European assessment of business climate in Azerbaijan

The return of the lands liberated after almost 30 years of occupation to the economic turnover opens up great opportunities for Azerbaijan to attract investments for the restoration of these territories. It can become a powerful incentive for the rapid development of the national economy in the medium and long term.

“The territory of more than 10,000 square kilometers has been liberated. Therefore, I think there is enough work for all the friends of Azerbaijan,” President Ilham Aliyev noted. “We will attract companies from friendly countries. We are already receiving applications from various countries for certain types of work.”

According to the president, there are already applications for the provision of services for the planning of cities, the construction of facilities, including infrastructure - roads, bridges.

Local experts agree that with the restoration of infrastructure (transport and utilities) in the liberated territories, the country will have a unique opportunity to make an economic breakthrough in the next decade.

The attraction of investments requires the government to carry out, I would say, the continuation of the initiated reforms in terms of creating a business-oriented environment.

In recent years, a great deal of work has been done to increase the transparency of government procedures, get businesses out of the shadow economy, expand e-services and create an attractive tax system for foreign and domestic investors, etc. The reforms are aimed at diversifying the local economy by developing the non-oil and gas sector and strengthening small and medium-sized enterprises (SMEs).

It is no coincidence that in the Doing Business-2019 report, Azerbaijan was among the 10 most reformist countries. Having risen 32 positions compared to the previous year, Azerbaijan ranked 25th out of 190 countries.

What do the business representatives themselves think? The 5th report on the business climate in Azerbaijan for 2020, prepared by the EU-Azerbaijan Business Forum, published this year, is quite informative and useful in this regard. The report is based on a survey of about 400 European businesses operating in Azerbaijan, as well as British companies and Azerbaijani entrepreneurs, whose business operations are mainly related to Europe. They represent a large group of investors in Azerbaijan and most of them are small and medium-sized enterprises operating in the non-oil and gas sector, which is of strategic importance for the diversification of the national economy.

More than 80% of the companies announced their intention to opt for Azerbaijan for economic activities in the future as well.

According to the report, businesses praised “the predictability of the government's economic policy,” which is especially important at a time of uncertainty and global economic turmoil that the world faced during the coronavirus pandemic. Thus, 75% of European companies stated that they are completely satisfied with the measures of state support taken to minimize the consequences of the pandemic.

European businesses have highly appreciated the recent changes in tax legislation and expect further positive changes after the transfer of the tax service to the Ministry of Economy. In particular, a positive assessment was given to both tax incentives and the introduction of electronic procedures in the tax system.

The report notes that the business environment in Azerbaijan changed significantly in 2020 and it was influenced by both global and local factors, such as the coronavirus pandemic and military operations in Nagorno-Karabakh.

Despite the new challenges, the confidence of European companies in the Azerbaijani economy remains stable. As in previous years, the businesses evaluate the political and social stability in Azerbaijan as the highest amongst the proposed local indicators.

The indicator has remained at the top in EU business climate reports for several years. It confirms the rather high level of confidence of companies in the policy of the Azerbaijani government, the report says.

In 2020, the quarantine regime and related measures became an additional impetus to promote the digitalization of the public sector, including taxation. European companies have confirmed that the possibility to use the online tax declaration improves the time efficiency of the reporting procedures. The businesses believe that further promotion of the e-tax system and its use by a larger amount of local companies in Azerbaijan will reduce the “shadow economy” and improve the business climate.

When compared to the previous 2019 year, the most positive dynamics in 2020 demonstrated the following local indicators: “infrastructure”, “custom tariffs”, and “predictability of economic policies”. The businesses also pay attention to the need for reforms on ensuring access to finance, increasing transparency in public procurement, and eradicating corruption.

Despite some difficulties faced by foreign investors, most of them remain optimistic about their future in Azerbaijan. Thus, almost 50% of the surveyed companies plan to expand their business in the country in the next few years, while 25% of companies plan to continue their activities within the existing capacities.

European companies are also convinced that the restoration of state control over the liberated territories by Azerbaijan is of indisputable importance both for the population and for the country's economy. In particular, they draw attention to the need to deepen economic reforms in Azerbaijan to attract investments to restore the economy of the liberated lands. The companies are interested in new projects and investment opportunities in such areas as agriculture, construction of civil and industrial facilities, implementation of ICT projects, rehabilitation of road infrastructure, etc.