WB Regional Director: Azerbaijan has achieved significant progress in reforming its business environment (Trend.az INTERVIEW)

Baku, Azerbaijan, Sept.25

By Leman Zeynalova – Trend:

Exclusive interview of Trend with Sebastian Molineus, World Bank Regional Director for the South Caucasus

“I would like to start by stating that this is my first interview with an Azerbaijani media outlet since staring my assignment as the regional director for South Caucasus in July. Thank you for the honor. I know from my colleagues that Trend is a very famous news agency and would like to take this opportunity to thank you for your constant interest in the World Bank’s work across the broader region,” said Molineus.

Question: What will be the priorities of your activity in particular in Azerbaijan?

Answer: As you know, the World Bank has been Azerbaijan’s trusted partner over the past 27 years and has supported the country through its challenging early years of transition, helped rebuild its key infrastructure and implement important reforms. And we have in turn learned so much from Azerbaijan and have passed this knowledge on to other countries undergoing similar transitions. Now Azerbaijan is redefining its development strategy to bring private sector to the forefront of future economic growth, to improve quality of its human capital so that its remains competitive for the 21st century economy, to create quality jobs, particularly in rural areas, and to provide fast, efficient and broadly accessible public services. My priorities as the World Bank director for South Caucasus will be to make sure that we continue to support the government and people of Azerbaijan in this crucial period through a mix of financial, advisory, and convening services.

Q.: As you know, the WB strategy for Azerbaijan was adopted in 2015 and covers the period until 2020. At present, WB is almost completing its existing projects. Which new projects are you planning to offer Azerbaijan?

A.: You are well informed and absolutely correct! Currently, we are making an interim assessment of our country partnership framework (CPF). This is a process in which we assess our performance in the first half of the strategy implementation, and decide if any changes are needed to make it more relevant for the country’s needs in the remaining period of its implementation. One of the recommendations would be to extend the period of our current country partnership framework by a year to be better position our support to the country over the coming years. We are currently discussing several new and exciting operations with the government of Azerbaijan. These cover sectors in which we have traditionally been active, such as transport, and we hope to work in a few new areas, for example, by supporting government’s self-employment program. But I should make one important note: the World Bank does not offer projects to governments. All projects we support are the government’s projects, and we only provide our finance and technical knowledge to help prepare and implement projects.

Q.: When do you plan to start work on preparation of the new strategy for Azerbaijan? What changes are expected in the new strategy?

A.: Our current CPF ends in 2020 and intend to launch a new one thereafter. Country partnership frameworks are underpinned by a very thorough analysis called Systemic Country Diagnostics [can you explain a bit more what this entails, ie establishing a robust analytical fact-base for understanding root causes that hinder growth]. So, any potential change in our strategy and approach will be informed by that analysis. In developing our country strategies will work and consult with a broad range of country stakeholders such as government, civil society, academia, private sector, and media.

Q.: Which changes should Azerbaijan make in its taxes system to increase effectiveness?

A.: Over the past couple years, the tax reform measures undertaken by the Government of Azerbaijan have taken on new momentum. The World Bank, with the financial support from the Swiss State Secretariat for Economic Affairs (SECO), is providing technical assistance to the Ministry of Taxes of Azerbaijan focusing on a number of aspects of both tax policy and tax administration, e.g. international Taxation; Tax Treaty Policy; transfer pricing; further advancement of revenue forecasting and tax gap analysis mechanisms, among other reforms. As part of the ongoing tax reform agenda of the country we believe it is essential to monitor and evaluate tax breaks and exemptions, and prepare a tax expenditures budget. It is important to systematically track information on the revenue foregone as a result of the various tax breaks. These tax breaks can be viewed as the equivalent of an expenditure program but provided through the Tax Code and, for this reason, are referred to as “tax expenditures”. A cost-benefit analysis of these tax incentives conducted on a regular basis would further inform policy makers on the need to continue, eliminate or modify these tax incentives. The Bank has recently commenced working with the Ministry of Taxes on these matters.

Q.: How can WB further help Azerbaijan to improve the financial stability of banks and enterprises of the country? What are the Bank’s recommendations in this regard?

A.: We are working with the Ministry of Finance, Financial Market Supervisory Authority (FIMSA), Central Bank of Azerbaijan, Deposit Insurance Fund and Presidential Administration through the Financial Sector Advisory Project and Financial Sector Modernization Project 2 (again. Supported by our trusted partner SECO) to enhance financial sector crisis preparedness and stability. We supported the authorities of Azerbaijan in many areas of reforms, to name just few, such as: creating the Financial Stability Council in July 2016; developing the new legal and regulatory framework for resolution and liquidation of failed banks in April 2017; and strengthening capital and capacity of the deposit insurance fund and building capacity of the Financial Market Supervisory Authority. Good progress has been achieved in restoring macro and banking sector stability, and reducing risks in the banking sector through increased capitalization of banks, reduction of non-performing loans, and exit of unviable banks. The recent unprecedented restructuring of household indebtedness, as instructed by the February 2019 Decree of the President, contributed to improving banking sector standing [better: trust in the banking sector?] Yet, more reforms are needed to enhance risk management, improve corporate governance in the sector, build stronger capital buffers, and resume lending to the real sector.

Allow me to add that Azerbaijan has achieved significant progress in reforming its business environment; similarly, robust reforms are being implemented in the financial sector, which are critical to attracting international investors and supporting the development of a strong domestic financial sector. In this context we are advising the authorities of Azerbaijan to modernize the financial sector’s legal, regulatory and supervisory framework in-line with international standards and good practice, and assisted FIMSA in preparing new laws which we hope will be supported by the government and Parliament of Azerbaijan. These laws include, for example, the Law on Regulation and Supervision of Financial Market (FIMSA Law), Law on Payments, Law on Insurance, Law on Banks which needs to be brought in-line with respective international standards to support financial sector stability and development.

Q.: How should Azerbaijan develop its alternative energy sphere? How can WB help the country in this field?

A.: We have been engaging with the Ministry of Energy to understand their needs on renewable energy resource mapping which the Bank can support. The World Bank has extensive global experience and expertise in supporting countries with developing renewable energy strategies and financing projects, and we would be happy to support Azerbaijan with preparation of its own feasibility studies and structuring of prospective investments. The Bank can also support the sector through direct project financing and/or provision of guarantees to potential commercial lenders.

Q.: The World Bank has allocated loan for the implementation of the Trans Anatolian Natural Gas Pipeline (TANAP), which has been completed recently. Both Europe and Azerbaijan are eager to further expand the capacity of the Southern Gas Corridor project, which will naturally require additional funds. Is WB standing ready for further allocate loans for the expansion of the Corridor?

A.: We are delighted to be part of the Southern Gas Corridor project which will have a significant impact by increasing Azerbaijan’s revenues over the coming decades, and contribute to energy security in South-East Europe. I am particularly delighted that we have been able to mobilize other international lenders who have joined this project. The construction of the pipeline is now nearly finalized and gas is being delivered to Turkey, with deliveries to Europe expected to commence in the coming months. As the SGC envisages a potential expansion of gas supplies from 16 bcm to 25 bcm and ultimately to 31 bcm, based on additional volumes of natural gas that may be contracted in the future the World Banks stands ready to consider support to additional investments required to enable the transportation of additional volumes of natural gas that would contribute to Azerbaijan’s increased revenues from this investment.