The Socioeconomic Impact of COVID-19 and Oil Price Fluctuations in Azerbaijan

 Azerbaijan’s Policy Response to COVID-19

The post-Soviet economy of Azerbaijan has been predominantly oil and gas dependent, making up 45% of the economy. The country’s high economic growth over the years can be attributed to rising energy exports through the Baku-Tbilisi-Ceyhan Pipeline, the Baku-Novorossiysk Pipeline, and the Baku-Supsa Pipeline. After the crisis of 2014, when global oil prices halved, almost overnight, Azerbaijan’s economy grew at a moderate pace (2.2%). During this period, the government focused on diversifying non-oil sectors like tourism, hospitality and agriculture sectors.

Nevertheless, the dual shock –  the collapse^[1] of oil prices and the COVID-19 pandemic – have increased the risk of poverty and socioeconomic instability for oil-reliant nations like Azerbaijan, which lacks the financial wherewithal to absorb these shocks. Additionally, the sharp drop (30%) in the demand for fuel due to global lockdowns, has had a negative impact on the government’s income, causing a sharp reduction in trade and financial flows, and severely affecting income derived from the country’s tourism and hospitality sectors. 

Since March of 2020, the government of Azerbaijan implemented a special quarantine, limiting travel and public gatherings, as well as business operations. Despite these restrictions, the measures did not prevent the spread of the COVID-19 virus^[2]. In fact, Azerbaijan has witnessed a steep surge in the number of COVID-19 cases, making it one of  Eastern Europe’s hardest hit as of 2020 June^[3]. Compounding matters, the quarantine has had a substantial economic impact on Azerbaijani society and has resulted in rising unemployment and major cuts to household income. With the daily economic losses reaching between 120 -150 million manat ($71 - 88 million USD)^[4],  Azerbaijan’s economic forecast is looking increasingly bleak for the rest of 2020. The European Bank for Reconstruction and Development (EBRD) expects that Azerbaijan’s gross domestic product (GDP) will shrink by 5% in 2020^[5]. This does not overlap with the government's 2019 projection of 3% growth for this year.

To counter the negative economic and social impact the crisis has wrought upon the country, the government has rolled out a major support package for the unemployed (5.5% in 2019)^[6] and small and medium-size businesses, issued state guarantees for bank deposits and a produced a bail-out package worth 2.5 billion AZN ($1.47 billion USD). The package includes assistance to businesses ranging from tax cuts to discounts. The packages included a social security scheme, which envisages financial aid for the unemployed (around 600,000 residents could benefit from 190 AZN per month) and assistance to businesses in the form of tax cuts, new loan subsidies and a financial support program worth an estimated 80 million AZN ($47 million USD) for 300,000 individual (micro) entrepreneurs working in the sectors negatively affected by the pandemic.

As of June 2020, amendments to the Tax Code were approved that provide benefits to businesses affected by the COVID-19^[7]. The amendments grant a one-year exemption from land and property tax to selected sectors, including tourism, passenger road transportation, and cultural facilities. Income taxpayers also receive a 75% exemption. Value Added Tax (VAT) was exempted from food and medical security goods and services. As part of the World Health Organization’s  Strategic Preparedness and Response Program, the government of Azerbaijan has given $5 million to the COVID-19 fund. Azerbaijan has also received medical aid from Turkey and China in the form of medical staff and supplies. Meanwhile, the Central Bank of Azerbaijan conducted foreign exchange auctions, with the involvement of the State Oil Fund, and met all foreign currency demands at the announced rate of 1.7 AZN / USD.

Effectiveness of the Socioeconomic Policy Responses

With the implementation of these economic and social programs, Azerbaijan allocated the largest share of GDP among post-Soviet Union countries in its effort to mitigate the adverse economic effects of the pandemic. A full 3% of GDP was allocated from the state budget to the Ministers of the Cabinet to address the economic challenges stemming from the pandemic. Measures have also been taken to address the challenges faced within the non-oil and gas sectors, such as construction, digital economy, transport, logistics, agriculture and domestic tourism.

However, the state’s social support measures left out many of the country’s disadvantaged – rural communities and those operating in the shadow economy. The International Monetary Fund (IMF) estimated that Azerbaijan’s shadow economy at 52.2 % of GDP in 2018, is among the top 15 out of 158 countries covered by the study according to the size of the informal economy^[8]. The primary drivers behind the largescale shadow economy and its increase in Azerbaijan are the lack of anti-corruption legislation and weak public accountability (ibid). The practices of competitors in the informal sector rank as a top obstacle for doing business in Azerbaijan, and shadow economy labor is widespread.

A variety of groups have been disproportionately affected economically by the pandemic. These include younger workers (who are more likely to suffer from unemployment), workers in the hospitality and medical services (mainly women), and gig workers (informal jobs). Some of the applicants for economic support during the pandemic have been rejected on grounds of being married, having a car registered in their name, and owning property. For those employed in the informal sector whose activities were impacted by the lockdown, there was no official government support. As a result, many within these disadvantaged groups found themselves in a “vicious circle”.

It was not only low-income families and individuals having trouble accessing government support, but also the middle-class, which makes up 29% of the Azerbaijani population^[9]. Middle-class growth has doubled since 2005 and the Asian Development Bank has ranked Azerbaijan as one of the top countries among emerging Asian economies with the largest middle-class population. Azerbaijan’s middle-income earners are mostly employed by the public sector and have received full salaries during the lockdown, but COVID-19 has challenged their “safety net”. Because most of the middle-class-identified earners in the country do not have health and income insurance, it pushes them to vulnerable poverty lines where they find it increasingly difficult to pay rent and credits borrowed from the local banks in the national currency or cover utilities in the case of losing their jobs. While those with middle-class incomes might have more financial wherewithal to absorb the economic impact of the pandemic (with the exception of those who recently entered the middle class), in the long run however, they will have less of a safety net and their numbers will decrease as a result of the pandemic. Overall, around 500.000 citizens benefited from state unemployment support during the pandemic^[10].

Gaps in the Data

Self-organized help groups from Azerbaijan and Azerbaijani communities based abroad have contributed to closing this equity disparity by assisting with food, cash money and supplements to over 30.000 families^[11] throughout the country. These groups have managed to reach out to families in need by using a snowball method^[12]. The aid recipients from the peripheral regions of Baku, Absheron, Khazar, Binagadi and Qaradag made up the majority. Despite being limited, the data collected by the support communities sheds light on Baku’s existing urban poverty.

There are a few obvious and unseen reasons behind the inaccuracy and gaps in the COVID-19 economic responses – first and foremost,  inaccurate data for evidence-driven solutions. Azerbaijan lacks transparent impartial and accurate data on household income across the urban and rural settlements, including informal activities and their income. It is as difficult to design policies without data as it is to measure the outcomes of those policies.

Information accessibility – the unrestricted access to relevant data – forms the basis for all quality assessments. Azerbaijan has deficient information infrastructures. In many regards, the availability and accuracy of statistical data is limited^[13] and access to official records is often impeded. The key reasons behind the question of data accuracy is deliberate falsification. State agencies may generate the desired information instead of the information that has been obtained, and then falsify data in order to make their findings more compelling. Although not as troublesome in ethical terms as intended forgeries, unintended mistakes such as techniques and procedures during data collection are also widespread. Both deliberate and unintended mistakes cause wrongly designed policies and implementation – especially in extreme cases like the COVID-19 pandemic.

For example, the Gini coefficient provided by the Azerbaijan Household Income and Expenditure Survey, which has been included in global datasets, is a related case. For Azerbaijan, the Gini coefficient had a low value, indicating a low degree of social inequality in the country. For a country undergoing an oil boom this result was unforeseen; the theory would rather imply high inequality. In fact, the low value was induced in part by better off, middle-class households not participating in the survey for fear of discovering their unreported income, resulting in higher taxation^[14].

Gender Gap and Inequality

Gender and social inclusiveness are the second key factors behind the incongruities of COVID-19 support packages. Neither of these issues were equally considered as financial factors in the design and implementation of the lockdown support packages. Women account for about 70 percent of Azerbaijan's healthcare and education sectors, which are the lowest paid fields, placing them at greater risk during the pandemic and requiring special attention to their economic and social needs. A survey by UNFPA (2020)^[15] shows that economic protection for women has been hit hard, affecting both jobs and income. Women from all social and age groups were affected by job loss, income loss and a drop in paid work hours. In addition to increased unpaid labor such as household and childcare, more than 15 percent of female respondents said they lost their jobs and another 41 percent faced decreased paid work hours. Nevertheless, the data shows that of all classes of women employed, self-employed women experienced the worst effects, with about 70 percent having faced cuts in paid working hours or job losses. Yet the real problem facing women is access to health insurance, as 60–80 percent of women in Azerbaijan are not covered by any kind of health insurance. Privatized medical treatment in Azerbaijan has become more affordable despite the way the pandemic has reduced the supply of financing. The UNFPA survey shows that household safety nets remain a significant coping strategy for women, as 46 percent of Azerbaijani women indicated that they depend more on help from local authorities.

Prospects for Diversification

It is clear that as a hydrocarbon export country, Azerbaijan would not be able to sustain oil price fluctuations in the long term and will be more inclined towards economic diversification. Hard hit by the fall in oil prices, general government net borrowing is expected to reach 13% of GDP and the country reportedly spent over $2.7 billion USD^[16] to maintain the manat’s fixed exchange rate. For future socioeconomic development, the government of Azerbaijan has accepted the Strategic Roadmaps on National Economy in 2016 and special task force groups were created in 11 directions of economic diversification. The strategy has aimed at doubling the volume of per capita GDP in the country through non-oil industries such as production of agricultural products, the development of logistics and trade, telecommunication and information technologies, and the tourism and hospitality sectors. Economic challenges resulting from the  COVID-19 pandemic in Azerbaijan include a heavy reliance on hydrocarbons, declining oil production (25% lower over the past six years), and a weak finance and banking system. Economic diversification seems like a global call for Azerbaijan, as British Petrol, a long-term partner, has also announced this year that “the company will stay committed and has no plans to scale down its oil and gas business in Azerbaijan,  but it has global plans to rebalance its portfolio toward renewables”^[17].

Nevertheless, in the short term, the state’s role in intervening in the economy will challenge independent, small and medium-size businesses along with their  financial dependency. The most obvious economic and social mitigation targets for fiscal intervention in Azerbaijan are emergency assistance for health systems and transfers to unemployed households to reduce poverty and build a household safety net as much as possible. Wider monetary and macro-prudential interventions also form a vital part of the response and mitigation efforts. Employment retention programs, whereby the state pays employee salaries, are intended to accomplish the first, while corporate grants, loans and tax cuts will support them through the market collapse. Azerbaijan also needs to make credible commitments to sustain the economic support well beyond the end of the pandemic.

The COVID-19 pandemic has demonstrated that natural resource-driven economies such as Azerbaijan’s are vulnerable to sudden economic and social changes. This creates a need for a new economic model – a model that benefits people. The government should focus on creating shared value, which means creating economic and social values for businesses and communities. And this could be achieved through participatory policymaking by involving non-governmental actors, community representatives and wider public opinion. In a state-led economy like Azerbaijan, what the government does is critical. Incentives for small entrepreneurs can attract or repel investment, taxes can favor or suppress economic choices, regulations can favor or stifle the shadow economy and data can falsify or validate the policies. Businesses and local communities have power too; they can persuade government cabinets to rethink policies and re-examine bottom lines – mainly through social media platforms.