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Azerbaijan adjusts the state budget with minimal losses thanks to its reserves

Author:

01.09.2020

Economic shocks because of the coronavirus pandemic force the governments of almost all countries to take serious measures to counter financial losses. Expenditures through social programs, unexpected health care costs, budget holes due to the underperformance of tax collection require a revision of state revenues and expenditures. For Azerbaijan, the situation was worse because of a significant drop in the global oil prices. So, the government decided to scrupulously recalculate the state budget.

 

On our own

The practice of revising the budget for Azerbaijan is not new. However, the budget was usually revised following the results of the first half of the year and depending on the volatility of oil prices. This time, the amendments to the state budget were approved in August, and all budgetary items were adjusted based on the new price for oil - $35 per barrel against the previously set price of $55. Over the past five years, the situation was worse only in 2016, when, due to the global crisis, the budget was revised in February with the oil price halved.

“Several months ago, oil prices dropped to $12-13. The price of Azerbaijani oil dropped as well. We believe that the current price of oil in the state budget ($35) will pay off," Finance Minister Samir Sharifov said.

Remarkably, for the past two years, the state budget of Azerbaijan has been applied a new budget rule, which minimizes the influence of the oil price on the budget parameters. Starting from 2020, the Ministry of Finance began to apply medium-term spending frameworks, which, in theory, should have increased the efficiency of public funds, as well as strengthen macroeconomic coordination between government agencies. But in the current economic climate, the new fiscal rule had to be suspended temporarily. “Under the existing special circumstances, the temporary termination of the fiscal rule is of great importance,” Mr. Sharifov said.

After all, the state budget parameters did not suffer much - the decline in revenue forecasts was only 0.1%, while the growth of expenditures was 2.2%. The only thing is that the budget deficit increased to ₼3.4 billion (or 4.9% of GDP), which was ₼2.8 billion (3.3% of GDP) previously.

The ‘black day’ stocks helped to ensure the overall stability. With the declining forecasts for tax and customs duty inflows (by 8.7% and 4.3% respectively), the volume of expected transfers from the State Oil Fund increased by 7.5%.

According to Samir Sharifov, the time has come when we have to spend the funds accumulated in previous years. “We use the available reserves, including the reserves of the State Fund for Social Protection under the Ministry of Labour and Social Protection accumulated in previous years. Unlike other states, we do not apply for loans. These resources are also properly managed,” Mr. Sharifov said.

International experts also supported this step of Azerbaijan. In particular, Fitch Ratings notes that the growth of transfers from SOFAZ to the state budget should support US dollar’s exchange rate at ₼1.7. “As in many other countries, countering the economic impact of the coronavirus pandemic required a temporary suspension of the fiscal rule. Despite the serious negative impact on the budget, large reserves provide Azerbaijan with a significant degree of financial flexibility,” Fitch Ratings stated.

Remarkably, in addition to the increase of healthcare expenditures (a record 25.4%, or ₼369 million), which is quite logical during a pandemic, spending on economic and other reforms also showed a growth of 18%. Therefore, no stagnation is expected in the course of economic and administrative transformation due to quarantine.

Also, ₼238 million will be additionally spent on social protection of the population: ₼136.6 million to support state-owned companies, ₼100 million to support private business. In general, as a result of the budget revision, the volume of additional financing in various sectors of economy will reach ₼1.4 billion, including ₼465 million to increase the defense potential of Azerbaijan.

 

Private sector share

Can the state budget stay at this level, given the forecast decline in GDP to 5% by the end of 2020? According to experts, in parallel with the growth of expenses on some of the most important budget items, it is planned to save ₼774 million on other items, which will require a slightly smaller amount of funds to finance additional activities. At the same time, despite the decline in oil prices, revenues from oil sales will still dominate - 58% versus 42% of revenues from the non-oil sector.

Nevertheless, as Mr. Sharifov admitted, the unfavourable situation in world markets due to the coronavirus pandemic and a decrease in consumption will lead in the second half of 2020 to a decrease in state budget revenues by about ₼1 billion.

It is clear that today medium and small business is mostly idle. It is therefore impossible to expect them provide significant revenue transfers to the state budget. On the contrary, entrepreneurship assistance programs have been adopted to help businesses cope the situation.

Big business though have reserves that allow them not only to continue activities, but also to look for new projects for investment, given the circumstances. The government recommends entrepreneurs not to export capital from the country, but to look for opportunities to use it for domestic projects.

“If in the current situation Azerbaijani businessmen, including representatives of big business, want to invest in foreign countries, they should justify their intention. This is important,” President Ilham Aliyev said. He added that the above measure should encourage private sector to increase investment in the national economy, urging local investors to use their own funds for the benefit of Azerbaijan’s economy.

“Investors investing tens of millions of dollars in foreign countries should first of all think about their own country, about their people. They must understand that in the current situation and a decline in oil prices, unemployment may increase. This should become a moral obligation for entrepreneurs. Therefore, I appeal to local entrepreneurs and say that your funds should now work for the benefit of Azerbaijan’s economy, where your funds are protected at the highest level,” I. Aliyev noted.

In fact, 75% of taxes in Azerbaijan are generated in the private sector. Thanks to reforms in the fiscal sphere, the government achieved a budget surplus in the first half of the year. Government officials indicate that this was the expected effect of the benefits provided to entrepreneurs to bring their ledgers off the shadows.

The government sometimes makes unpopular decisions to replenish the budget. In particular, the negative resonance in the society was caused by the amendments to the Rules of preferential and simplified transportation of goods by individuals across the customs border, produced or not intended for commercial purposes. In accordance with the changes, the total cost of goods that can be imported into Azerbaijan once during each calendar month on a preferential basis has been reduced from $1,500 to $800. In addition, the total cost of goods delivered within 30 days to the customs border of Azerbaijan by international parcels or other shipping companies in the name of the same individual has been reduced from $1,000 to $300. Obviously, the new rules will significantly reduce the number of orders for goods from abroad by individuals.

Nevertheless, the chairman of the State Customs Committee Safar Mehdiyev said that the revenues to the state budget within the framework of these amendments will amount to 70-100 million manats per year. However, many experts and parliament members point out that this decision may be disastrous for small shipping companies, and, accordingly, the amount of their tax deductions will decrease...

 

Liberalisation of the economy

At the same time, problems with replenishing the state treasury could have been substantially avoided if the government had time to complete all reforms on the efficiency of spending public funds. It has been repeatedly pointed out in recent years that with such a large number of state programs, the provision of huge funds for their implementation, it is unrealistic to expect an adequate return. Any economic project is a balance of investments and profits, and state projects are no exception here.

In this context, state-run companies have long required a thorough audit. “If we take their taxes, government subsidies and direct investment, we see a huge difference. What does this mean? It means that state-run companies are pulling our country and economy down. There can be no other explanation for this,” President Ilham Aliyev said.

Funds for gasification, drilling, construction and reconstruction of power plants, purchase of aircraft for AZAL, railroad cars, etc. were provided from the state budget. But, oddly enough, the losses from these investments are sometimes greater. Then, is it worth investing in projects with dubious financial efficiency, or is there a problem in their management and transparency in spending?

It is assumed that the newly established Azerbaijan Investment Holding (AIH) with an authorized capital of ₼10 million solves the burden of accumulated problems. The objective is to increase the economic transparency and efficiency of state-run companies and enterprises with state participation in capital, increase their competitiveness, financial recovery and improve their stability.

A larger step in the near future should be the liberalisation of the entire national economy. Despite two decades passed since the transition of the Azerbaijani economy to market economy, a considerable number of enterprises are still run by the state. Many of them exist only de jure with no assets and the possibility of recovery. Do we need these enterprises today? This is a question for a broad study. Based on the outcome of the study, a program for privatisation of such enterprises should be developed. Investors need to identify specific projects with adequate business plans, and if the enterprise is already impossible to restore, then at least its territory and ready-made infrastructure can be used for new industrial parks.

“If a strategic investor invests large funds there, then it can be privatized for a symbolic price... This can have a positive impact on job creation, and on the building materials industry, and on other industries,” President Aliyev said.

The crisis caused by the COVID-19 pandemic and the fall in oil prices has made the achievements and problems of the national economy eve more prominent, hence significantly urging the solution of these problems.


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