Foreign Trade and Diversification in Azerbaijan during the Pandemic

Nijat Hajizade

The Head of department of CAERC

04 March 2021, 11:34

 Foreign Trade and Diversification in Azerbaijan during the Pandemic

The government of Azerbaijan has demonstrated a quick response to the rapid spread of the COVID-19 pandemic in many countries around the world since the beginning of 2020. Upon the relevant order of President Ilham Aliyev, there were created headquarters under the Cabinet of Ministers to study the consequences of the pandemic, implement social isolation measures, and minimize the negative impact on the economy. A short- and medium-term roadmap has been prepared for the implementation of the President's Order to reduce the negative impact of the pandemic and, consequently, sharp fluctuations in world energy and stock markets on the economy, macroeconomic stability, employment, and entrepreneurship in the country.[1]  The roadmap covers 3 areas:

  1. Support to the economic growth and entrepreneurship
  2. Support to the employment and social welfare
  3. Macroeconomic and financial stability

Problems in various sectors of the economy that emerged due to the pandemic have also affected foreign trade. During the pandemic, growing uncertainties in business and the economy led to a contraction of the economies of major trading partners and a reduction in potential orders. Consequently, foreign trade turnover decreased in terms of volume and value. Responding promptly to the situation, the government of Azerbaijan has taken stimulating and supportive measures to prevent the decline in non-oil exports.

Including the mechanism of sale of goods with the export mark into the Tax Code (zero (0) VAT rate is applicable for the sale of goods with an export mark) in order to follow the international experience and raise the interest in the export of the non-oil products will lead to a price advantage for local products. Application of customs duty exemptions on the relevant list in order to increase the competitiveness of local industries dependent on imported and non-locally produced raw materials and intermediate goods is a step taken to ensure the competitiveness of exported products. The sectoral analysis demonstrates that the domestic production of some exported goods and products does not have a comparative advantage. The import of these raw materials and intermediates and their involvement in the production component will increase the price advantage of the exported product in foreign markets.

Taking measures to stimulate the use of special customs procedures by entrepreneurs inside the country and stimulating measures will facilitate the increase of foreign orders. Thus, protection of trade in physical and traditional services exports from the negative effects of the pandemic will also prevent the contraction of economic activity.

We can observe reforms that ensure Azerbaijan's transition to an export-oriented production strategy in the legislative and enforcement processes. During the pre-pandemic period, stimulating mechanisms were implemented to increase production and increase access to foreign markets. Diversification of foreign trade is an important condition for both the welfare of importers and exporters, as well as the sustainability of macroeconomic stability. The diversification of imports is as significant as the diversification of export. Non-diversification of imports negatively affects the sustainable production and services of various sectors. In terms of products and geography, the diversification of imports is as principal as the diversification of export. Geographic and product diversification of imports is more about the quality of trade rather than the statistical growth of trade. At the same time, the diversification of imports affects the diversification of export. A number of decisions of the Cabinet of Ministers of the Republic of Azerbaijan "On amendments to the Commodity nomenclature of foreign economic activity of the Republic of Azerbaijan, rates of import customs duties and rates of export customs duties" and the Action Plan to prevent the coronavirus (COVID-19) pandemic and, consequently, sharp fluctuations in world energy and stock markets[2]justify the application of customs duty exemptions on the relevant list in order to increase the competitiveness of local industries dependent on imported and non-locally produced raw materials and intermediate goods with the export stimulation and increase of competitiveness.

To ensure more competitive exports, there is a need for cheap and high-quality raw material components. According to statistics, the range of imported goods in Azerbaijan in 2020 increased by 20.6% compared to 2015. The share of the oil sector in export operations consists of 2709-2715 commodity positions[3]. Given the low diversification of the oil and gas sector, which is dominated by crude oil, the range of exported goods increased by 12.3%. The philosophy of the liberalization policy in world trade, as well as in Azerbaijan's foreign trade, is not only to increase consumer access to cheaper products but also to increase the volume and value of exports to ensure macroeconomic stability. In Azerbaijan, the diversification of imports in terms of foreign trade participants, products, and geography is wider than export diversification.

The COVID-19 pandemic has negatively affected exports of Azerbaijan. The analysis of the commodity structure demonstrates the necessity to deepen reforms to increase diversification. The importance of the policy of diversification has always been emphasized at the meetings chaired by President Ilham Aliyev. According to the State Statistics Committee of Azerbaijan, revenues from crude oil exports in 2020 decreased by 36.8% making 9.4 billion US dollars, and revenues from oil products decreased by 36.2% to 295.1 million US dollars. The same situation is seen when observing natural gas exports. Revenues from natural gas exports in 2019 amounted to 2.4 billion US dollars, while in the pandemic year this figure decreased by 7.4% to 2.2 billion US dollars. Following the analysis of statistical indicators, we observe a small share of the processing industry in exports of the oil and gas sector. The main principle of the reforms aimed at the development of the processing industry is institutional reforms. Considering the processes and uncertainties in the global economy, including the foreign oil market, there was signed a Decree on improving the competitiveness of the State Oil Company of the Republic of Azerbaijan in the international environment, its financial sustainability in the medium and long term, management, as well as investment efficiency and asset value by improving the corporate governance system and business model.

The government's initial steps to prevent export contractions caused by the Covid-19 pandemic are aimed at stimulating and supporting exports. The mentioned support will have a positive impact on export diversification. Thus, the high-cost burden for entrepreneurs to integrate into foreign markets leads to a loss in the price-related competition. Government support will prevent the slowdown in existing exports and facilitate the access of non-traditional goods to foreign markets

The 2.5 percent decrease in the range of goods and products in the export portfolio during the Covid-19 pandemic was related to a decrease in foreign orders. According to the statistics for 2017-2019 and the quarterly results of 2020, the 9 driving products in the non-oil export basket dominate in the non-oil export. Minimal changes in the composition of 9 driving products in the range of 0.2-0.3 percent of the export basket since 2017 and the change in the share of these goods in exports by about 50 percent proves the high concentration of exports.

According to historical statistics, a small number of commodities with a high share of exports have undergone minimal changes despite the effects of the pandemic. The main challenge of the study is to provide micro and macro support to further minimize the risk posed by the fact that only a small proportion of goods in the export basket are the driving force behind exports.

The implementation of measures, from the introduction of innovative solutions to the conclusion of free trade agreements, are effective steps used in international practice. Also, the liberalization of the business environment and ensuring competition between exporters will contribute to the diversification of exports in the post-pandemic period. Providing access to cheap financial resources to increase the share of small and medium-sized enterprises in exports, providing export-oriented loans and various support measures (application of international quality standards, research and development costs) will expand the range of products in export diversification in the post-pandemic period.

Serious export problems arising from export restrictions during the pandemic will further promote free trade in the post-pandemic period. Securing Azerbaijan's membership in trade and customs unions that provide incentives and support is one of the main challenges on the way to be open to international trade.

Thus, the diversification of exports directly depends on the diversification of the economy. The focus on export diversification policies to achieve economic development and growth is related to foreign trade liberalization. Nowadays, products with a comparative advantage must have a price advantage and meet quality standards. The inclination of the Azerbaijani business environment to innovative solutions, as well as the application of models based on knowledge and inventions by commercial structures to identify products with a comparative advantage will further accelerate diversification.