CORRECT APPROACH

Traditionally, in the last few years, the Azerbaijani parliament has made mid-year amendments to the state budget on the government's initiative. The changes take account of growing budget revenue and expenditure in the light of oil prices on world markets and the domestic economic situation.

This year is no exception - the Milli Maclis has approved amendments to the country's basic economic document in 2011. The amendments took into account President Ilham Aliyev's instructions to give additional material support to strengthen social security. This means a continuation of reforms in the pension system, increases in public sector salaries, social allowances, stipends and other social payments, as well as the financing of a number of investment projects.

Despite the fact that performance dropped off in some sectors of the economy in January-April 2011 according to the statistics, the government adjusted the macroeconomic forecast towards growth, taking into account the updated forecasts of international institutions for the global economy and world commodity markets.

Oil price

The government of Azerbaijan adopted a more restrained and cautious policy in 2010 while drawing up the budget forecasts for the current year. 

However, the favourable situation on the world oil market has made it possible for quite a long time to keep the cost of a barrel of Azerbaijani oil 80 per cent higher than the price set by the state budget for 2011. Because of this, during the first quarter alone, the country received additional revenues of 976.4 million manats to the State Oil Fund of Azerbaijan, in addition to the projected revenue of 193.5 million manats.

Therefore, the core of the current budget amendments is based on the increasing forecast for the price of Azerbaijani oil from $60 to $80 per barrel. As a result, the country expects to receive an additional 5 billion manats in revenues of which 770 million manats will go to the state budget and 3.5-4 billion manats to the State Oil Fund. "And this is despite the fact that during January-April 2011, oil prices on the world market exceeded $100, which allows us to further increase the level of key macroeconomic indicators and ensure budget revenues by the year's end," the chairman of the Accounting Chamber, Heydar Asadov, said.

Even with a large volume of transfers (9.2 billion) into the state budget, the assets of the State Oil Fund are expected to reach $30 billion by the end of the year.

In light of this, the government's policies are aimed at increasing funding both in the social sphere and in the implementation of investment projects.

Thus, the adjustment of macroeconomic indicators allowed the government to increase the forecast for budget revenue in 2011 to about 15.6 billion manats (more than $19.5 billion). This means that the treasury will increase by 29 per cent compared with the current budget and by 36.4 per cent compared with the actual rate in 2010. This was reported by Finance Minister Samir Sarifov during discussions on the draft amendments.

The correlation between the budget and GDP plays a key role in economic development. In countries that prefer a liberal economic model, the ratio of budget to GDP is 28-33 per cent, while a similar figure in the social model reaches 50 per cent. The indicators of countries that prefer the so-called middle ground vary between 35-45 per cent. Azerbaijan is taking steps towards transition to a budget package which is about 35 per cent of GDP.

It is thanks to the dynamic development of the country's economy in 2011 that 34.7 per cent of the total GDP will be allocated through the state budget, whereas the figure was 15 per cent in 2005.

The adjusted budget for 2011 provides for expenditure of 16 million manats (more than $20 billion). Growth compared with the approved budget for the current year will be 25 per cent and compared to the actual figure in 2010 - 35.5 per cent.

Under the amendments, the budget deficit will be reduced to 0.9 per cent of GDP from the current 1.7 per cent.

It must be stressed that, although in 2011 budget projections were implemented with a surplus, Azerbaijan continues to maintain a cautious position and is forecasting a budget deficit. In parallel, the government is continuing to follow its traditional but clear-cut programme of deficit financing. According to Sarifov, in 2011, it is planned to use traditional sources of financing for the state budget deficit - proceeds from privatization, the issue of securities on domestic and international markets, off-budget revenues of budget organizations and from the balance available on 1 January 2011 on the single treasury account of the state budget. The issue of securities on international markets is considered by the government a "deep" reserve. The Finance Ministry has already made a statement about the postponement of these plans until 2012.

Of course, the primary role in adjusting the budget belongs to the oil and gas sector, which will provide 74 per cent (11.51 billion) of revenue to the treasury. The basis of the state budget revenue in 2011 will be provided by the transfer of 9.2 billion manats from the State Oil Fund, which makes up 59 per cent of the total budget revenue.

The government believes that Azerbaijan's best option for spending oil revenues is the Norwegian model, where the infrastructure was modernized in 10 years through the aggressive spending of oil revenues, and then such costs were tightly limited. The Oil Fund of Azerbaijan was created 10 years ago, but it has been making active investments for less than seven years.

Social economy

In preparing the budget projections for 2011, as in previous years, special attention was paid to the social and investment orientation of the budget in line with the government's development strategy, priority areas, the country's defence capability, improving the country's economic strength, boosting energy and food security, support for business development, funding of state programmes, etc.

Most of the additional budget expenses - 78.1 per cent or 2.5 billion manats - will be spent on state capital investments, which is 73.5 per cent more than the expenditure approved for these purposes.

Expenses on increasing defence capability increase by 39.7million manats (3 per cent) and will amount to 1 billion and 364.8 million manats. Additional expenses will create an opportunity to strengthen social security for servicemen and civilian employees of the armed forces and other military units, improve their living conditions, meet their military, economic and military-technical needs and develop the military infrastructure in the country.

The government will continue to focus on the implementation of social security measures - raising the minimum wage, pensions and social benefits to prevent a decline in living standards. The current expenditure line of the budget will be increased by 698 million manats, of which 66.3 per cent will be allocated to pension reforms and to the increase in social benefits and pensions. To some extent, this is consistent with the nature of amendments to the Azerbaijani Constitution, which reflect the country's transition to a "social market economy".

An important decision will also be taken to improve the living conditions of the poor. The head of the Central Bank has already announced the preparation of a new strategy for mortgage lending. As part of the planned changes to the terms of social mortgage allocation, in 2011 funding for the social mortgage will increase by 6 million manats in order to meet the high demand for this type of loan (with a simplified lending mechanism and increased upper limit of loan size). Earlier, the state budget planned to allocate 14 million manats to the Azerbaijan Mortgage Fund at the Central Bank for this purpose, but following the adjustments to the budget projections, the funding of social mortgages increased by 42.8 per cent - up to 20 million manats.

In other words, the growth of the budget is promising for all segments of the population and the economy as a whole. Azerbaijan's coffers have expanded due to the dynamic increase in budget revenues and expenses since 2005. Over the years, the rate of growth in budget revenue sometimes reached 50-55 per cent within one year. In parallel, state budget expenses also rose by 75-77 per cent per year at times. Such a rate of growth in budget revenue and expenditure is fantastic. However, it seems that this year the country will only update its record, though it will not put a full stop to the growth curve.