There Are Prospects for the Development of Export of Services

Nijat Hajizade

The Head of department of CAERC

19 May 2021, 11:44

 There Are Prospects for the Development of Export of Services

President Ilham Aliyev continues economic and trade reforms to stimulate foreign trade. Diversification policy in the export of goods and products is of the highest importance. However, during the Covid-19 pandemic, it is necessary to expand export diversification not only through goods but also through the service sector. The narrowing of supply and demand due to the pandemic has been replaced with expansion compared to last year accelerating the recovery in the export of services. According to the statements of the World Trade Organization (WTO) during the pandemic, we can see that the export of services is more diversified. In parallel with the export-import of goods and products during the pandemic, the decline in transport and tourism services also led to a decrease in trade in services. It should be considered that these services have a high percentage in exports and imports related to this sector. Restrictions on participation in international procurement have also negatively affected other services, especially the construction sector. According to the International Monetary Fund (IMF), the European Statistical Service (Eurostat), the Organization for Economic Cooperation and Development (OECD), service exports in the first quarter of 2020 were decreased by 6%, in the second quarter – by 30%, in the third quarter – by 24%, and in the fourth quarter - 18%.

During the pandemic, the largest losses were recorded in tourism and transport services, which ranged from -69% to -14%, respectively. Export support services (e-commerce platforms) decreased by only 4%. We should take into account that stimulation of e-commerce orders during the pandemic has resulted in less decline in the mentioned sector. The main declines in service trade were recorded in the United States, Canada, the European Union, China, Japan, and South Korea. Thus, trade in these countries has fallen into a recession by an average of 15-23 percent.

Minimizing the damage to trade in services during a pandemic and the development of new technical regulations are now actual. issues According to international practice, several developed and developing countries of the world disclose foreign trade indicators together with the service sector. It is true that in world trade the turnover of goods still exceeds the turnover of services. However, in some EU countries, the share of the service sector is closer to exports. The United States, the United Kingdom, and the European Union, which are leaders in the export of services, have special technical regulations regarding the service sector. This encourages other importers to consume high-quality services.

The formation of new priorities in the export of goods in parallel with the export of services in Azerbaijan's foreign trade can be considered a major challenge. The statistics on the export of services of our country are determined based on current accounts of the balance of payments published by the Central Bank. As of the results of 2020, the export of services supporting the sustainability of macroeconomic stability in Azerbaijan amounted to 1.3 billion US dollars in non-oil exports of transport services. The export of transportation services was 1.1 billion US dollars, passenger transportation - 36.3 million US dollars, and other transport services 118.3 million US dollars. Exports of services also amounted to 47.4 million US dollars for tourism services, 28.9 million US dollars for construction services, 9 million US dollars for financial services, and 542 million US dollars for other business services.

Despite the negative balance on most of these statistics, we are among the countries with qualified and innovative human capital, developing educational potential, favorable geographical environment, and transport hub to increase the share of the service sector in exports. Further increase of the initiative environment and its criteria can lead to an increase in the export of services. Like most countries in the world, the dominance in the export of services in Azerbaijan falls on tourism and transport, and logistics. These sectors were the main drivers in our country during the pre-pandemic period.

The Turkish example can be considered as the best practice for the formation of the legal framework and incentives for trade in the service sector in Azerbaijan. Cooperation with the Republic of Turkey, both in terms of legislation and incentive mechanisms, will have a positive impact on the diversification and further expansion of our trade in services. In addition to tourism and transport, the traditional services of the Republic of Turkey include health, construction (through participation in international tenders), creativity (culture), tax and legal advice, services provided by engineers and architects. According to the amendments to the Law on Value Added Tax, adopted to promote and record the export of services, in case if their mutual, the export supplies and services, services for foreign customers, foreign services for customers in free zones, and roaming services provided to foreign customers in Turkey within international roaming agreements are exempt from tax. Besides, in the education, health, and other sectors service provision, especially financial transfer services, the recipient is exempt from VAT, provided that the non-resident has the opportunity to reside abroad and use this service abroad. In addition to the above-mentioned, it should be noted that in the European Union, which provides economic development, including the Republic of Turkey, exports are considered equal to "goods and services". Accordingly, export incentives (eg subsidies) are allocated not only to goods and products but also to the export of services.

If we look at the historical experience of countries that have come a long way in increasing service exports, we can see that the formation of trust and confidence has played a greater role than the formation of the legal framework and economic incentives. Representatives of the services sector have formed a common harmonization of trust and confidence through the application of high professionalism and standards based on honesty and accountability. This is the best way of export promotion and communication.