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

 

OCTOBER 1999 Volume I No. 5

GOVERNMENT NEWS

AGRICULTURE

ECONOMY

FINANCE

PROGRAMS

BUSINESS

INTERNATIONAL

GOVERNMENT NEWS

Draft Tax Code Still being corrected (9/20/99)

The draft was revised hopefully one last time after the new Chief State Tax Inspectorate, Fazil Mamedov was named and the WB and IMF added their remarks. One area that was revised was the tax on gifts and inheritance. Previously there was no distinction between the two and now gift tax was reduced and inheritance tax increased. Views differed in regards to tax on farmers. International experts felt the current 5-year exemption from income tax is sufficient while Azeri experts felt the length of this exemption should be not be specified. While these suggestions have been incorporated discussions are still on going.

Common Social Tax to be introduced

Another possibility for the new tax code is the introduction of a common tax that will combine the State income tax, Employment tax, invalid tax, and social protection tax. This proposition will be added to others and submitted for consideration to the Presidential Office

Azeri-Ukraine Cooperation

During a visit of the First Vice Premier of Ukraine, Anatoly Kinakh economic cooperation was discussed. Specifically the contract of diesel fuel to the Ukraine and contract for flour and grain from Ukraine were discussed. An estimated, 70,000 tons of lour and 50,000 tons of grain are scheduled for delivery to Azerbaijan of an undisclosed amount.

Websites
* www.iadb.org - The Inter-American Development Bank has a well constructed and easy to navigate site. There is a section for Private Sector, which not only includes small enterprise development, but all discusses the various methods through which IDP supports private sector development (loans, guarantees, Inter-American Investment Corporation, etc).

* www.ebrd.com - European Bank for Reconstruction and Development. This site has a strong private sector focus and includes information on how they support SMEs (donor sponsorship, equity, export trade finance). The section on Russian Small Business fund is particularly interesting and discusses the effects of the Russian financial crisis and EBRD’s response.

* www.ilo.org/public/english/business/index.htm - The ILO has a large site with many different aspects relating to business. The main one lists news, statistics, labour laws, calendar of events, publications and contacts. It also lists business development servi-ces, information on its international small enterprise programme (ISEP). The site is also is in French and Spanish.

* www.mcar.in-baku.az -The Ministry of Trade is scheduled to open a website on November 8soon to highlight the non-oil sector in particular agriculture, construction, light industry, carpet production, and food industry. The GoA is considering providing tax breaks and other concessions to encourage investment in non-oil sector

 

Micro-Fin Model (MFM)

MFM is an Excel-based financial Modeling tool developed expressly for Micro-finance Institutions (MFI) by The Consultative Group to Assist the Poorest (CGAP) of the World Bank. This is a flexible software package that allows institutions to prepare sophisticated five-year financial projections. The Package includes two disks and a handbook. The handbook consists of two parts. Part 1 provides overview of the key elements of strategic planning:

  • Articulating the mission and goals
  • Defining markets and clients
  • Analyzing the environment
  • Performing an Institutional assessment
  • Developing a strategy

Part II covers the main elements of operational planning from the perspective of developing detailed financial projections + includes:

  • Defining financial products + services
  • Specifying marketing channels
  • Planning institutional resources + capacity
  • Developing a financing strategy
  • Analyzing financial projections and indicators.

The last chapter briefly discusses how to use the business plan and financial projections as ongoing management tools.

Once readers have practiced with the MFM using the data provided in the case study, they can use the model to develop detailed financial projections for their own institution.

The handbook also includes several annexes with additional information on the MFM. These explain how to install the software, present printouts from the model, list data requirements, and provide an exercise on modelling of lending activity.

For further information please contact Nazim Aliyev at Mercy Corps International

Sources used:
Sharg
Radio Free Europe Newsline
International Herald Tribune
Azerbaijan Newsletter by Az Embassy in US

Tax Revenues increase steadily

Tax revenues for the third quarter of this year are 17% higher than the same period in 98. Analysis identified the reforms in the taxation systems as the cause for the increase. With joint effort between the National Bank and Tax Inspectorate, increased tax was collected through the installation of cash registers and fines. The State Budget estimates that it will be able to collect 84% of the forecasted budget, which is an overall increase of 15% over last year’s funds.

New railway route

A new route via Baku- Rostov (Russia)- Kharkov (Ukraine) opened mid-October. The run will operate twice a week. Besides this, another Baku-Ganje route is planned. Depending upon demand the route can be operated every other day at a cost of 25,000 per person.

Draft Law on food Products discussed in Parliament

The commissions for social and agrarian policies discussed a law to ensure control over the quality of food products being produced and sold in the country, the production and sales facilities, and prevention of substandard products being used. There are several items still to be addressed including the selling of meat products openly on the street.

WB and Islamic Development Bank discussed credit to rehabilitate irrigation system.

The WB and IDB intend to disburse $800 million to rehabilitate the nation’s irrigation system. The projects will begin with 3 of 11 priority projects; the Samur-Absheron canal (Cuba-Sumgait), Mil-Mugan drainage collection (Mingechevir -Imishli), and construction of Vayhir water tank (Naxcivan). The country’s water deficit on average are 3.78 billion cubic meters a re year and is increasing yearly.

Ministry of Communications Results for 9 Months

For first three quarters of 1999 the Ministry of Communications transferred 79 billion manats to the State Budget that is 11 billion more compared 1998 figures. The 1999 forecast was over 130 billion manats. It was also expected to put into operation over 308‚000 subscriber's telephone numbers in 1999. The Ministry thinks its revenues decrease is explained by role of private sector in the market of telecommunication services (50.4%). For example‚ Freestyle services (stipulating only monthly payment of services and taking into account duration of telephone talk) reduced revenues from international telephone talks. And representatives of private telephone structures say the MoC can raise its profit by expanding and improving quality of communications services.

AGRICULTURE

WB Pilot Farmers visit Italy

The Water Consumers Association (WCA) visited Italy for two weeks at the International Training Center (ITC). The ITC won the tender for to provide training and site visits. During the visit the WCA visited several regions of Italy and became familiarized with agriculture equipment and irrigation systems.

Sugar Refinery in Imishli

A sugar beet processing project in Imishli has been proposed by AJG Investments and received approval from economic and financial institutions. This project will provide an estimated 3,600 jobs – with 600 direct employers and purchasing from 3000 farmers. All the by products from the production will be used including using the pulp for livestock feed. The first output is expected in 2001.

Anthrax Breakout in Georgia

Accusations of corruption have erupted after dozens of people were hospitalized with anthrax after eating contaminated beef. The concerns were raised regarding the use of funds that were allocated for anthrax vaccination for the last two years and the recent outbreak.

Program for Mountainous areas in Azerbaijan and Georgia

International Fund for Agricultural Development (IFAD) is considering financing a program targeting farms in the mountain areas to encourage job creation. The first step is a feasibility study and disbursement of the credit will take two years before implementation. This is part of a larger ten year World Bank Agriculture project.

Grape harvesting to continue for another month

Grapes harvesting continues to drop. By the beginning of October 900 ton so f grapes had been collected which is 9,000 tons less than least year. The collection will continue as 240,000 are expected this year. Grapes are raised in 60 regions on 34,120 hectares of land. There are 18 wine factories to process the grapes. Grape harvest and sales are minute compared to 1985 production levels in which wine accounted for 30-40% of agriculture income.

Cotton collection is behind

120,000 tons of cotton is expected from 60,000 hectares. As of the end of September only 64,500 tons had been collected. The majority of the cotton will then be refined by the Turkish company MKT that hold a major stake in 14 cotton refineries and the Swiss company Gekot that manages 3 cotton refineries.

ECONOMY

Azerbaijan to attend annual IFM and WB Managing Directors Meeting

An Azeri delegation left for Washington on 9/24/99 to attend the annual meeting and will include Minister of Finance, Chairman of NBA, and Chairman of IBA. The economic reforms to date will be reviewed along with credit and currency regulation policy. An IMF team visit is expected in November to look at these issues. Azerbaijan expects to receive an additional $24 million this year.

No sharp decline of the manat exchange rate expected

The steps by the National bank in July to correct the exchange rate were seen as appropriate by the IMF. Following the Russian crisis, the IMF has expected a decline in the exchange rate to in order to maintain the country’s hard currency reserves. This devaluation of the manat was due not only to currency and monetary credit policy but inflation. In the 2000 budget a 4400 4500/$1 exchange rate is forecasted

FINANCE

Money Transfer will be possible

An agreement with MoneyGram, an international payment firm, was reached with the International Bank on17/9/99. With MoneyGram a sender pays a transfer fee approximately 5% of the transferred sum and then receives a code for sending the money. The wire transfer takes 10-15 minutes on average. No bank account or credit card is required to use this service. In addition, the registration process is simple and funds can be sent worldwide. Identification is required to transfer the funds, and up to $10,000 can be transferred without any problems. Amounts over that will require special permission.

TACIS fight continues with agent banks

TACIS is continuing its attempt to get repayment form its agent banks under the Partnership Fund. The Bank has a month to restructure and begin payments. While tentative agreement was made between TACIS and Imperbank, the scheduled transfer of 20 million manats did not happen. While Azadbank owes 2.3 billion, concessions must be made since the bank’s property is worth much les. A final decision should be made in September.

EBRD delegation discussing credit for Baku International Sea Trade Port (BISTP)

A $21 million project is being considered to reconstruction the ferry terminal. This reconstruction is part of the larger project to support transportation between Baku and Turkembashi and Aktau. Preliminary credit terms are libor + 1% with 15 years. The initial plan was to reconstruct the freightliner terminal but has been changed to the ferry line due to low cargo turnover for the freightliner terminal.

Government plans to revamp three state banks

During discussion on financial reform, the need to speed up the privatization of the International Bank of Azerbaijan and take radical steps to restructure the three state banks was highlighted. Although the GoA is concerned about the pace of the reform they stated hurried decisions should not be taken. The WB felt the easiest step is to close down the three banks. The outstanding debts of two state banks are primarily enterprises in the occupied territories and other former state owned enterprises, which will not be paying anytime soon.

Second tranche of IFC funds in 2000

Azerigazbank, will be begin to repay the $80,000 first tranche to IFC. The credit from IFC was used by the bank to finance 12 businesses. The bank financed 75% of the cost of the project and the client was required to put in 25% of the project. Some businesses found it difficult to repay the 25-30% annual interest rates. 25% of the businesses have completed repayment. The second trance of $400,000 is expected in early 2000.

Foreign banks

The GoA position on foreign banking capital is that foreign banks would be given a license at anytime. While from the macro perspective the entrance of foreign banks will result in increase in investment into the economy, local banks are concerned about the competition. Azeri banks are requesting that foreign bank activities be limited as they feel the average depositor would prefer to deposits in a foreign bank rather than a local. The official view is that foreign banks can registers as joint-stock bank or with purely foreign capital.

PROGRAMS

Four new generators at Mingechevir Hydro electric power station (HEPS)

The Russian company, Elektrosila will likely sign a contract to supply a generator at the power station. The total amount of funds is $41.5 million for the reconstruction, which started in 1997. EBRD, Islamic Development Bank loaned funds for this project. It is expected that six generators will be installed.

Advertisement Academy to Start

In 2000 the Azeri division of the International Advertisement Association formed in 96 plans to participate in the 37th World Congress. The Azeri Advertisement Association currently has 24 members and has held three exhibitions. The advertisement business grew tremendously between 95-97 relating to the oil deals and supporting service activities. But since 98 there has been a decline. The president feels this is due to the limit in private TV channels. Approximately 40 channels have been unable to obtain a license. The association has developed a plan to train 500 students in a new Advertisement Academy in Baku. They hope to attract students from Central Asian countries and Georgia.

Just one project approved

A competition commission of the National Fund of the State Committee for Anti-Trust Policy and Support of Entrepreneurship has chosen only 1 project of 12, the Optimal small enterprise in Lankaran for rice production. The State Committee will submit the project to the Cabinet of Ministers for approval and should be confirmed before the end of the year. Thirteen projects were initially submitted for the refining of wool‚ cotton‚ the manufacturing of fuel briquettes‚ sea buckthorn oil‚ the packing of meat and milky products‚ etc. One of the 13 projects was returned to a sender because of the lack of required formal documents. "Of the 12 projects‚ 9 are returned back for further development and 2 were rejected. In addition‚ the Ministry of Finances of Azerbaijan disbursed 3.1 billion manats to finance 20 projects to process agricultural products and manufacture plastic packaging through the International Bank of Azerbaijan.

TACIS project designed to make SMEs more effective

The new TACIS program is designed to strengthen the capacity of Kosia-Smedia (local organization founded by TACIS in 1994) to serve the needs of Small Medium Enterprises (SME). One area that will be targeted in support in areas of export marketing, trade relations with current and future partners. The objective is to support export activities within the country. Four regional offices, similar to Kosia-Smedia will be set up. A German consulting firm will backstop the process and select the 10 short listed regions.

New TACIS agriculture business consultancies

Four agriculture business consultancies have been established in Ganje, Quba, Ismayili, and Sabirabad. They provide market survey, business plans, and feasibility studies.

BUSINESS

Grants for Business Associations

The Association of Azeri Entrepreneurs has won a $25‚000 grant of the Eurasia Foundation designed to advance the development of business associations. The competition was funded by the United States Agency for International Development. The latter include real estate‚ transport and travel agencies‚ insurance‚ advertising‚ legal‚ audit and consulting firms‚ publishing houses‚ broker's offices. The Eurasia Foundation received 16 proposals in response to the competition‚ 7 of which received funding that totalled $72‚179. The grant of up to $7‚000 was given to five companies (Fineco‚ Ltd‚ international fund Veten‚ Autostern Baku‚ Research Center for contemporary social processes AREAT‚ agrarian scientific-international Center. Two grants were awarded to two existing organizations - the Association of Insurance Companies of Azerbaijan (up to $15‚000) and AAE for the further development of which was spent $25‚000.

CAUCASIAN fund started cooperation with AAE

The AAE management had recently met with representatives of the Caucasian Fund that helps investors who have intentions to invest in countries of the Caucasian region (Azerbaijan‚ Georgia‚ Armenia) on original stages of transition period. During the meeting the FUND members familiarized with the AAE activities proposing to prepare business plans of concrete projects. In the years of the former Soviet Union the Fund credit enterprises and created joint ventures with them. The fund's aim is provide repayment of its investors' funds of their 30% annual capital. We note the Fund signed an agreement with a special corporation on foreign investments on disbursing credits. It is expected $32 million will be invested and the remaining $60 million will be given by the corporation. Projects in such areas as agriculture‚ transport‚ energy‚ financial institutes‚ telecommunication technologies will be priority for disbursing credits.

Pepsi Cola opens its plant

The $25 million Pepsi Cola facility is open with a capacity to product 12,000 .5 litre and 6,000 2 litre bottles of soft drink per hour.

15 Auditors receive Certificates

The graduation ceremony awarding certificates by the US Institute of Domestic Auditors took place the end of September. Azerbajian is the first NIS country to receive this certificate. A new business will be formed to promote domestic audit services that are in accordance with international standards. In addition, foreign audit companies assist these newly licensed auditors.

Seminar Devote to Small, Medium and Large Businesses

According to Chairman for the State Committee for Antimonopoly Policy and Business Support, Azerbaijan is among the first CIS member countries to launch efforts focusing on small and medium enterprise support. The growth of SME in the country is uneven with 80-90% located in Baku. The main challenges facing the businessmen include tax, lack of access to capital, and other issues. The seminar particularly focused on linking SME with Multi-National companies. Many SMEs stated they lack information regarding MNC activities. In addition, businessmen said that legislation should promote joint ventures between SME and MNC rather than prevent it.

Group on fight against corruption to be formed

The Azerbaijan government has offered to the German, Friedrich Neumann Foundation to help establish a group to fight against corruption in Azerbaijan‚ said Arestun Orujli‚ Coordinator of the Foundation in Azerbaijan. According to the offered model‚ the group will consist of experts of the Azeri opposition‚ government and foreign specialists‚ mainly those involved in the activity on fight against corruption in East Europe. The fact that the Azeri government appealed just to the Foundation is evidence the government wishes to fight this corruption. The fight against corruption starts with legal procedures that must be liberalized to eliminate the reasons of existence of corruption. Corruption has always been connected with state authorities‚ so it is essential to make the economics free from state regulation. If this goal is accomplished‚ we may think that a half of the battle against corruption is won. Attending the last seminar‚ for the part of Azerbaijan‚ was Fuad Mustafayev‚ vice-president of the Azeri Fund of Democratic Development.

Swiss Company buys Garadag Cement

The owner of the Garadag cement plan was announced the beginning of October. The Swiss company, Holderbank Financiere Glarus AG will own the plan jointly with the offshore company Garadag Holding Ltd. According to the plan, Holderbank will invest $23 million to bring the factory up to international operating standards. The investment will be in two phases with the first phase being implemented over three years.

First McDONALD'S Restaurant opened in BAKU

McDonald's restaurant opened its doors in Baku at 8.00 a.m. This is a new enterprise was founded in partnership with company ISR Ltd operating in Baku on the basis of the Corporation McDonald's license. A newly-built restaurant is situated on the Fountain Square. The restaurant is meant for 190 seats inside and 100 seats outside. Nearly to $2 million was spent on its construction and personnel training. Together with our partner and suppliers we are going to open some more restaurants in the country. According to Mirzoyev‚ prices are reasonable as they were fixed taking into consideration level of the domestic market. Initially foodstuffs will be imported by foreign suppliers and later it is expected to develop a network of local ones. Currently 25‚759 such restaurants are operating in 119 countries of the world. Azerbaijan has become the 120th one.

GLOBAL

Pressure Mounts on Private Lenders

With all the recent economic problems in Asia and Russia and NIS who is responsible? The country for its domestic policies? International financiers to investment in the domestic economies? The answer is both. While there have been several bailout packages in recent years, the side effect of the bailouts themselves is to distort the market. When the IMF assists the country to meet its financial obligations, neither the country or the creditors are fully penalize for their mistakes. A balance must be maintained between limiting systematic risk and allowing market principles to operate. Not withstanding, the private investors did absorb losses of $350 billion in the Asian and Russian crises. The difficulty is that if the private sector must bear all the responsibility for its investments in developing countries, it may view it as too high of risk and not invest at all.

Will Visa Procedures become Effective?

Next meeting of the Russian-Azeri intergovernmental commission for economic cooperation on November 5. A Russian delegation led by First Vice-Premier Nikolay Aksenenko‚ who heads the commission‚ has arrived in Baku today. The delegation also comprises officials of the Ministry of Economy‚ the Ministry of Natural Resources‚ the Foreign Ministry‚ the Ministry of Fuel and Energy of Russia‚ as well as the Russian companies Transneft‚ LUKoil and others.

Yet prior to the arrival of the First Vice-Premier of Russia in Baku it became apparent that the matter concerning the introduction of visa procedures between the Russian Federation and Azerbaijan would be of prior importance. On November 4 Vladimir Putin‚ Russia's Prime Minister‚ ordered to the Ministry of Foreign Affairs to start talks with the Azeri and Georgian sides about introduction of temporary visa treatment on the territory of Russia in order to stop direct "migration" of Chechen terrorists from Chechnya and back. Yesterday Russian sources reported a new instruction of the Prime Minister of Russia. He ordered the Central Bank‚ the Ministry of Finances and the State Committee on Communications of Russia to draft measures to control over money transfer from the Russian Federation to Georgia and Azerbaijan. According to calculations of Russian experts‚ some $1.5 million are being transferred from Russia to Azerbaijan per month. Giving such instructions‚ Putin made a provision that they should not hurt the relations between Russia and the two Republics of South Caucasus.