NEW RECORD

The state budget of Azerbaijan in the new year of 2020 will break the record of previous years. However, in addition to the increased volumes of revenue and expenditure, the state budget adopted at the last meeting of the parliament will have some specific features.

First, it is the second time that the budget has been developed upon a set of new rules, which reduce the influence of oil prices on macroeconomic parameters to a minimum. Starting this year, the Ministry of Finance began to use the medium-term framework of expenditures in the draft document, which, in theory, should increase the efficiency of state funds, as well as strengthen macroeconomic coordination between government agencies.

Required deficit

The fact that the fiscal policy will continue to act as a mechanism to support the country's economic growth confirms the growth dynamics of the revenues in 2020 over the country's growth rate. Thus, the GDP growth of Azerbaijan in 2020 is projected at 3%. The state budget revenues, according to forecasts, will grow by 4.2%, expenses by 6.8%: up to ₼24.1 and ₼26.9 billion, respectively. The budget deficit for the next year is projected at ₼2,779.2 million or 3.3% of GDP.

Although technically Azerbaijan can implement the budget without deficit, the government will allow some deficit in the next year in order to ensure stability of the country's financial system. Indeed, the state budget deficit is one of the important elements for the financial system, primarily for banks and insurance companies, since the government issues government securities so that banks can exchange extra liquid assets in return for these securities. But, unlike other countries, Azerbaijan does not increase the budget deficit every year and does not fill it with money acquired as a result of securities sale. Therefore, the difference between the revenue and expenditure parts has never been a problem for the economy.

In 2020, it is proposed to finance the budget deficit through the privatization of state-owned enterprises, internal and external borrowing.

The use of funds from the placement of debt instruments on the external market to cover the budget deficit is part of the annual budget. However, the Azerbaijani government is not in a hurry to re-enter international markets, although the country has the necessary credit ratings. This is because President Ilham Aliyev instructed the government to limit the attraction of external borrowing and to limit it only for technology-intensive projects. Thus, by 2025, Azerbaijan plans to reduce the size of its external debt to $6.5 billion, or 12% of the country's GDP. Last year, this indicator amounted to 19% of GDP, and this year this ratio has already decreased to 17.6%.

Moreover, starting from the next year, Azerbaijan plans to provide funding to international organizations as a donor country. According to Minister of Finance Samir Sharifov, Azerbaijan will provide $7 million for various donor programs of the EBRD, ADB and World Bank.

Another source to cover the budget deficit is the balances on the unified treasury account of the state budget as of January 1, 2020, in particular, the state budget reserves accumulated in previous years, including the collected funds from in addition to forecasted tax and customs revenues. This source is to cover 60% of the budget deficit.

As in previous years, the main source of budget revenues will again be taxes and customs services: 32.6% and 16.6%, respectively, while 3.8% will be generated from different sources.

Oil factor

One of the important criteria for the effectiveness of the budget is the degree of its dependence on the global economic processes. To accumulate additional revenues at the State Oil Fund, the government of Azerbaijan uses a conservative approach in determining the forecasted price of oil in the state budget for the next year: $55 per barrel compared to $60 per barrel in 2019, albeit it is higher in world markets. As President Ilham Aliyev noted, as a result of the reforms, it is now possible to ensure state budget revenues from other sources: "We set the price of oil in the state budget for 2020 at $55 per barrel, although the price of Azeri Light is $70. We did this to increase revenues. If we set the oil price at $65, then this money would go to the state budget as transfers and would be used," president said.

In the revenue structure, ₼13.5 billion (56%) is planned to be provided from oil revenues and ₼10.6 billion (43.9%) from the non-oil sector of the economy. Compared to 2019, the government expects to have a 12% increase in budget revenues from the non-oil sector.

Next year it is also expected that the State Oil Fund reduces transfers to the budget by 0.1% down to ₼11.4 billion or 47% of all budget revenues.

In many countries of the world, including the developed ones, the fiscal policy is aimed at preventing slowdown of economic growth or keeping it stable. In Azerbaijan, the objective of fiscal policy is to support the country's economic growth. Meanwhile, a characteristic feature of the state budget for 2020 is the excess of the growth rate of expenditures over income, which is associated with the wide social program of the government.

Next year, 38.5% of the state budget expenditures (₼10.4 billion) are planned for social purposes (an increase of 33.5%). According to the Minister of Finance Samir Sharifov, "the budget will traditionally maintain its social orientation. The main priorities will be the development of human capital, increasing labour effectiveness, and creating a competent workforce. Reforms in education will be continued, funding for pre-school institutions, increased student enrolment on state orders will be increased," Sharifov commented on the increase in social spending.

At the same time, over ₼3.1 billion will be allocated from the state budget for education expenses, which is 38.3% more than in 2019. And expenditures in the healthcare sector will reach ₼1.4 billion (31.3% more than in 2019).

Tax incentives

In addition to reforms in the public sector, changes are traditionally expected in the tax year sphere as well. Last year's innovations were focused specifically on tightening the fight against corruption and the "shadow economy". At the initial stage, certain progress achieved in this area noticeably increased the volume of financial inflow to the budget.

"Taxes play a stimulating role for entrepreneurship in Azerbaijan, and the results are obvious. This year, the Ministry of Taxes collected more than ₼350 million in addition to planned amount of collections, which means the increased transparency in businesses. Naturally, these funds allowed the government to implement a very extensive and serious social package this year," President Ilham Aliyev said.

So, as a result of ongoing social reforms, the financial situation of over 4 million people has improved, pensions, salaries, and benefits have been increased. The minimum wage is almost doubled, and the minimum pension is more than 70%. Some changes in tax legislation are associated with obtaining additional income to finance these reforms and projects.

For example, part of the additional income received from raising excise taxes on domestic production of alcohol and tobacco will go towards financing mandatory health insurance (MHI), which will be fully introduced in the fourth quarter of next year. According to the Director General of the Tax Policy Department of the Ministry of Taxes, Samira Musayeva, this practice is accepted all over the world. Contributions to mandatory medical insurance should also be deducted from the issuance of excise stamps for energy drinks, e-cigarette liquid, alcoholic beverages (currently ₼0.1 per excise stamp) and for tobacco products (₼0.05 per excise stamp).

In accordance with amendments to the Tax Code, from January 1, 2020, excise tax rates on alcoholic beverages, tobacco and energy drinks produced in Azerbaijan will be increased.

In total, it is planned to introduce 162 amendments to the code, 73 of which are amendments introducing new measures and 89 are correctional amendments. The goal is to create healthy competition by establishing equal and transparent fiscal policy. In addition, the amendments will strengthen the supervision of risk taxpayers, fight against tax evasion, as well as reduce administrative and tax burden of entrepreneurs, and expand the tax base.

According to the amendments, it is proposed to increase the term of tax and customs benefits from 7 to 10 years for residents of industrial parks. Thus, residents of industrial parks will be exempted from income tax, land tax, property tax, and customs duties when importing machinery, plants and technological equipment for a period of ten years from the date of registration.

The amendments also apply to management companies and operators of industrial parks and industrial parks, which are exempt from paying income tax on the part of the proceeds allocated by them for the construction and maintenance of infrastructure of parks.

Also, from next year the simplified tax rate will be reduced by 33.3% (from ₼30 to ₼20) for hosts, musicians, dancers, ashugs working at weddings and other entertainment events.

In general, the amendments provide for 10 new benefits and exemptions. And, together with them, the state budget for 2020 will definitely be a continuation of the country's socio-economic reforms aimed at strengthening the non-oil sector and maintaining the stability of the pace of development.