Azerbaijan’s economy is expected to be adversely affected by COVID-19 pandemic in 2020. The real gross domestic product (GDP) of Azerbaijan is expected to shrink, unemployment level to increase and current account balance to show negative growth due to COVID-19 this year. As of 15^th June 2020, Azerbaijan had 9957 confirmed COVID-19 cases out of which 5583 people have recovered from the disease while 119 have lost their lives.

In this blog post we will be focusing on economic impact of COVID-19 pandemic on Azerbaijan. We will also be taking a look at the social, fiscal, monetary and employment related policy measured taken by Azerbaijan government under following sections –

1. Impact of COVID-19 on Azerbaijan Economy in 2020

2. Coronavirus (COVID-19) Containment Measures of Azerbaijan

3. COVID-19 Related Fiscal Policy Measures by Azerbaijan

4. COVID-19 Related Monetary Policy Measures by Azerbaijan

5. COVID-19 Related Employment Policy Measures by Azerbaijan

6. COVID-19 Related Social Policy Measures by Azerbaijan

We have covered various macroeconomic factors and PESTLE (political, economic, social, technological, legal, and environmental), SWOT (Strengths, Weaknesses, Opportunities and Threats) and risk analysis for Azerbaijan in separate market research reports.

1. Impact of COVID-19 on Azerbaijan Economy in 2020

Azerbaijan’s real gross domestic product (GDP) was AZN 29.826 billion in 2019 and due to COVID-19 outbreak it is estimated to shrink by 2.184% to be around AZN 29.175 billion in 2020.

Azerbaijan’s unemployment rate was 4.971% of total labor force in 2019. Due to slowdown in global economic activity due to COVID-19 pandemic the unemployment is expected to increase by 0.44% and reach 4.993% in 2020. Unemployment is further estimated to decrease in 2021 by 0.14% and reach 4.986% of total labor force in Azerbaijan.

Azerbaijan’s current account balance has remained constantly positive since 2017. It is expected to decrease it’s current account balance in 2020 to -8.249% of GDP from 9.232% of GDP in 2019. This means Azerbaijan will become net borrower from rest of the world in 2020 despite being net lender in 2019.

As of 04^th May 2020, the Azerbaijan government has taken following fiscal, monetary, employment and social policy measures to contain coronavirus (COVID-19) pandemic.

2. Coronavirus (COVID-19) Containment Measures of Azerbaijan

Quarantine/Confinement

To contain the spread of COVID-19, the authorities have introduced a special quarantine regime that included border closures, required quarantine of returning citizens, prohibition of mass gatherings, restriction on domestic movements; closure of restaurants and some other public facilities, airports, and transportation hubs; social distancing, and disinfection of public spaces. The COVID-19 Operational Headquarters has been created under the Cabinet of Ministers, and working groups under the leadership of the Minister of Economy, Minister of Finance, Minister of Labor and Social Protection of the Population and Chairman of Central Bank of Azerbaijan have been tasked with developing specific measures in order to reduce the negative impact of the pandemic on the country's business environment.

3. Coronavirus (COVID-19) Related Fiscal Policy Measures by Azerbaijan

The COVID-19 Operational Headquarters has been created under the Cabinet of Ministers, and working groups under the leadership of the Minister of Economy, Minister of Finance, Minister of Labor and Social Protection of the Population and Chairman of Central Bank of Azerbaijan have been tasked with developing specific measures in order to reduce the negative impact of the pandemic on the country's business environment.

The package of proposals submitted to the Parliament of Azerbaijan envisages the application of several tax benefits and tax holidays to the industries directly affected by the pandemic, which are listed as follows:

• Activities of hotels and other hotel-type facilities that are considered accommodation facilities
• Tour operator and travel agent activities
• Public Catering activities
• Domestic (inter-city and inter-district, intra-city and intra-district) passenger transport by road (including by taxi)
• Transportation and (or) delivery of goods on order, including food, food and non-food items from sellers to buyers
• Organization of exhibitions, stage, recreation and entertainment (game), cinema, theater, museum and concert halls
• Activities of sports and health facilities
• Activities of training (education) and professional development courses, out-of-school educational institutions, psychological centers
• Other activities that are fully or partially restricted by the Cabinet of Ministers in order to ensure the health and safety of the population in connection with the spread of the coronavirus pandemic.

The above-mentioned sectors will be provided with the following benefits:

• Taxpayers will be provided with exemption from property and land taxes for a period of 1 year from 1 January 2020
• Depending on the method of taxation chosen, taxpayers will be provided with several tax benefits for a period of 1 year from January 1, 2020
• For payers of corporate income tax (profit tax), it is planned to provide tax benefits in the amount of 75% of the profits
• For taxpayers engaged in public catering and passenger transportation, which are payers of the simplified tax, It is planned to provide a 50% discount on the simplified tax amount
• Public catering - 4% instead of current rate of 8%
• Passenger transportation (except taxi) - for each seat - 0.9 AZN  instead of current rate of 1.8 AZN
• Passenger transportation (taxi) - for each seat 4.5 AZN instead of current rate of  9 AZN

Furthermore, the following measures  are  envisaged  in order to reduce the tax and administrative burden on taxpayers:

• Reduction of the WHT rate on real estate lease from individuals from 14% to 7%
• Exemption from current tax payments and issuance of certificates related to current tax payments for a period of 1 year
• Extension of the deadline for payment of the taxes for 2019 until September 1, 2020
• Extension of the deadline for payment of income and property taxes for 2019 by non-micro-taxpayers until September 1, 2020
• Postponement of calculation of interest on unpaid taxes, compulsory state social insurance and unemployment insurance premiums from April 1, 2020 to January 1, 2021
• Extension of the right to choose the simplified tax method for 2020 by persons engaged in public catering activities registered for VAT from April 20 to September 1

For micro entrepreneurs

• 50% discount on simplified tax (tax rate is reduced from 2% to 1%)
• Provision of extension of deadlines for submission of simplified tax returns for the 1st and 2nd quarters of 2020 and reports on profit and property taxes as well as payment of accrued tax to the budget until September 1 of the current year.

For all entrepreneurs

• Expenditures on necessary preventive measures, including disinfection, carried out by the taxpayer in order to prevent the epidemic and protect the life and health of the population shall be deductible without any restrictions
• Temporary exemption from VAT of certain types of products necessary for food and medical needs of the population.  The import of medical equipment and medical accessories necessary for the fight against the pandemic, as well as certain types of food to meet the food needs of the population, including food for children, will be exempted from VAT temporarily.

4. Coronavirus (COVID-19) Related Monetary Policy Measures by Azerbaijan

• 2.5 billion AZN (approximately 1.471 billion USD), which is equal to 3% of GDP,  has been allocated from the State budget to the Cabinet of Ministers for financing the measures on reducing the negative impact caused by COVID-19 as well as subsequent fluctuations in the global energy and stock markets on the economy, macroeconomic stability, employment issues and businesses in the country.
• 97 million AZN (approximately 57 million USD) has been allocated to the State Agency for Compulsory Medical Insurance from the reserve fund of the President of the Republic of Azerbaijan for the supply of necessary medical equipment and other medical means in order to prevent the spread of the coronavirus pandemic and strengthen the fight against it.
• The President of the Republic of Azerbaijan has created a Fund to Support Fight against Coronavirus (Fund), to which it has transferred 20 million AZN (around 12 million USD), with additional contributions from the public and private sectors. As of 22^nd April 2020, according to the Fund’s website, the donations transferred to Fund amounted to 112, 898,697 AZN (around 67 million USD).
• Azerbaijan's government has provided $5 million to the COVID-19 Fund as part of the WHO’s Strategic Preparedness and Response Plan.
• The authorities have extended the blanket deposit guarantee until December 4, 2020. The guarantee covers all AZN (foreign currency) deposits within a 10 (2½) percent interest rate cap.
• On 19^th March 2020, the Central Bank of Azerbaijan left the refinancing rate unchanged at 7¼ percent but raised the floor of the interest rate corridor (within a de facto floor system) by 125 bps to 6¾ percent.
• The Central bank of Azerbaijan, with the participation of the State Oil Fund, has conducted scheduled and extraordinary foreign exchange auctions, and has satisfied all demands for foreign currency at the announced 1.7 AZN/USD rate.

State loan and guarantee in the support of the economy and businesses

Credit-guarantee support program for loans in the amount of 0.5 billion AZN (294.1 million USD) to be issued to businesses (including small and medium enterprises) operating in areas negatively affected by the pandemic envisaging the implementation of the following measures:

• state guarantee for 60% for new loans in the amount of 500 million AZN (294.1 million USD);
• subsidizing 50% of the interest on guaranteed loans from the state budget;
• establishment of a mechanism for providing unsecured microloans in the agricultural sector by the Agrarian Credit and Development Agency. In this direction 30 million AZN (12 million USD) have been allocated.

Additionally, allocation of additional funds to the Entrepreneurship Development Fund in the amount of 50 million AZN (29.4 million USD) is planned in April-May 2020.

The program will also support entrepreneurs with the existing loan portfolios who work in the coronavirus affected sectors. The government will subsidize 10% of the interest expenses of these loans for one year and for this purpose 1 billion AZN (588 million USD) were allocated.

Reducing the regulatory burden on banks

In order to stimulate non-cash payment services and reduce costs, given the decrease in economic activity and income of businesses and households, as well as the negative impact on indicators of the use of payment services till September 30, 2020

• reduction of service fees charged by banks in interbank payment systems up to 50% till September 3, 2020,
• in a similar manner, decrease of tariffs for payment services provided to customers by banks,
• reduction of acquiring fee up to 50% till September 3, 2020 to reduce cost of acceptance of payments with cards by business entities.

Support of participants of capital markets

Baku Stock Exchange will not charge tariffs to issuers of corporate bond until January 1, 2021 and minimize the number of documents required for placing securities by the mass offer method.

5. Coronavirus (COVID-19) Related Employment Policy Measures by Azerbaijan

In order to reduce the social insurance burden, it is proposed to change the rates of mandatory social insurance contributions for persons deriving income from non-employment activities:

For insured persons deriving income from non-employment activities

• Calculation of mandatory state social insurance premium from April 1, 2020 to January 1, 2021, by the amount of the minimum monthly salary for entrepreneurial activity (taking into account the application of differential interest rates by region)
  • 25% in construction and trade
  • 15% in other areas.
• Calculation of mandatory state social insurance contributions from January 1, 2021 to January 1, 2026 in the amount of minimum monthly salary * (taking into account the application of differential coefficients by regions):
  • 50% in the field of construction
  • 25% in other areas.

Agriculture sector

Mandatory state social insurance contributions for each family member of individuals using agricultural lands owned by them, depending on the area of land calculated by the amount of the minimum monthly wage (250 AZN):

• up to 5 hectares - in the amount of 2%;
• from 5 to 10 hectares - in the amount of 6%;
• more than 10 hectares - in the amount of 10%.

It is also planned to replace the submission of social insurance reports by landowners with a fixed receipt.

6. Coronavirus (COVID-19) Related Social Policy Measures by Azerbaijan

The following actions are among the measures implemented to support for economic growth and entrepreneurship during Coronavirus (COVID-19) pandemic:

• Financial support program in the amount of 215 million AZN (126.5 million USD) for the payment of salaries to 300,000 wage earners in the spheres affected because of pandemic (aimed at preventing job cuts)
• Financial support program in the amount of 80 million AZN (47 million USD) for 300,000 individual (micro) entrepreneurs working in the sectors negatively affected because of pandemic (aimed at safeguarding employment). The program was applied to the taxpayers who made tax, compulsory state social insurance and unemployment insurance payments in 2019.
• It should be also noted that, above-mentioned financial support programs were aimed at redressing damage to entrepreneurs and the payment of salaries in the sectors of the Azerbaijani economy (20 areas of activity) affected by Coronavirus (COVID-19) pandemic.

Support to individuals and business entities

Private business entities, including individuals engaged in entrepreneurship will be provided with the opportunity to restructure loans (of satisfactory quality, and with interests subsidized by the state) issued to them till March 1, 2020, without deteriorating their quality.

Also, it’s envisioned to create possibility for restructuring business loans issued with the means of state funds and having satisfactory quality as of March 1, 2020. as well as the restructuring of mortgage loans issued with the means of Azerbaijan’s Mortgage and Credit Guarantee Fund in order to support individuals (not engaged in entrepreneurial activity).

Furthermore, in case of full or partial delay in business and consumer loans (principal or interest-bearing debt), credit organizations will be advised not to levy a fine, penalty and other payments from the borrowers and not worsen their' credit history until September 30, 2020.

Source – With inputs from Organisation for Economic Co-operation and Development (OECD), International Monetary Fund, World Bank, International Labour Organization (ILO) and Government of Azerbaijan