Azerbaijan: 6 reasons for successful economic diversification

By Ilaha Mammadli, deputy editor-in-chief for economic issues - Trend:

Azerbaijan is gradually reaching economic diversification and modernization to improve its competitiveness, to ensure the country's sustainable economic growth and to improve the welfare of its citizens.

In general, Azerbaijan has six good reasons for achieving successful economic diversification:

-Macroeconomic and political stability in the country

-Acceptable investment climate

-Availability of currency reserves for ensuring the country's financial independence

-Availability of own unique model for the development of non-oil sector

-Existence of opportunity to expand Azerbaijani products' transit to world markets

-Azerbaijan's recognition as a reliable partner by the world's leading economic powers

As of January- March, the country's non-oil GDP has increased by 8.8 percent. The growth of non-oil economy amounted to 11.4 percent for the same period of last year.

Indeed, the word "diversification" has recently become one of the most popular while discussing Azerbaijan's economic policy.

In brief, this is what this concept is about: Azerbaijan must develop new sectors of economy to become less dependent on unpredictable hydrocarbon prices.

Besides stability, diversification must bring us wealth through higher value-added manufactured product. The aim seems to be worthwhile, but it is usually offered to be achieved through re-allocation of funds from oil and gas industry to other sectors of economy.

As Azerbaijan's president said recently, the country has managed to preserve the dynamic pace of development and to achieve rapid growth in non-oil sector of the economy in January-March.

"This has been the main index for the country for the recent years, reflecting its economic development," Ilham Aliyev said at the meeting of the Cabinet of Ministers, dedicated to the socio- economic development in the first quarter of 2014 and the further challenges.

Exceeding the population's income over the consumer price growth pace more than two-fold confirms the success of the economic and social reforms conducted in the country.

Azerbaijani citizens' savings in the banking sector increase, while their welfare improves as well. This expands the opportunities of banks to lend in the real economic rector. The population's deposits in the banks have increased by more than 20 percent since early 2014, while inflation has hit two percent. It is planned to keep it within these limits by the end of 2014.

President Ilham Aliyev said that today Azerbaijan is among the most dynamic and successfully developing countries worldwide, adding that one can expect the country's further successful future while preserving the current dynamics of the economic development.

Meanwhile, oil and gas sector is our comparative advantage in the world trade. This does not necessarily mean that we need to live at its expense. It is necessary to fight for country's economic growth by using other economic sectors, not just the oil and gas sector.

Namely, thanks to high oil prices, Azerbaijan created the so-called "safety cushion".

Azerbaijan has already been included in the list of the leading countries of the world on foreign exchange reserves per capita. And despite implementation of major investment programs, foreign exchange reserves of the country continue to grow, reaching $53 billion in the first quarter of the year.

"I have repeatedly stated that we certainly need to use our financial resources for the development of our economy, entrepreneurship and infrastructure projects, but at the same time our foreign exchange reserves should continue to grow every year," President Aliyev said during the meeting.

Stabilization of financial situation secures the independence of Azerbaijan, as economically free, independent country can decisively exist in the international arena.

Azerbaijan has become the initiator and a major participant of major projects of international importance. Among such projects are the second phase of development of Azerbaijani "Shah Deniz", offshore gas- condensate field, the construction of the Trans-Anatolian (TANAP) and Trans Adriatic (TAP) gas pipelines, which are the largest infrastructure projects of Europe.

Programmatic approach

Significant contribution to the dynamic development of the non-oil sector of the country and increase in production volume of the export-oriented and competitive products contributes to the implementation of government programs on socio-economic development of Baku settlements and the regions of country which gave a jump-start to the expansion of business activities.

The Azerbaijani president instructed to accelerate the implementation of state program activities on socio-economic development of the country's regions, as well as Baku and surrounding settlements designed for 2014-2018 and 2014-2016 respectively.

The goal is clear - they must contribute to the comprehensive development of all sectors of the Azerbaijani economy, as well as play a fundamental role in opening of new enterprises and job opportunities, implementation of major infrastructure projects.

Nearly 100 industrial, agricultural, trade and service enterprises started to operate in the country's regions in the first quarter of 2014 alone. The construction of about 500 more enterprises still continues.

Along with the creation of new enterprises, traditionally, the projects related to gas supply, construction of rural roads, laying of water supply lines and sewerage, will also be implemented in 2014. The projects related to water supply and sewerage have been considered to be among the priority projects by the head of state.

Additionally, Ilham Aliyev urged the government to speed up the works on creation of industrial areas that must be created in each economic region of the country.

The first four industrial areas will be located in Baku, Sumgait, Ganja and Mingachevir. These cities haven't been chosen accidentally, as they are historically the industrial centers of Azerbaijan and the agro-industrial sphere here is poorly developed.

Balakhani Eco-Industrial Park, designed for recycling plastic waste, tires, electrical appliances, batteries, non-ferrous metals, cables and other domestic waste, is being created in Baku.

Meanwhile, the works in the Sumgait Chemical Industrial Park, as well as the works on creation of a metallurgical industrial area oriented for aluminium production in Ganja, are being carried out successfully. At the same time, an industrial area in the sphere of light industry will be created in Mingachevir.

Throughout ten years of implementation of two previous state programs on the development of regions, the number of registered business entities in the regions has increased by 7.2 times, while the tax revenues increased by more than 12.7 times.

The increase in the volume of tax revenues enabled the cities of Sumgait, Shirvan, Mingachevir, as well as Absheron and Imishli regions to fully cover their own expenses with local taxes.

As a result, the share of private sector in employment has increased to 74 percent, while its share in tax revenues amounted to 72.5 percent. The number of business entities increased by 2.5 times and the share of private sector in GDP exceeded 80 percent.

International recognition

Today, Azerbaijan retains a leading role in the CIS in terms of volume of foreign direct investments. Azerbaijani president said in his speech that foreign investments should be first of all attracted to the priority sectors.

"We should try to attract foreign investments in the development of industry, agro-industrial complex, tourism, services and information and communication technologies. We must work to create conditions to attract foreign investments to the areas that need it the most," Ilham Aliyev said.

The successful placement of Azerbaijan's first sovereign bonds in March 2014 amid the market situation in the region also explains the investors' confidence in the fact that oil income is managed in a balanced manner.

This event also expands Azerbaijani companies' opportunities to attract both high-quality and cheap resources. Azerbaijani Eurobonds were acquired by investors from the U.S., European countries, Singapore and Israel.

Azerbaijan released its first Eurobond issue totalling $1.25 billion with demand of $4 billion. The bonds were issued for a period of 10 years with a yield of five percent per annum.

The macroeconomic stability and loan ratings allow Azerbaijan to increase the loans volume, however the government pursues a careful policy, thanks to which today Azerbaijan holds one of the leading places in the world in terms of foreign debt level - eight percent of the GDP.

At the same time, Azerbaijan's rapid economic development allowed the country to increase its financial capabilities and to create favourable conditions for making investment in foreign countries.

Azerbaijan has today become a country exporting investments, which exceed $10 billion. Most of these investments account for Azerbaijan's State Oil Company (SOCAR), and thus on expansion of SOCAR's participation in other countries' energy market.

Azerbaijan has already been recognized by the world community as a reliable energy partner. Along with supplying oil, the country also delivers gas to almost all its neighbouring states in the region, which facilitates the improvement of their energy security, economic stability and diversification of supply sources.

Azerbaijan's achievements are also highly appreciated by the international organizations and rating agencies. The country ranks 39th among world countries in the global competitiveness report and has, for five years, maintained its leading position in the CIS.

In turn, the international rating agencies annually confirm a stable outlook of Azerbaijan's investment ratings.