IFC Director for Europe and Central Asia Wiebke Schloemer’s interview with Report:
– IFC has allocated around $500 million since Azerbaijan joined the Corporation almost 25 years ago. Are you satisfied with the effectiveness and results of the projects implemented?
– As the largest global development institution focused on the private sector in emerging markets, IFC leverages the power of the private sector to help end poverty and boost shared prosperity. In Azerbaijan, we have been supporting the private sector for more than two decades, investing around half a billion USD, including mobilization from other lenders. In addition, IFC has supported around $100 million in trade through its trade finance program and provided $250 million for the Baku-Tbilisi-Ceyhan pipeline.
For many years, IFC’s investments have been complemented by a range of advisory projects aiming to support private sector growth. These projects have supported investment climate reforms; helped build capacity within the banking sector in various areas, including on-lending to MSMEs; supported the development of financial market infrastructure; and promoted good corporate governance.
Here is the most recent example—with our advice, the government of Azerbaijan has implemented a series of regulatory reforms to help improve financial infrastructure and allow more small businesses to access credit. IFC’s advice has helped develop a secured transactions law which allows small businesses, which often lack assets like real estate, to use their movable assets, including inventory, accounts receivable, and equipment, as collateral. As a result of the reform, a movable collateral registry was created. According to the financial sector regulator, since its launch in March 2018, lenders in Azerbaijan have filed notices to the registry for loan applications from 32,000 borrowers, including smaller businesses, enabling these businesses to obtain easier access to financing.
With advice from IFC, the government has also adopted a modern law on credit bureaus, enabling the creation of the country’s first private credit bureau in 2018. That has helped improve the quality and range of credit information, reducing financial institutions’ risks and facilitating more lending.
We have recently signed an agreement with Azerbaijan’s Bank Respublika to enable it to better manage its currency risk, helping ease access to local currency finance for local businesses and smaller firms, in particular. Under the terms of the agreement, IFC and Bank Respublika will execute cross-currency swap transactions that will allow the bank to hedge its USD-denominated funding and better manage its assets and liabilities. Through cross-currency swap transactions, the bank will improve access to long-term finance for its clients, helping local businesses grow and create jobs.
So, we’ve done a lot. However, much more can be done as now Azerbaijan is on the verge of a new era—an era of reforms. We know a vibrant private sector is crucial to economic growth, with firms making new investments, creating jobs, and improving productivity. While this is very much true for any country, it is particularly relevant for Azerbaijan, where creating conditions that will facilitate growth in non-oil sectors is now gaining more and more importance. So, finding new sources of growth for Azerbaijan is more important than ever before, as the new normal has created a completely new environment for the country’s economy.
Over the past decade, Azerbaijan has used its resource wealth well. Poverty has been reduced, the middle-class has grown, and the country has made progress on sharing prosperity among its population. However, in light of recent developments, especially low oil prices, countries in the region, including Azerbaijan, have to adjust to the new economic reality.
New sources of growth must be tapped into and we are glad to see the government recognizes this and is taking steps to not only diversify the economy but also have the private sector drive this diversification. Indeed, one of the key drivers to accelerating and sustaining progress is bringing the private sector to center-stage as the main driver of growth.
IFC is committed to continue supporting sustainable growth and the diversification of Azerbaijan’s economy by helping to mobilize the power of the private sector.
– While having a look to Azerbaijan’s new strategy regarding borrowing, what projects and new directions of cooperation are being discussed between IFC and Azerbaijan?
– Our country partnership framework, which covers fiscal years 2016-2020, sets out the World Bank Group strategy in Azerbaijan. Its aim is to help the country on its path toward sustainable, inclusive, and private sector-led growth.
As the private sector arm within the World Bank Group, focused on increasing the role of the private sector to drive growth, IFC works with Azerbaijan’s government to make it easier for companies to do business and invest in Azerbaijan’s non-oil economy. We support the government by bringing international expertise to the country in the areas of business regulation and investment policy and promotion, and we help enhance the competitiveness of the agricultural sector, a key source of jobs.
In response to increased government efforts to improve the business-enabling environment and make the country more attractive for FDI in the non-oil sector, IFC aims to continue supporting investment climate reforms.
In addition, we run an electronic and digital financial services project, which works to help boost financial inclusion by improving access to digital financial services for individuals and smaller businesses, helping them grow and create jobs. The project aims to help introduce modern e-banking services in the country, improving access to financial services for customers who find it difficult to access branch-based services by developing a legislative and regulatory base. It will also provide institutional and market support to help build an ecosystem conducive to the digitalization of financial services.
These advisory projects are funded by our donor partner—Switzerland’s State Secretariat for Economic Affairs (SECO).
IFC has been investing in the country for over two decades and we continue to explore opportunities for direct investments in private sector companies in the country, as well as to financial institutions for on-lending to small and medium enterprises.
Finally, IFC is committed to supporting the government in structuring pilot public-private partnership projects. We can help attract private investment through PPP transaction advisory support, as well as structure pre- and post-privatization investments, offering our vast global experience in structuring PPP projects in various sectors.
– Azerbaijan is taking certain steps to involve investors. What else does IFC offer for the acceleration of this process?
– There are several key factors that affect investors’ decision to invest in a foreign country, including political and economic stability, market size, the working of the judiciary—for example, on business disputes and the protection of property rights—a favorable business environment, a level playing field with other companies in the sector, the quality of economic infrastructure, and the availability of skilled or cheap labor.
It will be essential to secure macroeconomic and financial stability going forward. Azerbaijan needs to shift its policy towards FDI-led diversification polices, and it can do so by building its value proposition for more efficient investment through reforms to improve its policy, legal, regulatory and institutional framework for investment.
The value of FDI is not just about the capital it brings, but more importantly the productive knowledge that will enable local Azeri businesses to connect to the global economy.
No policy can achieve economic diversification in a short time period. There is always a need for a mix of macro policies that ensure an overarching business climate favorable to investment, and micro policies that allow firms in specific sectors to invest, take risks, innovate, improve their productivity, and access key markets.
Diversification means internationalization. Azerbaijan needs to upgrade its skills, standards, institutions and coordination mechanisms to promote Azeri businesses in the international economy.
While the domestic market in Azerbaijan is relatively small, the country needs to further improve its connectivity to European and Asian markets by expanding transport connections and liberalizing trade through a network of bilateral and multilateral free trade and investment agreements.
Efforts to improve legislation on foreign investments should be directed toward the creation of a legal system consistent with international standards. Implementation is equally important.
Azerbaijan needs to continue reforms aimed at the simplification of the regulatory framework for businesses and let market mechanisms work without bureaucratic interference.
Azerbaijan will also need to prioritize public investment in economic infrastructure to enable the development of sectors with the potential to become competitive and attract FDI. For example, in agribusiness, infrastructure such as production and storage facilities and logistics are typically developed by the private sector. But private investors would be unwilling to invest in the sector without good roads and irrigation.
The development of new competitive sectors will also need an improved labor force.
International financial institutions and development agencies play an important role in attracting FDIs in emerging markets and developing countries.
IFC, a member of the World Bank Group, in addition to its co-investments in FDI projects, provides a range of advisory services to governments, helping them attract, retain and maximize the benefits of foreign and domestic investment. And we are happy to provide advice to Azerbaijan’s government in those areas.