Azerbaijan has introduced a 20% tax on foreign currency taken out of the country in an effort to restrict foreign capital flight and to alleviate shortages of foreign currency the country is facing. The decision comes one day after Azerbaijani President Ilham Aliyev announced changes including privatisation, foreign borrowing, and pay rises for various categories of public officials and retirees on January 18.

Elman Rustamov, governor of Azerbaijan’s Central Bank, explained that the government had decided against a total ban on movement of foreign currency and capital.

“In the end we have applied a tax on the withdrawal of capital from the country,” the Financial Times quoted him as saying. The 20% tax would apply to foreign direct investment, foreign property deals and opening foreign accounts but not to payments for education and healthcare abroad.

In addition to interior ministry employees, war veterans, retirees, and internally displaced persons (IDPs), employees of the defence ministry will also receive a 10% pay rise in line with a January 19 presidential decree.

Meanwhile, the country's parliament is discussing changes to the 2016 government budget, which is based on a $50-per-barrel baseline price of oil. A revised version would be based on oil prices ranging from $25 to $30 a barrel, according to MP Ziyad Samadzade, and the legislature is currently seeking sources of financing that could include external borrowing and ways to cut expenditure.

The steep drop in oil prices has hit the Azerbaijani economy hard. The Central Bank of Azerbaijan (CBA) floated the currency on December 21, after spending $8bn in 2015 on propping up the manat, leading to a 50% devaluation of the manat and skyrocketing inflation. On January 12, residents of over a dozen regions in Azerbaijan started protesting against price increases and unemployment. Some of the protests were dispersed by law enforcement authorities with water cannons and rubber bullets, and over 60 demonstrators and representatives of opposition parties were detained.

This is "a foretaste of the trouble that Russia may soon face for very similar reasons", Thomas de Waal, senior associate at Carnegie Europe, wrote in a January 19 analysis. "The public, it seems, can forgive an authoritarian government almost anything except a falling standard of living...Many Azerbaijanis certainly feel angry at the way the billions the country has earned in the last decade disappeared into vanity projects like the European Games [held in June 2015] or into offshore accounts," he added.

"Lot of people highlight the weight of funds still in the sovereign wealth fund Sofaz," Nomura International's Tim Ash writes in a January 19 email commentary, "but I doubt that much of this is very liquid." Indeed, Sofaz' assets have been a source of concern for some observers, for a large part of its purported $34.7bn assets is believed to be engaged in real estate in Japan, Italy, South Korea, France and the UK, stocks in companies like Russia's VTB Bank, and other illiquid investments. Furthermore, the fund lost $594mn in the last week alone through interventions in foreign currency markets.

Meanwhile, Baku decided to protect small borrowers on January 19, by allowing those with loans under $5,000 to repay them at the former exchange rate. Approximately 40% of loans and some 75% of deposits in Azerbaijan are believed to be denominated in foreign currencies. While this move "has seen precedents in the region, in Azerbaijan's case the bulk of the banking sector is domestically owned, hence the cost of cleaning up bank's balance sheets as a result will likely end up falling on the state", Ash writes. The cost is estimated at AZN250mn (€142.9mn), and comes after Baku spent AZN3bn (€1.7bn) in 2015 to bail out the country's largest bank, International Bank of Azerbaijan (IBA).

Meanwhile, the national oil company Socar decided to buy back its $500mn worth of Eurobonds due in 2017, which was questioned by observers. "One might have thought that these funds would have now been useful both to assist in the defence of the manat, but also for longer term investment and development needs," Ash writes.

The currency controls instituted on January 19 are bound to affect some Azerbaijanis seeking to move their money to safer banks abroad, but also the thousands of foreign workers in Azerbaijan, who work primarily in the oil and gas industry, and foreign companies seeking to repatriate profits.

According to MP Gudrat Hasanguliyev, Azerbaijan should cancel its visa regime with Turkey and the European Union (EU) to "allow the citizens of these countries to visit Azerbaijan...and spend currency here". Azerbaijan only allows nationals of Russia, Georgia and a few Central Asian countries to enter the country visa-free, although Turkish nationals have the option of obtaining visas upon arrival.

In an address to parliament, Hasanguliyev also urged for an expedited privatisation process that would begin with gas utilities Azerishiq, which was founded in February 2015 to improve power supply in the regions, Azerigas, and the flag carrier Azerbaijan Airlines (Azal).

There are concerns that the privatisation drive will lead to mounting unemployment in a country where only 1.5mn out of a population of 9.5mn have jobs, despite the official unemployment rate of 5%. Counteracting such fears, Economy Minister Shahin Mustafayev promised that "over the next year and a half, we plan to implement about 150 projects that will cover all of Azerbaijan's districts in such areas as agriculture, processing and production" and that will create 15,000 jobs.

But many fear that Baku is not ready for real reform that would enable economic diversification and regional development, as well as combating corruption. "A six dollar increase in pensions, and renaming the Ministry of Economy are not reforms," Ali Kerimli, head of the Popular Front opposition party, wrote in a Facebook post. "These are not serious steps," he concluded.