Our Analytics 21 april — 13:35

How to save Azerbaijani economy? Balance of payments crisis! (Article five)

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BY MAMMAD EFENDIYEV, ELDAR ALIYEV, ELNUR MAMMADOV, ECONOMICS SECTION

Although official statistics does present optimistic indicators, in reality the social economic situation in the country is deteriorating. The crisis situation calls for a new and positive agenda, thanks to which each of us can find an answer to the question that is tormenting him/her - what will the country be like in 3, 5, 10 years.

This step was taken by President Ilham Aliyev, which was reflected in the Strategic Roadmap of the National Economy approved by him. The head of state took a decisive step to implement radical reforms that should ensure the development of the country's economy in the short term and lay the foundation for its long-term development. Now it's up to the officials.

How clear and timely will they cope with the tasks assigned to them, the faster will we achieve the set goals. And in order that they can effectively engage in strategic planning, first of all, it is necessary to restore order in the system of national statistics.

And, one thinks, it would be nice to develop another strategic map to bring national statistics to the international level. True, this will take a lot of time and effort, but the end justifies the means. And until it finds its realisation, it is necessary at least to 're-create' in a concise form the macroeconomic financial statistics (MFS) covering the period from the oil boom to the present day for the adequate formation of economic policy.

Central Bank and Balance of Payments

Analysis of the balance of payments (BOP) shows that another important indicator, which is conducted by the Central Bank of Azerbaijan (CBA), is distorted. So, when compiling the balance of payments, it indicates the repatriation of foreign investments from the oil sector in the financial account of the balance of payments.

The IMF recommendations on the composition of the balance of payments do not have a separate concept of 'repatriation of foreign investment.' Repatriation is a general economic concept. Let's consider an example: a foreign company acquires Azerbaijani T-bills, after a while, selling part of the bonds, it exports its capital abroad. At the same time, both our obligations to it and its demands to us are reduced exactly by this amount. And its income from bonds is indicated in the current account of the balance of payments in the primary income graph.

In principle, this is the repatriation of capital.

After all, when repatriating foreign investments from the oil sector, the demands of foreign investors to us, as well as our obligations towards them, do not decrease, since their share in oil and gas projects continues to be maintained.

Then the question arises: why repatriation of foreign direct investment from the oil sector should be indicated in the financial account of the Payment Balance?

Let's try to explain this process in a more accessible form. Direct foreign investors invest in one of the foreign companies that is a resident of Azerbaijan, creating in the production process value added, part of which they take in the form of income.

According to the investors' agreement, before withdrawing their share, they withdraw some of their investments from the profit in accordance with the share (similar to depreciation charges). And this is nothing more than the withdrawal of a part of the total income and therefore should be indicated in the column 'primary incomes,' but not as dividends, but as a withdrawal of corporate investors' incomes. But all this is our reasoning.

And what does the IMF recommend in this regard?

The recommendations of the IMF do not include the concept of repatriation of direct investment. This process is taken into account under other concepts. In particular, the IMF applies such concepts as 'dividends from the income of a corporation that is directly invested', 'withdrawal from the income of a corporation being directly invested', 'reinvested income from foreign direct investment.' The first two indicators are indicated in the current account with the sign (-), and the third - simultaneously with the sign (-) in the current account and with the sign (+) in the financial account of the BOP. Payments made in this way to foreign direct investors are reflected in both the SNA accounts and in the balance of payments statistics (in a new edition) as international flows of investment income.

However, in this case all the indicators of the balance of payments, except for the article 'changing reserve assets', will change. Consider this using specific facts: according to the results of 2016 repatriation of capital in the financial account of the BOP is indicated in the amount of 2.824 billion US dollars. Calculations based on IMF recommendations show that the balance of the financial account will be (-) $ 79 million against the indicated CBA (+) 2.760 billion dollars. At the same time, the balance of current operations will decrease from (-) 1.364 billion dollars, indicated by the CBA, to (-) 4.188 billion dollars. But the column 'balanced articles' of the financial account, which by international definition is called 'statistical and other discrepancies,' will not undergo any tangible change. And instead of the said by CBA 3.626 billion dollars will be 3.610 billion dollars.

In order not to bore the reader with long arguments, we merely note that in the version we propose, the balance of payments will more effectively reflect the processes that are taking place in the economy. And this is one of the key issues for the correction of the current situation around the balance of payments crisis.

Probably, the CBA has specially introduced the column 'balanced articles,' since it is generally accepted that the permissible norm of 'statistical and other discrepancies' to imports fluctuates within 4-5%, and the whole amount above this indicator is accepted as an unaccounted capital outflow. We have this indicator at 40% though for balance of payments such volume of discrepancies is inadmissible.

Another no less important document than the balance of payments, which is also maintained by the CBA, is a monetary survey. The indicator of the difference in the balance of net foreign assets of the monetary survey statistics for a certain period should coincide with the indicator of the balance of payments for net lending and borrowing for the same period. Our calculations show that these figures in the statistics of the CBA differ significantly.

Similar problems with the receipt of huge flows of petrodollars remained, as it were, invisible. But the fall in oil prices has led to a severe balance-of-payments crisis, and today every 'trifle' that used to be unremarkable is of great analytical importance for carrying out an adequate policy.

We are far from thinking that the CBA deliberately allowed such manipulation in order to bring the balance indicator in the BOP in line with GDP indicators using the method of use calculated by the State Statistics Commitee.

This is a paradox, when the balance of current operations of the BOP is no less important, and it is brought into line with the derivative transactions included there for the sake of observing the 'inviolability' of the GDP value set by the State Statistics Commitee, to which the country's leadership is oriented.

Although such changes do not influence the GDP value, the gross national disposable income (GNDI) varies greatly - an indicator that is perhaps more important than GDP. It is this income that we spent, as noted in the previous article, during the period under review.

As already noted, users of the MFS are primarily government agencies involved in the development of the state's macroeconomic policy. Equally interested in MFS data and business, large banks and financial companies create their own units, which in accordance with them develop their own investment policy.

International financial institutions (IMF, World Bank, EBRD, etc.) also use MFS data provided by countries. It is on the basis of the analysis of MFS data that they negotiate with the countries on cooperation and allocation of credits. It is not difficult to guess what the attitude of these organisations to Azerbaijan is, the state structures of which have distorted the national statistics to an extreme degree. And we, unfortunately, have one of the worst in the CIS (with the exception of Uzbekistan and Turkmenistan).

Economic patterns can be explained by simple logic and macroeconomic statistics among them is no exception. Only on the basis of 'correct' statistics can you conduct real empirical studies and analyses. And, as the above reasoning shows, it is not an easy task to make the right decision on the development of this or that branch on the scale of our country today.

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