ADB recommends Azerbaijan to create agency for overseeing SOEs

Azerbaijan’s establishment of a new agency for overseeing SOEs would allow the regulation of their debt obligations and limit the government’s burdens from their debt services, reads a final report by the Asian Development Bank (ADB) on “Improving Governance and Public Sector Efficiency Program (Subprogram 2),” Report informs.

“The introduction of the financial tools and mechanisms for control of public funds allowed for a drastic reduction in the level of mismanagement of funds as well as a decrease in the burden of debt obligations,” reads the report.

Since SOEs operate in strategic sectors, the government recognizes their special financial needs and provides budget support when adverse events occur. For example, when the International Bank of Azerbaijan defaulted on its nonguaranteed bonds, the government intervened to move the bank’s bad debts off its balance sheet, the ADB noted.

In this regard, target is not likely to be fully achieved since most state enterprises shut down their activities while retaining staff, increasing the financial burden. However, the underlying pre-crisis trends support the fulfillment of this outcome indicator: for instance, the country partnership strategy for Azerbaijan, 2019–2023 also envisaged fiscal outlays to SOEs to be reduced by at least 0.2 percentage points by 2022 which is in line with the quantitative targets of the outcome indicator in the DMF for subprogram 2.

“Furthermore, even though general government expenditures spiked from 33.3 percent of GDP in 2019 to 40.4 percent of GDP in 2020, they are forecast to decline in 2021 and return to pre-crisis levels by 2026, suggesting a gradual curtailment of fiscal outlays that were launched in response to the pandemic,” reads the report.

Under the program, Azerbaijan was able to build its Debt Management and Financial Analysis System. The main goal of the system was to ensure more efficient public debt management for sustainable economic growth, good governance, and poverty reduction as well as the creation of a better reporting system. The project provides for the permanent in-house use of the software by the Ministry of Finance and appropriate training for the ministry’s staff, according to the report.

Improving Governance and Public Sector Efficiency Program consists of two subprograms aimed at improving public sector governance and diversifying the economy through increased private sector participation at the expense of greater access to finance and a better business environment. The Azerbaijani government, by reforming the legal and institutional spheres, also contributes to the improvement of the business environment, access to finance for small and medium-sized enterprises (SMEs).

The cost of the program was estimated at $500 million with a period of implementation in 2018–2019.