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 Report - MCI Economic Opportunities Bulletin (MC)

 Report date: 31.07.1999

Economic
Opportunities
Bulletin

MERCY CORPS
INTERNATIONAL

37 v, Suleyman Rustam street, Baku-370007, Azerbaijan
Tel: 40 02 41 Fax: 41 10 65 E-mail:cathy@mci.baku.az

 

AUGUST 1999 Volume I No. 4

GOVERNMENT NEWS

AGRICULTURE

ECONOMY

FINANCE

PROGRAMS

BUSINESS

INTERNATIONAL

GOVERNMENT NEWS

Amendments to the Ecology Code

The Parliament has made the following changes to the Ecology Code:

l In edition of 163-3 article of the Code On administrative violations. In case of death of people or material damage during processing of harmful wastes, people responsible for the fact will carry criminal responsibility and be imprisoned from 1 to 5 years and

l The burying of dangerous wastes is prohibited in natural resource areas.

Hasanov grateful to humanitarian organizations

On July 7, Azerbaijan's Deputy Prime Minister Ali Hasanov met with John Post, a representative of the U.S. State Department's Program on Humanitarian Assistance. Mr. Hasanov expressed his gratitude to humanitarian organizations which, "despite restrictions imposed by Section 907, work hard to improve the living conditions of numerous displaced communities in Azerbaijan."

Websites
* www.worldbank.org/html/exdr/offrep/eca/az.htm - This is the homepage within the World Bank on Azerbaijan. It provides a country brief with a snapshot of Azerbaijans development prog-ress at the macro level and a two page country at a glance with key indicators tracing the trends in social and economic development in the country for the last three decades.

* www.bisnis.doc.gov/bisnis1/ - BISNIS is the US Department of Commerces primary resour-ces for exploring business oppor-tunities in Russia and the NIS. It provides market reports, tips on development, export and invest-ment opportunities, and strategies for doing business in the NIS. It includes industry reports, country reports, lists sources of finance, and other relevant information

* www.usembassybaku.org - The Baku US Embassy has it own website including information on USIS, Commerce, and Consular activities. Under commerce it has specific information on oil industry, economic development, and trade and investment opportunities.

 

Business and Economic Publications

As Azerbaijan continues it transition to a free market economy, a variety of training guides, journals have been published in Azeri. For the Agriculture Sector there are several training books for private farmers that have been prepared. These include

  • Diakonie Extension Manual

In both English and Azeri, this manual covers extension methodology, family greenhouses, and vegetable production. They also have 9 individual brochures covering specific vegetables and pesticide both natural and chemical

  • Zacatala Management School Farmers Book

This book sponsored by GTZ and published in 1997, covers accounting, business planning, livestock production, profit & loss statements, case studies, taxes, and insurance. Almost 9000 farmers have been trained with this book.

  • Short term course for farmers of the pilot farm project

Through WB loan the State Commission responsible for the pilot farm privatization project has published this book. In, addition 12 issues.

  • Business Journals by The Center for Economic & Political Research

Six 6 journals covering market research, constraints to business, advertising, management, accounting, registration issues are available.

Sources used:
"Azer-Press", BISNIS Bulletin
Herald Tribune
Sharg, Economist 9/11/99 issue

ARRAs activities

ARRA has repaired 200 buildings in the liberated regions of Agdam, Goranboy, and Fizuli, with another 3,193 to be built this year according to Ali Mamedov, head of ARRA. In coordination with ARRA, UNHCR is repairing and reconstructing another 2000 buildings. To date, ARRA has spend $73 million of which $30 million is allocated by WB and Islamic Bank. The remaining $43 millions are grants given by TACIS, ICRC, UNDP, and UNHCR. In addition, land mine clearance activities are being implemented in Fizuli. The tender for building another 270 houses in nine villages in Fizuli will be determined in September.

AGRICULTURE

Irrigation & Drainage Assessment

An assessment of the rehabilitation and improvement of irrigation and drainage infrastructure in the country has been completed. Eleven priority systems have been identified including reconstruction of the Samu-Apsheron channel, the Main Mil-Mugal collector. The assessment began in May and surveys were implemented in 10 regions, Guba, Guza, Hachmaz, Divishi, and Saatli, Sabirabad, Imishli, Agcabedi, and Beylegan. They reviewed the following topics, opportunities to pay for irrigation services, participation in repair and maintenance of the systems and type of water customers.

Seedling exchange

Iranian scientists are planning to travel to Baku the end of September to exchange seedlings and seeds. They will also conduct research in sugar beet, cotton, and grain productions. Azeri scientists in turn are interested in olive production in Iran. Chinese scientists are also interested in the same activities and are planning a visit in October.

Pasture erosion

Based upon results of geo-botanical survey, the mountainsides used as grazing for sheep are being eroded by rain and wind. Farmers are encouraged to sow wild plans in the autumn-winter period to protect the lands. In addition, trucks driving on fields should be minimized.

Cotton producers less advance payments

The companies operating cotton plants have reduced advance payments to farmers growing cotton by more than twice in comparison with last year, AzerPress learned from MKT Company. This move was caused by the fact that the processing factories did not receive sufficient harvest last year, although 20 billion manats had been paid in advance. In this connection, the cotton processing companies restricted the advance to purchasing fuel and lubricants for the producers at reduced prices; besides, they repaired artesian wells and irrigation systems. The fact that the number of hectares used for cotton decreased twice also influenced the decision to cut advance payments.

ECONOMY

l The US Agency of Trade and Development will allocate $400,000 for rehabilitation of a major chemical facility in Azerbaijan in a move aimed at revitalizing the countries petrochemical industry.
l The EU has decided to earmark 7 million EURO for financing a fiber-optic communications line, which will connect the countries of the south Caucasus with the European capitals.
l Industrial production increased 2.2% for the first six months of 1999 compared to 1998 levels. In addition, the number of people employed increased by 21.5% over last years level. However, industrial activities are not operating at international standards in regards to environmental issues.
l Chinese Azeri trade deficit. For the first six months $3.8 million was imported from China and only $61,000 was exported to China.

EBRD will monitor water project

A mission of European bank for Reconstruction and Development (EBRD) for water project visited Baku. EBRD plans to allocate $23 million for replacement of pump stations. The mission also held a seminar together with World Bank for the representatives of interested offices and Baku municipality.

Azeri- German Economic Relation are being discussed

The second symposium and session of Azeri- German economic relations was held in June. The first symposium was held in October 1998. According to the German Ambassador these actions will give a new impulse to bilateral economic relations. German Ambassador explained that for the development of investment process, improvement of legal defense of investors, transparency of tax system, and reforms of banking sector are necessary which may explain low foreign investment levels. The representative of German Economic Ministry noted that lending to Azerbaijan needs governmental guarantees. On the other hand dependency on the oil market and limited local market interfere investment process. Germany hopes to development of projects at regional level. Potential German investors are asked to give attention to projects in the sphere of tourism, agriculture, leasing, and banking.

Work on Transport Ministry to start

A two-year project by TACIS to establish a Ministry of Transport will start within a month. The project will determine status of transport department, training course for staff, and assist with the initial creation of the Ministry.

FINANCE

Azadbanks property seized

The economic court is reviewing the TACIS-Azadbank case, which began in July. The bank owes 2.3 billion mantas to TACIS. The bank has refused to pay, as it has not received repayment from loans for agriculture activities. The bank is accused of violating banking rules when lending by not requesting adequate mortgage to minimize the risk. If the sales of the banks assets are not adequate, then the banks management may be responsible.

International Monetary Fund

The IMF is currently supporting the Government Azerbaijan's economic reforms with lending using resources from several IMF financing facilities. The total budget of the program for 1999 is about $135 million of which $79 million is designed to help to compensate the export shortfall experienced in 1998. IMF also is providing technical assistance to Azerbaijan. A resident advisor on treasury development is assisting the Ministry of Finance to further strengthen and computerize the national treasury. Another resident advisor is working with the Azerbaijan National Bank to strengthen banking supervision and regulation. Additional technical assistance is being provided to draft a new tax code for Azerbaijan, strengthen tax administration and reform the payments system.

Bank Association Proposal 8/23/99

The Azeri Bank Association is working on a proposal for the IBA. The proposal addresses several issues; to increase the limit on currency export, increase the 7% limit of capital spending on foreign currency. In addition, to the proposals, the Bankers generally feel the dollar will continue to rise to an estimated 4600 manat value per dollar.

The World Bank

The WB Board of Directors approved in March the Supplementary Credit in amount of SDR 5 million. For Azerbaijan to address negative impact of the Russian crisis and to help promote stability in financial markets. The Board is also expected to endorse in the coming few months another two projects Agricultural Development and Credit Project. The aim is to create the land markets, development of rural advisory, information services and improvement of the Government's capacity for the rural sector, and Education Reform project. The purpose of which is to improve the effectiveness of teaching and learning in selected grades of 20 general schools in different regions of Azerbaijan. The credit is expected to be approved in the coming month.

Two more projects the Irrigation Project which would include rehabilitation of 50 km of Samur-Apsheron canal, and construction of 32 km of the Mil-Mugan irrigation drain, and the Highway Project aimed at reconstruction of the part of East-West Highway historical Silk Route are currently under preparation.

Number of commercial banks to reduce

On September 11 the National Bank held a board meeting to review the request to cease operatio ofr two banks. Following a performance review of the first two quarters, four other banks are reported to shut their doors.

PROGRAMS

Agriculture Insurance

The insurance company Bashak Inam is currently reviewing the six pilot farms funded under a WB project for insuring loans and credit institutions. Insurance would reduce the risks associated with agriculture production. Currently only two insurance companies are licensed to insure agriculture activity. The tariff rates established by the firm are; .3% for equipment, 6.5% for cattle, and 3% for poultry. Other proposals at the sessions attended by the Ministries of Finance, Agriculture, Cabinet of Ministers, Agroprombank, and Central Working Agency included having the state cover 50% of the administrative costs of issuing the credit. Given the low interest by farmers for this credit the scope of activities may be expanded to include small scale processing activities.

Processing Activities

Agroprombank under WB credit will begin lending for processing and preservation activities under the pilot farm project. Projects over $30,000 will require approval from the State Commission. This change in direction of financing was decided at the Agroprombank conference based upon the results of the project success to date. The financing was expanded to include three-year medium term credit. However, there was not a high response by farmers to this loan product. It is suggested to build canneries in Lenkoran, Hackmas, mills in Berda and Ujar and a sugar refinery in Sharur. They are also considering funding a greenhouse project based upon an Israeli model. There are also looking at decreasing the interest rates from 14% to 8-10%.

Banking school funded by TACIS

The firm to won the tender to start a banking schools will arrive 9/13/99. The $1.5 million two-year project will support a school for bankers.

Agrarian Investment Fund

The TACIS office is considering a new structure for its agriculture activities. The new Agrarian Investment Fund was presented under the RARP-1 project. The idea is to form a council that will guide the credit policy, state fee, and encourage business plan development. The credit will only be given after a MOU is signed between the EU and GoA with a focus on short-term projects.

SME credit support from Germans

The signing of a $6 million credit agreement was expected during a visit from the German Government. Credit will be provided to the GoA for 40 years and .75% interest rate. The visit also included stops at several electrical power substations in which a German company is working. The reconstruction is part of another loan from the German Government. The German-Azeri Foundation (GAF) established under the program will serve as an agency responsible for disbursing the credit to agent-banks. Azerdermiryolbank and Arkobank have already been selected as agent-banks. The banks will individually examine the business plan and will have the right to disburse for small loans. For medium sized loans, GAF experts will review the projects. The loans sizes will range from $10,000-50,000.

Electricity line from Agjabedi to Barda

A tender is out to build a 110 kw electricity line from Agjabedi to Berda under funding from the Islamic Bank of Development. This tender is part of a larger project to reconstruct the Mingechevir HES.

Japan's interest to reconstruct the Baku Port

Industrial Finance Group of Japan were discussing on behalf of Japan investors on allocation of favorable credit for reconstruction of general cargo terminal of Baku Port. According the feasibility study carried out by European Union $17 million investment is needed for modernization of piers of cargo terminal and for increasing capacities of the container area.

Marketing Program almost finished

The Azerbaijan Institute of Economics has just finished the coursework for a new International Economic Relations Bachelors Degree. The program will cover international trade, customs, foreign trade, economics, and marketing. Six textbooks will be issued by the end of the year.

BUSINESS

Departure of Foreign Investors

In a press release, a lawyer representing a foreign firm cited a specific example in which connections with Azeri officials were used to avoid payment of contractual obligations. Despite repeated visits to the Prosecutors office no action was taken.

Antimonopoly Committee proposes license reform

The State Antimonopoly Policy and Entrepreneur Support Committee prepared and offered proposals on revising licensing requirement for businessmen. The main points are;

  • Expand the list of activities under the license so businessmen not forced to buy new license for each individual activity,
  • Consider opening license houses to deal with this rather than being issued by various state bodies,
  • The licensing fee should be adjusted to according to size of business and activity, and
  • Regulation of the entity issuing the license is needed.

Control books results from first six months

74 private enterprises submitted information on un-official visits by government employees demanding payment or favors. During the first six months of documenting these visits, the businesses did say there was some reduction in the number of visit but theses problems still hinder the success of the business. 85% of the unofficial visits were from the tax department, 71% by police, 31% by customs, 27% by health and sanitation, and 25% by prosecutors office.

Antimonopoly Committee concerned with reduction in JV

The number of operating JV is dropping due to high registration fees and lack of financing. During the survey 55 JV were interviewed. The committee has suggested a reduction of registration fee particularly for local JV processing agriculture products, and foreign JV involved in industry creation and export of equipment. In addition, the committee proposed to strengthen the information systems.

UNDP & Antimonopoly Committee to conduct seminar

On September 30 a seminar to support cooperation between SMEs and foreign investors will be held. Issues regarding intellectual property rights, EU-Azeri cooperation, technology transfer, direct foreign investment, and skills development will be covered.

Association of Securities Brokers (ASB) to start

Until the President approves the roles of order for licensing professional broker activities, the ASB will delay registration with the Ministry of Justice. The ASB main activities will be to train brokers, provide ethical guidelines for operation, represent brokers rights, and to standardize brokers operations.

First JV between Baku and Tebriz

An understanding between the Baku and Tebriz executive powers has been reached. The JV would deal with import and export of construction materials and food products.

Cash registers in petrol stations

The Tax department announced a plan to introduce cash registers at petrol stations to increase tax revenue. Of the 700 petrol stations, the majority is not paying taxes on sales activities. As expected this announcement was not received well by station owners. In their opinion, cash registers will slow down the service provided and increase expenses. Currently one cash register costs approximately $400. If the requirement is one cash register per pump the cost could rise to $1600 per station.

Leasing activities

Azerlizing, a leasing company is investigating the leasing market in the country. While they are still awaiting registration, the company intends to buy equipment from bankrupt companies and lease it for one month to two years.

Tax Service targeting services

The tax inspectors were out in force during the beginning of July to monitor the use of cash registers. Over 381 violations were found ranging from lack of receipt or writing a lower price. They also monitored the Marriage Registration House. Tax rates for services are determined by a variety of methods. For traders, every cubic meter of space is subject to 7000 manats. For restaurants, 80,000 is assessed for every 6-person table and 80,000 per chair for hairdressers and beauticians. In addition, rates were increased if businesses were located in the center by two.

INTERNATIONAL

Ukraines Farm Reform

Individual farmers are only allowed to own 100 hectares of land and while there is no shortage of land in the Ukraine, only 5% of the peasant farmers have chosen to be private farmers. 46% of the land still remains in the enterprise control with individual farmers owning 2% of the land. The land code introduced in 1992 recognized three forms of ownership, state, collective, and private. All the collective farms according to the government have been replaced by private collective agriculture enterprises. But these new private enterprises are the same soviet style collective farms and farm output continues to decrease. Land reform is not the only challenge, there is no open market for farm produce. The government is the largest buyer and only suppliers for seeds, fertilizer, and other inputs.

Georgian Budget

Addressing the parliament on 10 September, Minister of State Vazha Lortkipanidze said Georgia'scurrent budget deficit amounts to 356 million lari ($180 million), Caucasus Press reported. As a result, Lortkipanidze said, the government still owes a total of 42.8 million lari in wage and pension arrears for 1999. He noted there are problems with funding the army, police, and border guards. And he called for changes in Georgia's investment policy to attract investment in larger enterprises.

New Mulitlateral Bank

In June 1999 the Black Sea Trade and Development Bank located in Greece began operations. The bank will provide financial and technical assistance to viable projects and trade activities to the 11 shareholder countries which includes Azerbaijan. The goal of the bank is to accelerate development and cooperation among the member countries. Eligible projects from both the public and private sector are required to facilitate trade and investment activities. Priority will be given to telecommunications, manufac-turing, financial services, transport and agribusiness.

Agribusiness Progressing in Moldova

Moldova has the potential to be a key producer of agriculture products in the NIS. Agriculture currently accounts for 40% of GDP. Major reforms are currently being implemented but leave newly privatized farmers cash and equipment poor similar to Azerbaijan. While there is limited access to capital financing, banks require excessive collateral and have a complicated application process. Moldova is also recovering from the Russian economic crisis of August 1998 which resulted in a currency drop and a collapse of market for Moldovan agriculture products. A new initiative supported by USAID is aimed at organizing Farm Service Centers. Small farm stores will be created in each village to augment the distribution system. Typically payment for these goods and services is made with harvested crops. While it is planned that the farmers will operate with cash transactions in the future, currently most transactions will be through barter.

Georgia to Build New Black Sea Oil Terminal

The President has approved plans by an Austrian-Georgian joint venture to build a new oil terminal in the village of Kulevi, north of Poti. The terminal will have a capacity of 5-6 million tons per year and will be used primarily for the storage of crude to be transported by barge across the Caspian from Turkmenistan and then by rail across Azerbaijan and Georgia. The joint venture has reached a preliminary agreement with the EBRD on financing for the project, the cost of which is estimated at $70 million.



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