Abstract The purpose of this paper is to analyze the possibilities of the accumulation and mobilization of savings and their role in the economic development of Azerbaijan.
Currently, the national economic growth is mostly based on the resource component of the Azerbaijani economy, on crude oil, natural gas and oil products. For the development of the non-oil sector mobilization of domestic savings into investments would prove very useful. Savings of people in Azerbaijan will be the most important investment resource for the development of the non-oil sector, as the foreign capital is mostly involved in production of natural resources like oil and gas.
Attraction and encouragement of private investments is the key factor for this development. Most importantly, a number of determinants of savings are analyzed, as these determinants are the major forces that shape the economic situation of the country.
For the mobilization of savings of population into investment the major emphasis is given to the development of the broad network of intermediary financial organizations, such as banks, investment banks and funds, insurance companies, stock markets and pension funds. Mobilization of domestic savings is crucial for raising the economic growth and promoting development, as it is the private savings that affect significantly the domestic investments. The most of the savings is made when they are fully channeled into the productive investments.
As a result, this will lead to the solution of problems of the full employment and an economic growth.
Over the last three years the economy of Azerbaijan is developing at an accelerated pace, so that its growth rate is one of the highest in the world. The speedy growth of the economy is due to the existence of huge oil reserves and an increased production of oil. The increase of oil production has accelerated rapid growth of GDP as the oil sector accounted for over 50% in 2007 and 2008(Economy. http://www.traveldocs.com/az/economy.htm.)
Azerbaijan’s integration into the World Economy has intensified in recent years. 49.5 billion USD was invested into economy over the period of 1995- 2007, 70% of which were foreign investments. 80% of foreign investments are foreign direct investments (FDI). Most part of FDI – about 90% is made into the oil sector.
As it is obvious from the above data, incomes from production and sales of oil make up the significant part of GDP. For example, in 2007, mining and hydrocarbon industries accounted for well over 95% of the Azerbaijani economy and oil and oil products made about 98% of total export in the first half of 2009 year. Main export products of Azerbaijan are oil and oil products and the economy is not well diversified into manufacturing industries.
According to the new report of the International Monetary Fund (IMF) the economic growth in Azerbaijan will decrease due to the year by year reduction in oil production(IMF on Economic Growth of Azerbaijan. http://deyerler.org) Growth of investments in Azerbaijan is stipulated by availability of vast reserves of oil. As a result, along with a decrease of oil, inflow of investment resources will decrease and an economic growth rate will also be negatively affected.
Therefore, it is vitally important for Azerbaijan on this stage of development when the country receives vast amounts of income to develop the non-oil sector of the economy and launch production of goods having potential to provide the country with additional incomes. To solve the problem of the development is very important to stimulate the real sector of the national production. The sustainability of development of Azerbaijan will depend on its ability to save and invest in productive enterprises. Entrepreneurs organizing the production of goods which could compete with imported goods should be supported by all means.
Steady and long lasting growth can also be ensured on account of production of competitive goods and application of new technologies. This requires an increase of investments into the real sector of the economy. The state support of direct investments could create favorable investment climate for provision of development of production of goods and services.
For the development of the production of competitive goods it is necessary to attract investments from domestic sources. The investments into the economy of the Republic of Azerbaijan and their development will contribute to an increase of the production potential of the economy. In the literature there is a wide support of the positive influence of attraction of domestic sources of financing on the level of investments and on the economic growth. Realization of an objective of a steady economic growth and development will be difficult without attraction of savings and investments.
In this paper we consider the role of savings in economic development of Azerbaijan and the possibility of a stimulation of an accumulation of savings and their subsequent use in the development of investment projects. The importance of this topic is determined by the need of creation of the appropriate conditions for subsequent development of the economy on account of domestic sources not only on account of foreign sources. The remainder of this paper is organized as follows. Section 2 describes the situation with domestic savings and their importance in the economic growth. Section 3 gives an analysis the some of the determinants of savings in Azerbaijan. The fourth section emphasizes on the significance of transformation of savings into investments and the role of financial institutions. Paper’s last section draws conclusions and suggests avenues for future work.
Situation with domestic savings in Azerbaijan
As it is known in the long-run the level of investments in national economy closely correlates with the level of national savings. Savings of population are integral part of the economic system. The existence of savings increases the possibility of the future development. The savings of the population in Azerbaijan will be the most important investment resource for the development of the real sector (agriculture and manufacturing), because foreign capital is mostly invested in production of natural resources like oil and gas. It is of vital importance for the state to mobilize savings of people into the economy. Due to this, the state will be less dependent on foreign investments and the domestic investments accumulated due to the savings of people will provide better stability of the country. This in the long run could contribute to economic growth and development (Surina P.A. 2007).
For maintaining a stable growth rate in the economy of Azerbaijan it will be necessary to increase investments by means of domestic resources. The amount of domestic savings could serve well for this purpose. Currently the ratio of savings of attracted from population to GDP in Azerbaijan equals to 5%, which is not considered to be an optimal level. In the table below it is seen that the Saving/GSP ratio over the last years does not exceeds 5%.
Table 1: Savings attracted from population's (in thousands AZN)
Savings attracted from population's
Source: State statistical committee of Republic of Azerbaijan
(1 Euro = 1.14 AZN)
According to the estimations of the Standard & Poor's Ratings Services the level of the per capita deposits in Azerbaijan equals to $561. This reflects insufficiently strong market positions of the banking sector, the low level of well-being and savings (Standard & Poor’s, 2008). It is common knowledge that, the savings of the population are closely connected to their well-being and are the main source of investment resources. There is a general consensus on the positive role of investments in acceleration of an economic growth and that high level of saving leads to high level of investments. The largest share of financing for development has to come from domestic resources. The level of financing of an economic growth in the republic largely will be determined by the level of savings of population. The majority of the countries are more likely to finance the most part of their investment out of national savings instead of using the international movements of the capital (Obstfeld M., Rogoff K. 2000). In other words, the most important factor for a country's investment is indeed its own savings.
Today’s savings are future investments. The situation with savings and investments in Azerbaijan is such that the ratio of investment to GDP is higher than the ratio of savings to GDP. Large investments in Azerbaijan are realized on account of the state financial resources not the private ones. The role of savings of population in investments activities currently in Azerbaijan is not great. In developed countries savings of population attracted through the banking system and the capital markets are the important sources of financing of the economic growth. By conducting the necessary policies the government should create the required conditions for the growth of savings of population.
Determinants of Savings
The issue of increasing of savings is of great importance for maintaining of the economic growth and development.
“The growth of output of any economy depends on capital accumulation, and capital accumulation requires investment and an equivalent amount of saving to match it. Two of the most important issues in development economics, and for developing countries, are how to stimulate investment, and how to bring about an increase in the level of saving to fund increased investment.”(Anthony Thirlwall. 2002, page 7) Identifying the factors determining savings, as well as factors positively influencing attraction of investments is a major policy challenge for all countries (Zhou Xiaochuan. 2009)
The main emphasis in the analysis below is given to the determinants of savings of people. The income level is considered as the main determining factor of savings, but this is not the only factor affecting the savings. Other factors are the level of interest rates and the age structure of population.
“Both theoretical and empirical work on savings, have consistently outlined the major potential determinants of savings that can be grouped loosely under the headings of government policy variables, financial variables, income and growth variables, demographic variables, financial variables, uncertainty measures, and external variables.” (Metin K., Asli O., Ertac S. 2003, page 1409).
“Understanding the motivation for saving (at the level of individuals and for the community as a whole) is not only of academic interest but also important in terms of its policy implications. Identifying the key determinants of saving may help policy makers to design policies to stimulate domestic savings and thus domestic investment.” (Economic Survey of Europe, 2001 No.1. page 177)
Expectations of people regarding the future economic situation are also important factors because they can affect the current expenditures and savings. The study and the analysis of the determinants of savings will enable to forecast the tendencies in accumulation of financial resources by population and will also help to develop an efficient mechanism of transformation of savings into investments.
As it is stated above incomes of people is considered as the main determinant of the savings. According to state statistical data population’s income is increasing. Per capita income of population increased by over 3 times within the last 5 years: from $641 USD to $2,000 USD. Average monthly wage in the country increased by about 4 times in this period and reached $252 USD. According to forecasts of the Ministry of Economic Development, these indicators will reach $4,500 USD and $657 USD in next four years respectively.
Incomes of population according to the forecasting made by government agencies in 2009 will increase by 22.5 % and will amount to 22.77 billion manats. In 2009 the largest share of income of population will be formed due to entrepreneurial activities. In 2009 entrepreneurial income will amount to 11.3 billion manats which will make 49.6% of total incomes. The second largest share income will be due to wages and salaries. According to the forecasting wages and salaries will amount to 7.4 billion mantas, which is 32.8% of all incomes. According to the same forecasting expenditures will be equal to 18.1 billion manats, which is less than revenues by 20.3%. Amount of savings according to the same forecasting will be equal to 4628 million manats(Khankishiyeva. E. 2009).
So, according to the forecasts incomes of population will be higher in comparison with the previous year. The level of incomes directly influences the amount of savings, and also increases the propensity to save. Increase of incomes of households will lead to an increase of an investment potential of the republic of Azerbaijan. Increase of the size of an income will be accompanied by even higher increase of savings. Savings of people as one of the indicators of living standard depend on the well-being of population.
Encouragement of an increase of interest of population in investing of savings can be realized also through the taxation. “Several studies have shown that tax policy has a positive influence on the real sector and is an important tool not only for stabilization but also for promoting saving and capital.”(Peter V, Peter R. 2006, page 36). As the most developed countries practice tax stimulation of savings tax incentives for domestic investors should be actively used. It is necessary to introduce in Azerbaijan the appropriate model of taxation based on benefits on incomes that people receive from investments. Types of benefits are tax discount on installments in investment funds and special non-taxed savings accounts. Introduction of special banking accounts which would allow people to deposit some amount of money without taxation of accrued interests within the first several years is one of methods of tax stimulation of increase of savings.
Demographic variables are considered important as a determinant of household savings. The population structure affects saving behavior of people.
“In the basic life-cycle model, the age distribution of households has an effect on the aggregate personal savings rate because the savings rates of individuals are assumed to vary with their age. An increase in the proportion of elderly households in the population is expected to reduce the aggregate savings rate because retired households are assumed to dissave, or at least save less than those of working age. Similarly, an increase in the proportion of the population that is of pre-working age is also expected to reduce the aggregate personal savings rate as parents spend a large proportion of their income on taking care of their children.” (Bérubé G, Côté D. 2000, page 5)
According to the age structure of population of Azerbaijan 23.9% of population is 0-14 years old, 69.4% is 15-64 years old and 6.7% is 65 years or older. Median age of population equals to 27.7 years. According to the State Statistical Committee of Azerbaijan Republic out of 8.6 million of people 5.8 million are at working age. 2.9 millions are in the category of 1-19 years old and 0.6 millions in the category of 65 and over. The population factor for the development of the savings is favorable, as population is young and the majority in working age. The number of the younger generation prevails the older generation. Young, energetic and growing population predetermines the long-run economic growth. This factor increases the potential of an economy for growth and contributes to an increase of aggregate saving in the country.
Importance of financial institutions
The problem of transformation of savings into investments has a special significance for the development of the republic of Azerbaijan. Redistribution of financial resources from those who own to those who need is essential for the economy. Traditionally the households accumulate financial resources and businesses need these resources. Thus, savings and investments are interrelated.
In order to transform savings into investments, savings should be attracted by financial institutions. The process of transformation of savings into investment can be carried out by financial markets and by financial intermediaries. Mobilization of savings of population by financial intermediaries is the most important type of relevant banking operations. Commercial banks play a key role in transformation of savings to investments. They attract savings of people and ensure economic growth of the country.
Mobilization of savings of the population into the economy can be realized with the help of the banking system and other institutions of financial sector. For the people in order to deposit their savings in bank accounts, it is necessary to apply more widely such mechanisms as payment through banks for various kinds of services and the goods, transfer of wages and salaries to current accounts of individuals. It is also necessary to use mechanisms of commercial banks for realization of programs of stimulation of a consumer demand and acceleration of activity of non-bank organizations working with the savings of the people (Lopintsev A. Stocking Economy, 2008). Financial interrelations of people with other sectors of the economy depend on the level of the development of financial institutions and mechanisms that ensure the realization of saving and investment potential of people.
Encouragement of transformation of savings of people into the investment should be carried out by way of the development of system of insurances of investment of individuals. It is also necessary to develop a more efficient mechanism of guarantees and protection of deposits of people which will increase the confidence to the banking system. The use of insurance mechanisms for the transformation of savings into investments is of great practical importance. The solution to the problem of the low trust of people to banking system is to increase the amount of insured deposits. Amount of deposits insured by the state in Azerbaijan until recently were equal to 8,000 AZN ($9,900 USD), but starting from May, 2009 the amount equals to 30,000 AZN ($37,000 USD)(The Law on “Deposit Insurance” of the Azerbaijan Republic, 2009). The measures taken on protection of the rights and legitimate interests of insured people increase the financial stability of the insurance organizations and confidence of people to the financial institutions.
The development of an institution of nonbanking financial intermediaries in Azerbaijan could be a positive factor in accumulation and in attraction of savings of population. Nonbank financial institutions play an important role in accumulation and mobilization of savings. These financial institutions are insurance companies, pension funds, savings and loans associations, investment and financial companies, and credit unions which could transform the savings of population into investments. These institutions are indispensable suppliers of loan capital. Specialized nonbanking institutions unlike banks accumulate financial savings for sufficiently long periods and therefore make long-term investments. The main forms of activities of these institutions are accumulation of savings of people, granting credits by means of issuing bonds, mobilization of capital and granting mortgage and consumer loans. Non-banking financial and credit institutions also play an important role in market of loans capital and also in credit system of developed countries. Expansion of nonbanking segment of financial market by way of introducing new financial instruments will stir up investment activities of people.
“Azerbaijan's financial system is not fully developed but is growing rapidly. Availability of long-term financial instruments remains limited, providing virtually no viable domestic savings options other than bank accounts. The market for state and corporate bonds remains small and illiquid.” (2009 Index of Economic Freedom)
Development of securities market in Azerbaijan can be useful in transformation of savings into investments. Securities markets are indispensable for the stability of financial markets. Development of stock exchanges is also conducive to an efficient transformation of savings into investments due to the fact that by trading securities stock exchanges can concentrate large amount of capitals which are used for the development of productions. Weaknesses in the regulatory and supervisory framework, deficiencies in market architecture and infrastructure, insufficient development of equity markets are the main impediments of the development of capital markets in Azerbaijan (Project Information Document, 2008). The lack of investment interest of people in investment institutions is caused by the lack of development of the infrastructure of the market of securities, its informational non-transparency, illiquidity of the most of securities, and lack of knowledge in investments issues. The policy of the regulation of securities first of all should be aimed to the development of its investment potential, to the system of attraction of investment resources and to the attraction of private investments.
For the development of securities market, companies and enterprises in Azerbaijan should work hard on the improvement of their corporate governance practices. Good corporate governance is pivotal for the integrity of corporations, financial institutions and markets, and essential to the health of economies and their stability (OECD Principles of Corporate Governance. http://www.oecd.org). “Corporate governance has become an important topic in transition economies in recent years. Good corporate governance helps to increase share price and makes it easier to obtain capital. International investors are hesitant to lend money or buy shares in a corporation that does not subscribe to good corporate governance principles.” (McGee R., Bose S., 2008, page1).
The World Bank has conducted a number of studies on corporate governance practices in various countries all over the world including Azerbaijan. Classifications of the extent of the observance of various corporate governance practices into five categories were as follows: observed, largely observed, partially observed, materially not observed, not observed. The World Bank studies evaluated various corporate governance practices in Azerbaijan and made relevant conclusions: basic shareholder rights are only partially observed; participation rights, market for corporate control equitable treatment of shareholders, disclosure standards, accounting & audit standards and independent audits are materially not observed; disclosure of interests, access to information are not observed (McGee R., Bose S., 2008). As it is clear the situation with the corporate governance in Azerbaijan is not favorable and a lot has to be improved in this issue.
In conclusion it is necessary to say that to sustain economic growth it is necessary to ensure macroeconomic stability and develop strong financial institutions and fund market to provide accumulation and transformation of savings into investments. “The private savings ratio tends to increase along with the development of the financial system.” (Koskela E., Viren M. 1983 page 117). Strong financial institutions facilitate the flow of funds from savings to investments. Even if savings is high in the country without developed capital markets and financial intermediaries there will be no use as they could not be channeled into investments. On the other hand, insufficient development of the system of financial intermediaries lowers the rate of growth of the economy and can render inexpedient the mobilization of savings.
Policy makers should focus on increasing of the level of domestic private savings because the burning problem for developing countries is a lack of investments which restricts economic growth. Savings of people serve are the basis of investment resources of the country and are essential for development and growth. By channeling savings into the economy through investments the country becomes more economically developed. Increase of the savings will lead to the capital accumulation and capital accumulation will lead to the economic growth. High level of domestic savings will serve to the solution of the problems of the unemployment and the development of entrepreneurship and can positively influence the rate of the economic development. Under a strong financial system the level of savings can be a reliable gauge of the economic development of the country. ”The experience during a decade of economic transformation provides convincing evidence that the most successful transition economies have been those where the economic environment stimulated savings…” (Financing Growth and Development in the Transition Economies: The Role of Domestic Savings., 2000)
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