A MODEL BORROWER

The world financial crisis, which began in 2008 has led to a considerable rise in the value of money. At the same time, access to finance has become significantly limited. During the period of recession many countries, including Azerbaijan's neighbours, actively borrowed money on the world markets in order to extricate themselves from an extreme financial situation. As a result, most of these countries' foreign debt soared, reaching critical levels.

According to data from the Bank for International Settlements, the total volume of debt in the world is more than 100 trillion dollars. Moreover, in mid-2007, when the first signs of the imminent crisis appeared, until mid-2013, the world debt leapt more than 40 per cent to 70 trillion dollars, since, in the wake of the financial crisis, states actively turned to borrowing in order to pull their economies out of recession, while they could take advantage of concomitant low interest rates.

In 2008-2013 Azerbaijan actively took loans from international financial and commercial institutions as well. This was not however done to overcome the crisis, but to implement infrastructure projects. Moreover, its own currency reserves increased at the same time as the amount of the loans. Whereas  at the end of 2008 Azerbaijan's strategic currency reserves amounted to 18bn dollars, at the end of 2013, they already stood at more than 50bn dollars. The state could therefore afford to actively but cautiously pursue a policy of availing itself of foreign loans.  

On 1 January 2014 Azerbaijan's state foreign debt was 6.59bn dollars and had increased by 6.1 per cent over 2013. All in all, over the period from 2008-2013 Azerbaijan's foreign debt more than doubled in absolute terms. But, in spite of the debt doubling, it still only amount to 8.2 per cent of GDP. Today Azerbaijan's per capital foreign debt is 639.3 dollars.

It can clearly be seen that Azerbaijan is enjoying a more favourable foreign debt situation than the countries in the region as well as some leading economically developed countries. For instance, Armenia's foreign debt at the beginning of 2014 amounted to more than 60 per cent of its GDP, Georgia's to roughly 70 per cent, Ukraine to approximately 80 per cent, Turkey to 36 per cent, Russia to 14.1 per cent and Belarus to 17.4 per cent. In the economically developed countries in general foreign debt exceeds the level of GDP: in the USA it is 101 per cent of GDP, in the European Union 108 per cent, in Great Britain approximately 400 per cent and in Germany more than 140 per cent.

According to government data, throughout the period of its independence Azerbaijan has signed credit agreements with international and commercial  financial institutions to a total value of 12.013bn dollars, of which it has drawn down 7.884bn dollars. At the same time, Azerbaijan has repaid 1.825bn dollars of what it owes. Consequently, as mentioned above, Azerbaijan's foreign debt amounted to 6.059bn dollars at the beginning of the current year.

The structure of the foreign debt is the following: 3.924bn or 64.8 per cent is owed to the World Bank [WB], the International Monetary Fund [IMF] and a number of other financial institutions. At the dawn of its independence Azerbaijan actively borrowed from the WB and the IMF in order to implement various programmes of reform and support for the economy. The focus of cooperation with the financial institutions subsequently changed. The government increasingly borrowed money from the WB to implement infrastructure and other projects; cooperation with the IMF began to take the form of consultations. From 2005 Azerbaijan stopped borrowing money from the IMF, as a result of which the country only owes the IMF 6m dollars now, which will most probably be paid off completely in 2014.

Of the foreign debt 1.11bn dollars or 18.3 per cent is due to loans for implementing projects relating to water supply, the building of power stations, support for small and medium business, upgrading aviation and rail services.

A further 1.024bn dollars or 16.9 per cent of foreign debt is being spent on the implementation of government-backed infrastructure projects with various state organisations.

In 2013, 809m dollars were channelled into paying off the foreign debt, of which 714.3m dollars were repaid off the capital and 94.7m dollars formed the interest payment. Last year 594.5m dollars were paid directly out of the state budget to service the debt, another 210.5m dollars were paid by the state structures that had taken the loans, and 12m dollars were paid from a special Guarantee Fund. 

The estimates for 2014 indicate that Azerbaijan's foreign debt will most likely be more than 8bn dollars and will probably reach a level of 10 per cent of GDP. In March this year for the first time the Finance Ministry acquired eurobonds to the tune of 1.25bn. The demand for the country's own securities thereby exceeded supply fourfold. The government is also planning to take new loans from the World Bank, the Asian Bank for Development and the Islamic Development Bank, the German KfW Development Bank and other financial institutions in order to implement various projects relating to road construction, improving the communal infrastructure and for other purposes.

But at any rate the country is quite far from a critical level of the debts of 25-50 per cent of GDP and it is hardly likely that they will rise above this. Over the last 10 years Azerbaijan has managed to create a reputation for itself of being a reliable borrower that always meets its commitments on time and in full. Azerbaijan does moreover have its own financial resources which it is channelling into the financing of priority projects by means of the State Oil Fund. Therefore, no matter how the financial institutions might wish to attract a model borrower like Azerbaijan, the latter's loan policy remains a conservative one.