THE NATIONAL BUDGET FOR 2010 IS IN DEFICIT, BUT IS REALISTIC

Conservatism, the main leitmotif of Azerbaijan's economic policy during the crisis, has finally claimed the country's budget too.  It seems that the Government, puzzled by fluctuating oil prices in the international markets in 2009 and by their natural influence on budget revenues in general, has decided to adopt a more reserved position this time by basing the nation's main economic document on a much lower oil price. However, the decision to lower the price forecast from $70 per barrel to $45 brought a mixed response from Parliament, society and experts.  Ministers say that this decision was well thought out and the proposed parameters are the right ones in consideration of the dramatic changes in the world economy.

Price is the point

A budget deficit is nothing new for Azerbaijan.  But next year, it will be somewhat greater than before: 3.9% of GDP or AZN 1.249 billion.  Forecasts for both revenues and expenditure have been reduced.  Budget revenues for next year are set at AZN 10.015 billion (31.5% of GDP) versus AZN 12.177 billion this year, and expenditure - at AZN 11.264 billion (35.4% of GDP) versus AZN 12.355 last year.  

As already mentioned, the main reasons for the lower figures are oil prices and the recession in the world economy.  Finance Minister Samir Sarifov said during the parliamentary debate that "the decrease is our reply to international challenges in the final period of global crisis.  Lowering the expected oil price to $45 per barrel in the 2010 budget is a protective measure."

In the minister's words, "when the forecasts were made, the Government tried to secure the budget against crisis-related risks, as the global economy is expected to emerge from stagnation in 2010, energy prices are likely to increase and the country's economy will develop further.  Given conflicting forecasts for growth in the world economy next year, which the International Monetary Fund set at 1.4% and the World Bank at 2.9%, and because the situation in the world markets will generally remain unclear, a conservative approach was taken to preserve a stable financial base," the minister said.

At the same time, some experts and members of Parliament said that cutting the expected oil price to $45 was too conservative an assessment.  In their opinion, the government has gone from one extreme to the other.  It could easily have gone for $55, especially as oil prices are starting to rise rapidly on international markets.  A number of deputies who voiced their concern about a deficit of more than AZN 1 billion, are of roughly the same opinion.

Perhaps these statements make sense.  However, it is also obvious that we must learn lessons from a negative experience, and the government seems to be doing just that.  The whole of 2009 has demonstrated how dangerous it can be to make budget expenditure dependent on the volatile situation in the oil market.  Executive Director of the Azerbaijani State Oil Fund Saxmar Movsumov said that "when we, in late 2008, predicted an oil price of $70 for the 2009 budget, the real market price was about $140.  Back then, everyone wondered why only $70 was forecast for the budget when the price was $140.  However, we have seen that even $70 was too high.  Today, when we set the price for the next year at $45, everyone says that the international economy is stabilizing and this is too low."

So, the budget has to be protected against price fluctuations, and setting the oil price at below market level is perhaps the only solution.  In this case, the best determinant of spending parameters is not revenue, but the real needs of the economy.

Unquestionable priority

It is notable that cuts in budget expenditure in 2010 will be accompanied by a broadening of the taxable base and by reducing taxation rates - profit tax will decrease from 22 to 20%, and the highest rate of income tax from 35 to 30%, annual income to be taxed under the simplified system will increase from AZN 90,000 to AZN 150,000, and preschool educational institutions will be exempt from VAT.

In addition, the main burden in meeting budget revenue targets in 2010 will be borne by three departments - the Taxation Ministry (AZN 3.98 billion), the State Customs Committee (AZN 1.1 billion) and the State Oil Fund, which will transfer AZN 4.915 billion.  In the opinion of Ziyad Samadzada, chairman of the parliamentary committee for economic policy, "forecasts for the ministry and committee are realistic, and we are certain that these departments will play increasingly important roles in the collection of revenues."  Incidentally, the country's revenues for 2010 are expected to reach AZN 11.885 billion, and expenditure - AZN 12.466 billion.

As for the spending cuts which made the public suspicious in the first place, they do not affect the social component of expenditure.  In other words, pensions, subsidies and salaries, which are paid from the state treasury, will not be reduced.  On the contrary, the proportion of social expenditure in the budget will reach 34.4% (3.878 billion), which is 1.8% more than last year.

Fasil Faracev, head of the budget department of the Finance Ministry, said that in 2010 the Azerbaijani Government will also continue to fund targeted state programmes in this field.  In particular, the scientific development fund will be allocated AZN 7 million next year, AZN 16.4 million will be spent on the introduction of information technology in secondary schools, AZN 8 million will be spent on free manuals for schoolchildren, AZN 11 million on medicines for oncology patients, AZN 9 million on the development of theatre, AZN 6 million on movie productions.  Overall, the total amount of funding for state programmes in the fields of science, culture, education and health in 2010 will be AZN 242 million.

Besides the social sector, budget cuts will not affect the defence sector.  Mr. Sarifov said that, compared to 2005, Azerbaijan's defence spending in 2005 will increase 4.2 times and reach AZN 1,120,991,000.  "Compared to 2009, defence spending will increase by 10.7%, and compared to 2008 - by 0.9%," he said.

Things to come

Then, in which areas has spending been cut?  According to the Government, first, they have saved money by completing a number of large infrastructural and investment projects which were funded by state.  It was decided to suspend new projects which are not strategically important or urgent.  At the same time, let us note that in 2010, the funding of programmes and events of national importance will reach AZN 4,387.3 million, which is 39% of budget expenditure.

As for the budget deficit, four sources will be used to fund it.  It will be funded by proceeds from the privatization of state-owned properties, domestic and foreign loans, including proceeds from the floatation of stocks abroad, by proceeds from paid services provided by budget-funded organizations, and funds remaining in the treasury accounts of the national budget on 1 January 2010.

In short, the government's caution does not pose a threat of any major economic cataclysm.  On the contrary, this caution stemmed first and foremost from a desire to avoid tension in fulfilling the budget and to respond properly to the challenges in the international economy.  In addition, should the post-crisis problems in the world be successfully resolved and revenues exceed expectations, the Government can easily revise the law on the national budget to increase it.  Heydar Asadov , Chairman of the Azerbaijani Comptroller's Office said that in mid-2010, in accordance with the established pattern, Parliament will be able to consider any proposed amendments.  So the likelihood of going back to the already-customary rate of growth in the Azerbaijani budget as early as in 2010 is quite high.