1. Implementation of the 2008 System of National Accounts in Azerbaijan and some challenges of FISIM estimation Author: Nuru Suleymanov State Statistics Committee of the Republic of Azerbaijan Geneva, 5 – 9 May, 2014

2. I.INTRODUCTION The State Statistics Committee (SSC) of the Republic of Azerbaijan began the work on the study and implementation of the provisions of the 2008 SNA in 2009. In April 2009, an action plan was drafted and approved to improve national accounts indicators for 2009–2011, which aimed to fill gaps in implementing the 1993 SNA, improve basic statistics and price indices used for producing SNA indicators and establish a methodology and database for implementing the recommendations of the 2008 SNA.

3.  Improving FISIM calculations;  Improving the calculation on insurance services;  Improving the calculation of consumption of fixed capital;  Improving sectoral accounts, consistent with the 2008 SNA;  Output of the informal sector and illegal activities;  Implementation of NACE rev.2;  Recording expenditures on research and development in the SNA;  Recording military expenditures in the SNA;  Output of the Central Bank The following issues were identified as priorities for the first stage of implementation of the 2008 SNA:

4. II. Activities on implementation of the 2008 System of National Accounts in Azerbaijan  Studying the main changes to the 2008 SNA and its implementation within the State Statistics Committee of the Republic of Azerbaijan is part of a three-year plan for implementing the 2008 SNA with the scope of improving National Accounts statistics;  Action plans are approved by the decisions of the Board of the Committee in order to involve all departments whose participation is necessary for the implementation of the plan;

5. …….continued  So far, the first three-year plan covering 2009-2011 has been successfully completed and work is nearing completion on the next action plan (2012-2014);  In order to work more closely with other government agencies that produce statistical and administrative data, activities for implementing the 2008 SNA are also included in the “State Program on development of official statistics in the Republic of Azerbaijan 2013-2017”;  The State Program was approved by the President of the Republic of Azerbaijan.

6. Main achievements in the field of the 2008 SNA implementation  The modification of existing and introduction of new forms of statistical questionnaires;  The improvement of worksheets for the calculation of SNA indicators and quality of basic statistics;  The implementation of a new classification of economic activities;  Formation of the necessary base for restating SNA;  Amendments to the statistical questionnaires for improvement of FISIM estimates;  Closer cooperation was organized with the Central Bank and an agreement was signed to provide detailed consolidated balance sheets of the banking sector and other necessary information;  Was analyzed the European experience In order to evaluate illegal activity;  Was developed experimental estimates of the output of the central bank, military expenses, R&D output and its allocation, and improved the sector accounts to reflect changes in the sector classification.

7. Further work to improve the indicators of national accounts Until the end of 2017 SSC will work in the following areas:  Continuation of work to improve the system of annual sector accounts;  Further development of the methods and data sources for calculation of SNA indicators for the financial corporations and government units;  Improvement of data of the business register for the correct identification of economic units, in accordance with the classification of sectors of the 2008 SNA;  Development of quarterly sector accounts;  Development of government sector accounts;  Implementation of updated classification of assets for compilation of balance sheets

8. III. Some issues related with estimation and allocation of FISIM  The total value of FISIM was measured as total property income receivable by financial intermediaries minus their total interest payable, excluding the value of any property income receivable from investment of their own funds i.e. that does not arise from financial intermediation;  The 1993 SNA recognized that in practice it may be difficult to find any method of allocating FISIM among different users and therefore accepted that some countries may prefer to continue to use the convention whereby the whole of the services are allocated to intermediate consumption of a notional industry. This possibility has been removed in the 2008 SNA. Methodological background: 1993 SNA

9.  Inclusion all loans and deposits for financial intermediaries, not just made from intermediate funds and only when those loans and deposits are provided by, or deposited with, financial institutions;  The 2008 SNA calculates the output of FISIM on loans and deposits only, using a reference rate;  The reference rate should contain no service element and reflect the risk and maturity structure of deposits and loans;  The consumption of FISIM should be allocated between users (lenders and borrowers), treating the allocated amounts either as intermediate consumption by enterprises or as final consumption or exports. Methodological background: 2008 SNA

10.  The transition to the new methods for calculating FISIM output and its reflection in the accounts required the presence of extensive and quite detailed information on assets, liabilities, income and expenses of financial intermediaries;  The 2008 SNA proposes the rate prevailing for inter-bank borrowing and lending as a suitable choice for a reference rate. Problems of estimation and choice of method for the FISIM calculation The analysis of the data on inter-bank lending rates by maturity and currency, developed by the Central Bank of Azerbaijan, showed that these rates are not suitable for the role of the reference rate.

15. It turned out that:  The significant impact on inter – bank lending interest rates in the country have the funds lent to finance certain segments of the economy from government anti-crisis measures and  The inter – bank lending resulting from bilateral agreements with low interest rates.

16.  The reference rates were calculated using the data on stocks and interest rates on loans and deposits of legal entities and physical persons denominated in national and foreign currencies;  separate reference rates were estimated – on financial assets denominated in national currency and on financial assets denominated in foreign currencies Estimations of reference rates

19.  The stocks of loans and deposits were allocated by institutional sectors and subsectors based on data provided by the Central Bank.  Given the small share of translations on loans and deposits with «the rest of the world» and the absence of all the necessary data, export and import of FISIM have not been calculated.

20. Allocation of FISIM among different categories of users, and direction of use (data for 2011), millions of manat Total Intermediate consumption Output Final consumption of general government Final consumption of NPISHs Final consump- tion of households P2P1P3P3P3 Non-financial corporations 255.1255.1 Financial corporations 67.367.3 General government 8.58.58.58.5 Households256.252.8203.5 - entrepreneurs 14.814.8 - owner-occupiers 38.038.0 - consumers 203.5203.5 NPISHs5.05.05.05.0 Total592.2388.713.68.55.0203.5

21. The impact of FISIM allocation to national accounts aggregates  The change in the method for recording of FISIM led to changes of some flows and balancing items from production account to the use of income account, but at the same time it did not change the value of saving by institutional sectors;  In the transition of the method of allocation of FISIM output to user sectors, the changes in the recording of property income from interest special consideration.

22. Procedure for recalculating of property income records when FISIM is allocated (data for 2011), millions of manat Transactions Non- financial corporations Financial corporations General government HouseholdsNPISHs Total economy S11S12S13S14S15S1 Property income (receivable) 229.5 229.5 1 626.7 15 448.6 648.5 648.52.3 17 955.6 FISIM on deposits +206.1+66.2+8.5+59.6+5.0+345.5 FISIM on loans (total) -246.7-246.7 Property income (receivable) * 435.6 435.6 1 446.2 15 457.1 708.1 708.17.3 18 054.3 Property income (payable) 20 897.5 476.8 476.8 105.1 105.1 298.0 298.00.1 21 777.5 FISIM on loans -49.0-1.1-0.0-196.6-0.0-246.7 FISIM on deposits (total) +345.5+345.5 Property income (payable) * 20 848.5 821.2105.1101.40.1 21 876.2 * - when FISIM is allocated

23. Thank you for your attention!