlending, it turns out that more than 50 percent of the total loan portfolio is directed to consumer lending. However, the consumer loan rate in Azerbaijan is the highest among the CIS countries. Leading banks offer consumer loans at 29 percent. In some banks, this figure is 22 percent, but if you add insurance and other rates, this figure sometimes reaches 30 percent.
We should note a significant difference between dividends on deposits and interest on loans. Credit interest is four times higher than the interest on deposits. The deposit portfolio makes up 65 percent of the total loan portfolio. Thus, banks take 7 percent from one citizen and sell to another client at a 29 percent rate. There is a need to regulate interest rates in lending. This will lead to a reduction in bad loans.
In 2019, the volume of bad loans in the total loan portfolio decreased from 14 percent to 10.8 percent, but overall the volume of bad loans remains high - over 1.4 bln dollars, and its decrease is reached due to the loan portfolio increase. In February, the presidential decree compensated for a part of the bad loans, more than 700 mln were allocated for this issue. More than a million citizens took advantage of this order, but bad loans have not decreased. The point is that a large share of bad loans belongs to legal entities and citizens whose bad loans are more than 10,000 dollars. Compensation for problem loans was available only for those citizens who had bad loans up to 10,000 dollars. That is, there is a need for fundamental reforms in the banking sector.
Today's problems in the banking sector emerged before the global oil shock, in 2011-2012. Bubblies were generated during the oil boom period, and they became visible after the devaluation.