Our Analytics 11 september — 14:03

Banks and finances remain outside Azerbaijan's road map (Our analysis, Part Two)

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

The Strategic Road Map for the National Economy and the Main Sectors of the Economy, adopted in Azerbaijan in late 2016, lists all important sectors of the economy that require special attention and government assistance. Local experts and European experts pinned great hopes on it, considering that the road map will lead the country out of the crisis, help diversify the economy and give impetus to the development of the non-oil sector. But, as we noted in our previous article, the implementation of the programs indicated in the strategic maps following the results of the first year and a half leaves much to be desired, which is better seen in the case of specific sectors of the economy.

Economy built on oil

We have already noted that the strategic maps provide for a transition from a resource economy to a performance-based economy. This was repeatedly noted in his speeches by President Ilham Aliyev, urging officials to forget about oil and focus on the non-oil sector. And officials themselves of all ranks echo the head of state, talking about the need to develop the non-oil sector. But how can you develop a sector, which has long remained in the shadow of the oil sector, without large financial injections. And this, in turn, is impossible without a developed banking and financial system, about the shortcomings of which Azeri Daily wrote a lot. In addition, statistics do not take into account such an important factor as productivity. Maybe over the past 1.5 years there have been changes in this system?

We have always advocated the need for a breakthrough precisely in this system, otherwise it will be impossible to achieve profound reforms in other spheres. But the developers of the strategy somehow arranged the Strategic Road Map for the Development of Financial Services in Azerbaijan closer to the end of the list, which includes 10 sectors. Apparently, they believed that solving the problems of the remaining sectors would lead to an automatic solution and problems in the provision of financial services. Increasing productivity in any area requires considerable investment, and where to get them, if loans are issued with sky-high interest.

However, in addition to these 10 sectors, which constitute the so-called horizontal approach, the Strategic Map of the National Economy Perspective provides for 4 more functional areas, including fiscal and monetary policy, which, as it were, doubles its essence. This combination of fiscal and monetary policies requires a new approach from executors: financial institutions and the Central Bank of Azerbaijan (CBA). In the previous model, the state created an infrastructure and improved the social welfare of the population through fiscal expansion. But the financial capacity of the state has decreased, it cannot continue fiscal expansion and should narrow it. But it can act as a catalyst and stimulate the private sector to expand investment. That is, the emptiness, which is formed as a result of a slow decline in the investment share of the state, must be filled in by private investments.

Natig Amirov, Assistant to the President of Azerbaijan for Economic Policy and Industrial Issues

Again investments, again loans that are practically inaccessible to the private sector. These can only be afforded by a narrow circle of oligarchs. Therefore, in order to prevent the negative impact of such a transition on the population, it is envisaged to define the fiscal framework, increase fiscal responsibility and efficiency, move to a budget policy designed for the final result - in other words, the implementation of the medium-term expenditure strategy.

The implementation of the Strategic Road Map for the Development of Financial Services in Azerbaijan is carried out by three main working groups: the Ministry of Finance, the Chamber for the Supervision of Financial Markets and the Central Bank. In 2017 (there is no monitoring data for the first half of 2018 yet), the Ministry of Finance was to hold 1 event, the Chamber - 37, and the Central Bank - 6 events. The report on monitoring and evaluation shows that the Ministry of Finance fulfilled the assignment by 100%, the Chamber - by 89%, and the Central Bank - by 68%. In general, the implementation of the Strategic Road Map for the Development of Financial Services in Azerbaijan last year was 80%. At the same time, 17% was partial implementation, and 6% was not fulfilled at all. And if you believe the methodology of the Centre for Analysis of Economic Reforms and Communication, then the CBA coped with the tasks worst of all. But the methodology of the Centre too cannot cause doubt, since it passed a rigorous examination. Thus, the Central Bank... Either the deadlines set for the CBA tasks are unrealistic, or these tasks are not feasible.

And now we will consider the main priorities set in the road maps in this sector. One of the main problems of the country's banking system is the capitalisation of banks. According to the schedule of activities for this priority, the solution to capitalisation of banks should be found in 2017-2018. There is not much time left until the end of this year, but according to some reports, almost a quarter of operating banks are lame in this matter. For the same period, the restructuring of banks, which failed to restore the level of capitalisation, is envisaged. In addition, the Chamber will have to decide before the end of the year the issue of restructuring non-performing assets. Will the Chamber responsible for these priorities cope with such a difficult task, it's hard to say.

Another important sector of the financial system is the insurance market. If in other spheres of public life insurance to some extent still works, then it is difficult to say so about insurance in agriculture. But the measures envisaging the development of this market in 2017, necessary for building the basis of the civil insurance market, are in embryo. And the creation of basic insurance products, including in agriculture, as well as their implementation are envisaged until 2020. How can we achieve the desired results in the field of agriculture, including small and medium-sized businesses, without one of the main products, one can only guess.

Another priority is to increase financial inclusiveness. In the action plan, the development of channels for the delivery of financial services to customers (mainly small and medium business) is expected in 2018-2019. Then it turns out that by 2020 we will only prepare a basis and proceed to implement this priority. When will we develop the economy itself, do we have enough time in reserve to be sluggish so long?

It's all about the bank!

In addition, all this is impossible without increasing the transparency of the financial market. This is necessary at least to attract investors. Such work is also planned for 2017-2018. But 1.5 years have passed, and about half of our banks basically continue their meagre reporting in the same manner.

On their websites they report quarterly, although it costs them nothing to switch to monthly reporting, for a year and a half it could have been done. At the same time, the Chamber for Financial Market Supervision reveals the main indicators of the banking sector in the monthly review, albeit in a condensed form. And, one thinks, it would be better if the Chamber could disclose the share of loans for small and medium-sized businesses in its monthly overview balance of the banking sector.

This task could be taken by the Central Bank as well, which in the monthly bulletin shows the credit investments of the banking system by sector. But we cannot see here, let's say, how small and medium-sized enterprises are credited, although a separate road map is provided for SMEs. In many countries, SME lending is shown separately, although many of them do not have strategic road maps. And without the level of SME lending, we simply cannot analyse the development effectiveness of this sector, which even in strategic maps is given special attention.

In addition, in 2018-2019, the establishment of a national rating agency is planned. But today we do not even have a more or less authoritative structure, at least to determine the ranking of banks and other financial institutions, not only on the basis of official financial and statistical indicators located in a certain order, but also based on their indicative indicators. The fact is that the rating is an assessment of a set of indicators and an expert evaluation based on the results of this work. One can and should trust it, but for greater certainty it is additionally necessary to obtain the ranking data, which, unlike the rating, gives information based on the ranking of specific statistical indicators.

We would like to specifically point out one common, in our opinion, shortcoming. One year is indicated as a period of implementation of all the strategic road maps in the action plan, although monitoring and evaluation of the performance are carried out twice a year: according to the results of six months. It would be better to split the implementation plans in half year periods too. It's not just our whim, it's a matter of principle.

In addition, the strategic road maps clearly indicate what growth of certain indicators (GDP growth, jobs, etc.) will be achieved with full completion of their implementation. Having such a guideline, it would be possible to develop similar indicators for each year; so, monitoring and evaluation of performance would be carried out on yearly results. And this would make it possible to better judge the achieved goals on the basis of specific statistical data. Otherwise, years will pass, and we will still not know how the strategic maps are being executed...

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