IFC ready to support Azerbaijan in short- and medium-term priorities

Over the past few years, Azerbaijan has seen a significant increase in economic indicators, which makes the country increasingly attractive to foreign and international companies, as well as financial institutions. The International Finance Corporation (IFC) is one such example.

Rana Karadsheh, IFC’s regional director for Europe, spoke in an interview with Report about the main priorities of the corporation in Azerbaijan:

- What are IFC’s main short and mid-term priorities in Azerbaijan?

- Azerbaijan’s priorities have evolved over the last three decades along with is robust economic development, with the country reaching the upper middle-income level. The country’s economic growth and prosperity can be attributed to the substantial increase in oil and gas production, responsible for around 90 percent of its export revenues.

Oil and gas reserves have been depleting globally, causing volatile fuel prices. Major changes in geopolitics and energy systems in the region are further exacerbating the situation. As a result, while being at the forefront of regional energy security, Azerbaijan is also at the crossroads.

In response, Azerbaijan’s 2030 national development vision is prioritizing “green growth”, increasing the share of renewable energy sources, and leveraging the power of the private sector in the non-oil sector. Optimizing the non-oil economy will help Azerbaijan diversify away from oil and gas, reducing greenhouse-gas emissions and its vulnerability to price fluctuations.

IFC is ready to support Azerbaijan on both its short and mid-term priorities.

We see potential in several sectors, especially in supporting private sector participation in infrastructure. IFC is also well positioned to help foster green growth, strengthen transport corridors and connectivity, and boost financial inclusion and agriculture in Azerbaijan.

We’ve already laid the groundwork. To increase private sector participation, IFC, in partnership with the Swiss State Secretariat for Economic Affairs SECO, worked with the government to make it easier for companies to invest in the non-oil economy.

In agriculture—an important sector for Azerbaijan and the region—IFC, through its Agricultural Financing Project, implemented in partnership with SECO, supported local financial institutions to launch value-chain financing products. It also helped selected value chains on strawberry and hazelnut crops increase their competitiveness in export markets.

In the short-term perspective, IFC and the Azerbaijan government are working to introduce innovative financing instruments—crop receipts and warehouse receipts—to provide financing and boost agriculture in Azerbaijan by connecting smaller farmers to global value chains.

Building on our over decade’s work in investment climate reforms including legal, institutional, and technical reforms, among others, the country recently adopted several laws with IFC’s advisory support— Law on Tourism, Law on Food Safety, and Law on Investment Activity, Law on Public-Private Partnerships, to name a few.

The first law introduces novelties to make the tourism sector more competitive and aligned with international best practices. The second law is designed to mainstream the food chain and modernize the food safety management system. The third law is aimed at providing fundamental investment protection guarantees, inspiring confidence and attracting more investors. The law on Public-Private Partnerships - where IFC has provided input - lays the ground for private investments in provision of public services such as infrastructure, healthcare, and other social services.

- Could you elaborate on the new partnership between IFC and Azerbaijan’s Alat Free Economic Zone (AFEZ)?

As Azerbaijan focuses on its non-oil economy, our cooperation with Alat Free Economic Zone (AFEZ) targets country's economic diversification. Given its strategic geographic location near the Baku International Sea Trade Port and global transport corridors, AFEZ will be an export-focused industrial zone, with the potential to emerge as a regional hub.

AFEZ is designed to attract and grow value-added and manufacturing activity. Accordingly, the partnership aims to explore opportunities to support potential investors in developing projects that help the country's net-zero transition and its climate-resilient development.

Supporting Azerbaijan’s efforts to harness opportunities in its non-oil sectors, IFC has signed a memorandum of understanding with the AFEZ Authority to create a framework for early-stage project development through cooperation with companies interested in locating their operations in AFEZ. IFC, in partnership with the Austrian Federal Ministry of Finance, and in collaboration with the AFEZ Authority, will also advise and support AFEZ’s tenants.

- What’s IFC’s position regarding the development of renewable energy in Azerbaijan? How is IFC supporting the development of this sector?

While low-carbon solutions are gaining traction, emerging markets with their huge development needs and growing energy demand are likely to see a steady growth in greenhouse-gas emissions over the next decade.

Given Azerbaijan’s substantial renewable energy resources, the country has scope to develop its offshore wind energy. This will help reduce the country’s reliance on fossil fuels for electricity generation and accelerate decarbonization while facilitating private sector participation in the power sector.

The technical potential of offshore wind energy in Azerbaijan is estimated at 157 gigawatts, according to an analysis provided by the World Bank's Energy Sector Management Assistance Program. This is massive compared to the current total installed capacity of around 8 gigawatts. Also, Azerbaijan could transfer infrastructure, equipment, knowledge, and its workforce to offshore wind.

In June 2022, Azerbaijan’s Ministry of Energy, the World Bank, and IFC, released an offshore wind roadmap. It shows the nation has the potential to install 7 gigawatts of offshore wind power by 2040, which means it could create over 69,000 full-time equivalent years of employment and up to $7 billion in local gross value added.

Optimizing offshore wind will allow Azerbaijan to position itself as a renewable energy powerhouse in the region. It will allow the country to export renewable energy to its neighbors and to the rest of Europe. This could help improve energy security, contributing to the decarbonization of the European continent.

IFC and the World Bank are now working with the government on implementation of the roadmap focusing on initiating offshore wind development and attracting developers and private investors to the country.

We believe that IFC can provide relevant global experience and expertise in this area for Azerbaijan to effectively develop and utilize its potential.

- How does IFC plan to increase its support to Azerbaijan’s small and medium enterprises (SMEs)?

At IFC, we believe, expansion of the SME sector is critical to boosting employment and driving growth, which is why we support financial intermediaries in reaching out to the SME sector more effectively and efficiently.

As an example, this year we signed a significant transaction—$40 million to Bank Respublika—to support Azerbaijan’s smaller businesses, an important part of Azerbaijan’s economy, accounting for 45 percent of employment and a 15 percent share of value added.

We are optimistic that the financing package will help boost the bank’s lending to micro, small, and medium enterprises (MSMEs). The funding comprises $20 million by IFC, which will also mobilize up to $20 million more. Around 50 percent of the proceeds will be earmarked for on-lending to women-owned MSMEs. This project is supported by the IFC Women Entrepreneurs Finance Initiative and the Women Entrepreneurs Opportunity Facility.

Talking about access to finance, one of the emerging areas is Fintech. While supporting financial inclusion, it uses new technology to improve and automate the delivery and use of financial services. In one of our latest collaborations, IFC has partnered with the Azerbaijan Fintech Association to help companies provide faster, cost-effective, and efficient financial services.

Going back to supporting smaller businesses, over the years, IFC—in partnership with SECO—has worked with the government on the development of new legislation for SMEs, as well as regulatory reforms to strengthen financial infrastructure and ensure that MSMEs have better access to credit. IFC also advised Azerbaijan on its first private credit bureau and on a movable collateral registry, allowing smaller businesses to use their movable assets—inventory, equipment, and so on—as collateral. This helped unlock an additional pool of borrowers.

Based on that, IFC recently launched its Asset-Based Finance (ABF) project. The goal is to support a robust legal framework governing the prudential regulation of ABF products, as well as setting up a national ABF platform and developing an ABF product program for financial and non-banking financial institutions.