Karabakh and industrial clusters - two factors of investment burst Review by Caliber.Az

In recent years, Azerbaijan saw a change in its economy's capitalisation structure. State investments are decreasing while the share of private capital is gradually increasing. Meanwhile, for three years, the vector of state investments has been focused on restoring Azerbaijani lands liberated from occupation, forming basic infrastructure, and residential and social facilities here. The capitalisation of agro-industrial clusters, the housing construction sector, and service facilities are dominated by private structures here. At the same time in 2022, the investments of foreign investors in the non-oil sector increased 2.3 times. Judging by the latest data of the State Statistics Committee, the efforts made are quite successful: in January-April 2023, investment in fixed assets grew by 21%.

At the beginning of last year, the government launched its "Strategy for Socio-Economic Development of Azerbaijan for 2022-2026". These medium-term plans are based on the long-term strategic program "National priorities of socio-economic development: Azerbaijan 2030". The new strategy envisages a number of qualitative changes in the activities of state companies and the sphere of state funding, expansion of public-private partnerships, and directing the vector of economic development to private investment.

Thus, it is supposed to increase the competitiveness of the non-oil sector in the domestic market, and most importantly, to orient it towards exports. As a whole all listed above are stipulated in the perspective plans of economic transformations: minimisation of dependence on the raw material factor by the deepening of diversification of the non-oil sector, expansion of public-private partnership in all sectors of the economy, and active involvement of the private sector in realization of state projects. We are talking, in particular, about the maximum participation of SMEs in public procurements, the attraction of private contractors to construction and infrastructure projects implemented in the Karabakh region, and ensuring transparency in this sphere.

The mechanisms of public-private partnership are planned to be aimed at the joint implementation of innovative, high-tech projects, which are so far unfeasible for the private sector without state support.

The most important factor in expanding private financing of the non-oil economy and attracting large volumes of investments there have been the reforms aimed at improving the climate of the country's business ecosystem and increasing the investment activity of business through the expansion of fiscal and other preferences and incentives. For this purpose the modernization of normative legal documents, regulatory acts in the business sphere covering also the sphere of production, foreign trade operations, the attraction of investments and know-how, fiscal transformations, simplification of crediting rules, and so on are provided.

Residents of economic zones in Azerbaijan are given wide preferences, including 10 years of exemption from income tax, property tax, and land tax from the date of registration, as well as VAT on imported machinery, technological equipment, and installations. Residents are also exempt from customs duties on imported machinery, technological equipment, and installations for seven years.

Not surprisingly, the greatest effect of the measures taken can be traced within the policy of new industrialisation of Azerbaijan pursued in recent years and focused on the formation of industrial zones, industrial and agro-parks, and other specialized clusters, including the industrial-logistic free economic zone in Alat seaport. In recent years six technological parks with total investments of a little less than $3.8 billion have been established in the country as well as five industrial neighborhoods (the commissioning of two more is expected).

The next stage of the current projects stipulates additional investment in industrial zones of about $265 million and the creation of over 4,500 new jobs. In turn, private investment in about 45 agro-parks formed in the country is estimated at more than $824 million. The development of agro-industrial zones has been launched in the Karabakh and East Zangazur economic regions of the country, and in the near future investments there will exceed $59 million.

In general, state investments in the restoration of the liberated territories, including the formation of primary infrastructure here and laying the foundation of future production clusters, are now the main part of the budgetary investment program. So, for more than two years, almost $3.8 billion have been allocated from the budget for infrastructural and other works in the Karabakh region, with $1.8 billion foreseen for these purposes in the state budget for 2023.

The wide governmental financing and fast restoration of infrastructure played a key role in attracting private business to Karabakh and East Zangazur economic regions: the number of potential projects directed to the Ministry of Economy by businessmen has exceeded 1400, and almost a third part of applications comes from the foreign companies. And the total sum of private investments already coordinated and invested in Karabakh nearing $177 million.

The leading are Turkish companies. They are planning to develop the mineral resources of the Karabakh region, including gold and copper mines, as well as to develop the sphere of tourism, agrarian processing, production of clothes and consumer goods, building materials, construction services, etc. Lots of applications have been received from Kazakhstani companies wishing to realise business initiatives in Karabakh and there is already a number of proposals from businessmen from Hungary, Uzbekistan, Great Britain, Israel, and Pakistan - in general from 40 countries around the world.

The mentioned trends had rather a positive impact on the growth of the internal investments to the fixed capital - by 13,8% in 2022: the investments of the state organizations have increased by 17%, and those of the non-governmental organizations - by 6,3%. Last year's investment in fixed assets amounted to $10.749 billion, which by 5.5% exceeded the previous year's figures, and the highest growth - 13.6% was recorded precisely in the non-oil sector.

It is noteworthy that despite the global recession and all other negative external factors this positive trend has been preserved in the current year: according to the latest data of the State Statistics Committee in January-April capital investments, reaching $2.695 billion, increased by 21.1%. At that, in the non-oil sector investment growth during the reporting period amounted to 18,5% which is also higher than last year's figures. It is encouraging that more than $1.541 billion or 57.2% of total investments were directed to the objects of industrial importance, another $1.001 billion (37.2% of total assets) - to the construction of enterprises in the service sector, and $151.3 million (5.6% of all investments) - to housing construction.

Already in the first quarter of this year, we can observe a noticeable interest of foreign investors in the economy of Azerbaijan: foreign companies and organizations, mainly from Great Britain, France, USA, Türkiye, Japan, Switzerland, Russia, Norway, and some other countries, have directed $556.3 million to the main capital of the country that is 23,8% more than during the same period of last year.

It is worth recalling that according to the Agency for Export and Investment Promotion (AZPROMO), total foreign direct investment (FDI) in the non-oil sector of Azerbaijan during 2018-2022 is estimated at $5.093 billion, and the non-oil sector accounted for 21.2% of all FDI in the economy of Azerbaijan. At that, the highest rates of foreign investments were registered last year: they reached $1.8 billion, having increased 2.3 times compared to 2021. Participation of foreign companies in the capitalisation of the Azerbaijani economy is a significant point, which contributes to the attraction of foreign capital and technology in the production of competitive and internationally demanded products.