OLD TRADITIONS AND NEW TRENDS

As the saying goes, you soon get used to good things. Azerbaijan's annual economic growth has, in recent years, become a matter of habit. Therefore, each time the government submits a draft budget for the following year to parliament, everyone expects updated and improved figures for revenue and expenditure and, consequently, better living standards for the population and strengthened foundations of statehood.

However, the globalization taking place in the world underlines the existence of a single economic system, all elements of which are closely intertwined. The crisis has clearly demonstrated how the system works: when a bank collapses in Iceland, police officers in England lose their pensions. Therefore, despite confidence about today, we are less optimistic about tomorrow.

In order to avoid negative consequences in the future, the government of Azerbaijan, when predicting budget parameters for 2010, switched to the social budget model and developed a more restrained and careful projection of revenues and expenditures. This, to some extent, is consistent with the nature of amendments to the Constitution of Azerbaijan, which led to the country's transition to a "social market economy".

Even though the Azerbaijani government has pursued a cautious policy in developing budget forecasts against the background of the global crisis, our state budget is several times larger than those of Georgia and Armenia. Thus, budget revenues next year (over $15 billion) exceed Georgia's budget by more than four times and Armenia's by six times. Anticipated expenditure ($15.9 billion) is 4.2 times higher than Georgia's and 5.7 times higher than Armenia's. In other words, Azerbaijan will retain economic leadership in the region next year.

From 2005, budget revenue growth has reached 50-55 per cent per year. Accordingly, budget expenditure has also increased, at times reaching 75-77 per cent per year. Such growth in budget revenue and expenditure would be considered fantastic for many countries. At the same time, economic growth in Azerbaijan over these years was 25-35 per cent. Thus, growth in budget expenditure and revenue was sometimes double that of economic growth. However, due to the global crisis, such trends were not continued in the draft budget for 2010. For example, the government forecasts GDP growth at 6.8 per cent this year, against 9.3 per cent last year, and 3.8 per cent growth for 2011.

As is known, the ratio of the budget to GDP plays a key role in economic development. In countries preferring a liberal economic model, the ratio of the budget to GDP is usually in the range of 28-33 per cent, while in the social model this figure reaches 50 per cent. The figures for countries preferring a so-called middle position vary between 35 and 45 per cent. Today, Azerbaijan is taking steps towards a transition to a budget package which amounts to almost 35 per cent of GDP. In 2011, 30 per cent of total GDP will be allocated via the state budget, whereas in 2005 the figure was 15 per cent.

It is worth indicating that the budget package for 2011 differs from that for the current year in several important parameters.

The bulk of state budget revenues in 2011 will be secured by the transfer from the State Oil Fund of 6.48 billion manats (a rise of 9.5 per cent), which will constitute 53.7 per cent of total revenues, while earlier the main burden for execution of the budget lay on the tax authorities. The share of tax revenue in total budget revenue has been reduced from 39 per cent in 2010 to 34 per cent next year. However, tax revenues from the non-oil sector are set to increase in 2011, to reach 240 million manats, or 9.6 per cent more than those forecast for 2010. This is despite the fact that non-oil sector GDP growth is expected to be at 7.2 per cent.

According to Rauf Namazov, acting director of the main directorate for state registration of commercial entities and economic analysis at the Ministry of Taxes, these factors point to a reduction in the Azerbaijani economy's dependence on the oil and gas sector, which should be seen as an indicator of dynamic development in the private, especially non-oil, sector. He believes that the reduction of projected revenues from several forms of tax in the draft budget for 2011, especially from income tax, is not due to a decline in business activity, but is explained by the writing off of some public arrears by the state.

In particular, by decision of the Cabinet of Ministers on 9 August 2010, the arrears of AzerEnergy OJSC to SOCAR (State Oil Company of the Azerbaijan Republic), totalling more than AZN 1.5 billion, have been written off. This decision envisaged the remission of a debt of Azerbaijan Airlines (AZAL) CJSC for aviation fuel supplied by SOCAR to the amount of AZN 99 million. However, the largest amnestied debt, over AZN 1.555 billion, was the one of AzerEnergy to SOCAR and its subdivisions for gas, fuel oil and other fuels supplied.

The receivables written off had accumulated as a result of under-collection of payments for electricity from such major consumers as the Qabala radar station, OJSCs BakiElektrikSebeke and SumgayitElektrikSebeke, as well as old arrears from the period when Barmek Azerbaijan LLC was in charge of the electricity distribution networks. Among the forgiven debtors of AzerEnergy there are enterprises with higher energy consumption - joint-stock companies AzerSu, Melioration and Water Management, AzerIstilikTechizat and AzerAluminium. Relatively smaller arrears have been forgiven to the Ministries of Health, Defence, Education, Culture and Tourism, Agriculture, Ecology and Natural Resources.

Next year, the government of Azerbaijan also expects a reduction in state budget revenues from the Azerbaijan International Operating Company (AIOC), even though the price of oil, which forms the basis of budget projections, is envisaged at $60 per barrel (the same as in 2010). This is due to investment in the Chirag Oil Project until 2013, which will lead to increased costs for the oil companies participating in the project, and reduced profits. The Chirag Oil Project requires investment of $6 billion. Planned daily production of Azeri Light crude oil from the new platform to be built at the ACG field will be 183,000 barrels.

It is worth mentioning that, as in previous years, special attention in preparing budget projections for 2011 was paid to the social and investment orientation of the budget, in line with the government's strategy and priorities for development.

Social spending forms the core of budget expenditure for 2011 (33.3 per cent, against 31.7 per cent this year). The projection for these items is an increase by 8.8 per cent over that for the current year (up to AZN 4,234 million). This increase, according to Xaqani Rzayev, chief of the department on financing social spheres at the Finance Ministry, is explained by the fact that decisions were made in 2010 to raise the salaries of public sector employees, the basic pension and other social benefits in order to strengthen the social protection of the population. Thus next year's state budget envisages the allocation of resources for the social security of three million people.

The government will continue the implementation of social security measures next year by raising the minimum wage, pensions and expanding mechanism for the provision of targeted assistance. This will support the standard of living. The criterion used in determining targeted social assistance will rise to AZN 75. The subsistence minimum will rise by 9.2 per cent to AZN 95 in the new year.

However, it should be noted that the share of social expenditure is gradually declining, although its volume continues to grow. Whereas in 2004 social expenditure accounted for 56 per cent of the total budget (AZN 856 million), next year this figure is expected to reach 33 per cent (budget expenditure is projected at AZN 12,748 billion). This suggests that there is a rise in expenditure in other areas of the budget. Simply put, while previously most budget costs were channelled into social security and social protection, current revenues enable the state to pay no less attention to defence, investment and other areas.

Social spending is followed by public investment (AZN 3.38 billion), expenditure on education (AZN 1.338 billion) and defence (more than AZN 1.325 billion). It is expected that high levels of spending of oil revenues will be continued in 2011. This will be linked to infrastructure investment that cannot be ignored, because development cannot be achieved on the basis of dilapidated and underdeveloped infrastructure.

As before, a variety of funding sources will support the agricultural sector - the National Fund on Support for Entrepreneurship, Agroleasing OJSC and the Agency for Agricultural Lending. At the same time, most of the assistance is envisaged under the State Programme for Food Security, to which AZN 111 million will be allocated next year to subsidize purchases of fuel, fertilizer etc.

Also, due to the application of the Law "On education", the mechanism for funding universities will be changed. For the first time next year, the training of students as part of the state order will be financed directly through the budget. As a result, the viability of educational institutions that are no longer competitive will be called into question. These reforms in higher education will be continued in subsequent years, to complete the transition of universities to the principle of self-financing.

Deficit or surplus?

The state budget deficit for 2011 is projected at 1.7 per cent of GDP (against 2.3 per cent in 2010), which is a pretty good figure. But when you consider that the forecast of budget revenues is somewhat cautious, it may be that at the end of 2011 the budget will be executed with a small deficit or even a surplus.

The Azerbaijani government continues to follow a traditional programme for financing the deficit. According to Finance Minister Samir Sarifov, traditional sources of financing this deficit are envisaged for 2011 - proceeds from privatization, the release of securities on domestic and international markets, and off-budget revenues from budget organizations. In fact, the issuing of securities on international markets is seen as the last resort.

Thus, projections show that the most important issue for Azerbaijan now is to maintain not only the rate of growth but also quality and balance for the near future.