Agricultural sector needs private investments to realize its potential

Agricultural sector needs private investments to realize its potential

By Gulgiz Dadashova

Azerbaijan's government currently pursues a policy aimed at economic diversification, capitalizing upon the country's non-oil wealth. Experts agree that favorable soil and climatic conditions, relatively cheap labor and access to rail transport turn the agricultural sector into a major priority of the domestic non-oil economy.

More than half of the Azerbaijani population lives in the regions and agriculture has the largest share of employment, as 38 percent of the population is employed in this sector, which enjoys extensive assistance of the government.

The establishment of agro-parks, the specialization of areas on production of agricultural goods, and introduction of information technologies in the process of production of agricultural produce have been defined as the highlights of the state policy on the development of the agricultural sector in the fast-growing South Caucasus republic.

However, the agriculture sector is not strong enough to attract necessary financial resources for development despite the state support.

Currently, mainly universal banks provide banking services to the agriculture sector in Azerbaijan. Different models are applied in the world to increase support of the financial sector to agriculture, with different combinations of public and private presence.

Expert at the Support for Economic Initiatives Public Union Samir Aliyev said that in the non-oil economy the agricultural sector has the greatest potential for development and economic diversification.

But the sector needs to attract financial resources to ensure the required level of development.

According to Aliyev, the main obstacle here is that commercial banks are not interested in lending to the agricultural sector, which is evidenced by the low proportion of the agricultural sector in the total loan portfolio of banks.

Currently, only 5 percent (671 million manats a year) of the loan portfolio of the banks operating in Azerbaijan accounted for the agricultural sector, while the share of consumer loans is 37 percent.

The banks apparently lack interest in agriculture due to high risks and beware of losing their money. The banks often are not interested in lending to farmers, because they have nothing except land and investments, which do not pay off immediately in this sector.

For example, Aliyev said, one should wait several years for the wine-growing crop to yield. In case a loan is received, it must be paid the next month. Therefore, entrepreneurs working in the agricultural sector often face challenges related to the repayment of loans.

The expert offers several measures to ensure the interest of the banks in agriculture funding, including establishment of a guarantee fund. Such a fund may provide guarantees to banks by paying compensation in case of potential problems with the repayment of loans.

Also, mechanisms of insurance in the agricultural sector can be considered here. For example, crop farmers are insured against floods and fires in Azerbaijan. But due to certain problems crop at all cannot be produced, otherwise, prices could fall sharply. Farmers need insurance against such situations.

The potential of the Azerbaijani agricultural insurance market is estimated at 100 million manats (about $127 million). The market could grow by at least 20-30 percent, as a new field of activity will emerge after the new law on "Insurance of agriculture" is passed.

In this regard, the Azerbaijani Finance Ministry has reached a preliminary agreement with the International Finance Corporation (IFC) and the Swiss State Secretariat for Economic Affairs (SECO) to implement a project on applying an international model of agricultural insurance by adjusting it to the requirements of the Azerbaijani market.

Finally, the creation of a specialized agricultural bank in Azerbaijan would be a way out in this regard. The bank should specifically engage in lending and the development of the agricultural sector.

Earlier discussions were held on setting up such a bank on the basis of Agrarcredit organization or a separate bank in Azerbaijan. The Azerbaijani government conducted consultationswith the World Bank, the IFC, EBRD and other international financial institutions, but no result has been achieved so far.

Agrarcredit's main shareholder is the Finance Ministry, which owns 99.9 percent of shares in the credit organization, while the rest is divided equally between Azersigorta state insurance company and Irrigation and Water Management.

Expert Ogtay Haqverdiyev, in turn, believes that to ensure the interests of the banks it is necessary to set up large agricultural farms. Large farms will have equipment, large livestock farms, etc., that is, they will turn into major agricultural enterprises that the banks will be interested to work with.

The government has already created several large agricultural enterprises. New companies have all the necessary equipment and there is a high yield. The creation of specialized farms on viticulture, grain, cotton growing and other fields would be the next step in this regard.

Haqverdiyev believes it is necessary to create specialized enterprises as farms engaged in all types of agricultural activity are not effective.

"The state, based on the example of established businesses shows how you can create civilized farms with high yields. This practice will give an impetus to the development of the agricultural sector in our country. Tourism can be an example to see that governmental intervention leads to positive change. Tourism development has been the private sector worldwide. Due to the fact that in the private sector tourism in Azerbaijan is not developed, the state began to build major tourist destinations, especially in the north and the south (of the country). Once the infrastructure for tourism was created, the private sector began to build hotels and small tourism centres," Haqverdiyev said, noting the need to develop the agriculture sector in a similar scenario.

Experts assure that if the above-mentioned issues are resolved, the agricultural sector will receive the necessary funding.

Currently, 871,220 rural farms and households, 2,343 agricultural enterprises, 2,593 farms of individual entrepreneurs, and 531 ventures processing agricultural products operate in Azerbaijan.

The State Statistics Committee reported that in January-July 2013, the volume of agricultural production in the real prices amounted to 2.123 billion manats, increasing by 4.9 percent in comparison with the same period of 2012.

The growth of crop production amounted to 4.5 percent and that of the livestock production made up 5.1 percent.

About 587.2 million manats were allocated in subsidies in Azerbaijan under the state support to agricultural producers in 2003-2013.

The amount of funds allocated from the state budget to the agriculture sector reached a record high of 468.2 million manats ($596.4 million) in 2012, compared to 444.7 million manats (nearly $566.5 million) in 2011.

The development of the agriculture sector, which is measured in terms of food security, is one of the main directions of the "Azerbaijan 2020: Vision of the Future" Development Concept.

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