Azerbaijan reported its first COVID-19 case in early March 2020, shortly after the virus started spreading across Europe. After a slow-down of reported new cases during the summer 2020, the second wave of the pandemic in Azerbaijan reached the peak in December 2020. As of June 2021, Azerbaijan had reported 33,000 cases in total and 490 deaths per million inhabitants. Overall, the officially reported death toll as of August 2021 stood at 5039 COVID-19 deaths. Compared to other EaP countries, Azerbaijan reported the lowest number of COVID-19 cases relative to the size of its population (see Figure 1 Figure 2). Estimates of excess mortality suggest that the actual impact of COVID-19 was substantially greater.1
Promoting Enterprise Digitalisation in Azerbaijan
Introduction
Azerbaijan was significantly affected by the COVID-19 pandemic
Figure 1. Reported COVID-19 cases in EaP countries
Source: (Worldometer, 2021[1]).
Figure 2. Reported COVID-19 deaths in EaP countries
Source: (Worldometer, 2021[1]).
Azerbaijan’s economy was significantly affected by the COVID-19 pandemic. In 2020, Azerbaijan’s GDP contracted by 4.3% due to the economic shock of the COVID-19 pandemic and related business closures. Border closures disrupted trade flows, and the sharp fall in global oil prices led to the contraction of GDP growth. Strong containment measures also led to a loss of economic activity of around Azerbaijani Manat (AZN) 120-150 million (US Dollar (USD) 70.7-88.4 million) per day in the spring of 2020 (OECD, 2020[2]). Foreign trade turnover decreased by 21.2% in the first half of 2020, with imports down by 42.8% and exports down by 6.1%. Since Azerbaijan is the only country in the EaP that maintains a fixed exchange rate, the loss of revenue put significant pressure on public finances. In total, 5.7% of firms closed permanently as a result of COVID-19 by summer 2021 (World Bank, 2021[3]).
In the first half of 2021, the recovery was led by non-energy sector growth, and it is predicted to continue as more COVID-19 restrictions were lifted. However, some sectors that were particularly hard-hit by the pandemic, such as tourism and hospitality, remain depressed. As higher oil prices are expected to underpin economic growth in 2021, GDP is expected to grow by 5.0% in 2021 and 3.1% in 2022 (World Bank, 2021[4]).
The crisis had a particularly powerful impact on SMEs, which made up the great majority of enterprises that closed permanently as a result of the pandemic. Furthermore, 75.3% of small firms in Azerbaijan experienced a decrease in demand for their products and services compared to 59.6% of large firms and 58.2% of medium firms. SMEs also required a higher amount of government assistance: 65.5% of small firms and 67.6% of medium firms have received government assistance since the start of the pandemic. However, SMEs were more resilient to lay-offs (or did not have such flexibility): 58.8% of large firms in Azerbaijan reduced employment during the pandemic, compared to 29% of small firms and 22.9% of medium firms (see Figure 3).
Figure 3. Impact of COVID-19 pandemic on firms in Azerbaijan
Source: (World Bank, 2021[3]).
In order to support households and businesses through the duration of COVID-19 related restrictions, Azerbaijan introduced a substantial economic support package, amounting to 4% of its GDP. The package was tailored to help businesses that were hit hardest by the pandemic, such as tourism, and included measures such as tax breaks for businesses, support for mortgage borrowers and transit companies, and assistance with utility payments. Under the package, businesses were able to apply for state guarantees of 60% of the loan amount and up to 50% interest rate subsidies for one year. Individual entrepreneurs and business owners also received financial assistance from the government. Social support programmes were also introduced, supporting citizens and helping to protect jobs and wages. The government delivered payments to over 600 000 low-income individuals in the spring and summer 2020, as well as providing unemployment insurance and food assistance to over 20 000 individuals (OECD, 2020[2]).
The economy continues to rely heavily on extractive industries
Azerbaijan’s energy sector continues to drive its economy. Despite efforts to diversify production, employment and exports, the oil and gas sector generated around 38.2% of GDP in 2019 (State Statistical Committee of Azerbaijan, 2020[5]). Their indirect contribution to GDP is also tremendous, via demand for services and other activities dependent on the hydrocarbon sector’s dynamics; thus, some estimates place the direct and indirect contribution of the sector to total GDP as high as 60% (International Fund for Agricultural Development, 2019[6]). Other sectors, such as agriculture and manufacturing make considerably smaller contributions and in 2020 they accounted for 6.9% and 5.8% of GDP, respectively (State Statistical Committee of Azerbaijan, 2020[5]).
Azerbaijan also continues to rely on its energy sector for exports, with hydrocarbons accounting for over 90% of all exports (Economist Intelligence Unit, 2021[7]). Primary export destinations are Italy, Turkey, Israel, India and Germany. For imports, Azerbaijan’s key trading partners are Russia, Turkey, China, Switzerland and the United States (World Bank, 2019[8]). In 2020, as a consequence of global energy trade shocks, exports contracted by 11.5%. As COVID-19 restrictions gradually lifted in the first part of 2021, foreign trade recovered, with energy exports bouncing back. Imports also grew by 34% in early 2021, as domestic demand picked up with the lifting of COVID-19 lockdown measures (Economist Intelligence Unit, 2021[7]).
Despite important policy initiatives, the SME sector remains underdeveloped
SMEs in Azerbaijan are an important source of employment, but their full potential remains untapped. In 2019, Azerbaijan’s SMEs generated 43.7% of total employment but only 14.9% of gross value added (see Figure 4). By way of comparison, SMEs in OECD countries account for about 60% of value added and 60-70% of employment. In part, this structure is a natural by-product of Azerbaijan’s specialisation in capital-intensive extractive sectors, but its SMEs are largely concentrated in low-value added sectors – trade and repair of vehicles, transport and storage, and food service activities (State Statistical Committee of Azerbaijan, 2020[5]).
The Ministry of Economy is in charge of the SME policy agenda in Azerbaijan. It oversees the regulatory framework for enterprises and is responsible for creating a stimulating business environment. The Ministry oversees the State Service for Antimonopoly and Consumer Market Control as well as the State Tax Service. The Ministry of Economy also oversees important parts of business support infrastructure such as the Small and Medium Business Development Agency, which provides mostly non-financial support services for SMEs, and the Entrepreneurship Development Fund, which has a mandate to facilitate access to finance for SMEs.
Figure 4. Contribution of SMEs to Azerbaijan’s economy (2019)
Note: According to the government’s definition, micro enterprises have fewer than 10 employees and less than AZN 200 000 turnover; small enterprises have 10-49 employees and a turnover of less than AZN 3 000 000, and medium enterprises have 50-249 employees and a turnover of less than AZN 30 000 000.
Source: State Statistical Committee of Azerbaijan, database.
During the past five years, Azerbaijan has made significant progress in improving its business environment and fostering SME development. In 2015, the government launched a plan to enable a transition to a more diversified economy by adopting 12 Strategic Roadmaps for the National Economy and Main Economic Sectors, detailing goals for a number of economic policy reforms, including the development of the SME sector. As part of its Strategic Roadmap for the Production of Consumer Goods at the Level of Small and Medium Enterprises in the Republic of Azerbaijan 2016-2020 (SME Roadmap), the government streamlined administrative procedures, expanded e-government services and launched a number of policy initiatives to stimulate private sector growth. The government also introduced tax exemptions for start-ups and individual entrepreneurs. It also introduced a new SME definition in December 2018, distinguishing between micro, small, medium and large enterprises (OECD, 2019[9]).
In the 2020 edition of the OECD SME Policy Index for Eastern Partner countries, Azerbaijan improved on 11 of 12 policy dimensions assessed, demonstrating a strong performance and high scores on operational environment (4.2), institutional and regulatory framework (3.53), and entrepreneurial learning/women’s entrepreneurship (3.41). The main areas recommended for further improvement were innovation policy (2.83), SME skills (2.62), and green economy (2.31) (OECD et al., 2020[10]) (see Figure 5).
Figure 5. SBA Assessment score for Azerbaijan (2020)
Source: (OECD et al., 2020[10]).
Azerbaijan could further improve the business environment by prioritising enforcement of competition rules to create level-playing-field conditions for all businesses, implementing measures to promote alternative dispute resolution and strengthening private-to-public litigation. Further efforts are also needed to improve the institutional and regulatory framework for SME policy, by improving co-ordination, strengthening public-private dialogue and ensuring that institutions responsible for SME development have appropriate resources to provide tailored services for SMEs. The government should also build on the skills intelligence approach using data collection instruments to target the needs of specific groups and sectors. The government will need to improve SME access to finance by supporting uptake of alternative sources of financing and fin-tech and making an effort to extend financial services to smaller enterprises, especially ones in rural areas (OECD et al., 2020[10]).
Note
← 1. In 2020, the total number of deaths from all was about 27.8% above the average for the 2015-19. During January-July 2021, total mortality was around 23.7% above the average for the corresponding periods in 2015-19. This suggests an incidence comparable to that seen in some other Eastern Partner countries, all which show far higher levels of excess mortality than officially reported COVID deaths (Source: World Mortality Dataset, State Statistical Committee of the Republic of Azerbaijan).