OIL'S TOP PRICE

Despite the best efforts of the leaders of the world's powers, international financial institutions, experts and analysts, it is already clear that the problems experienced by the world's financial market today will continue into 2009. At the same time the oil price remains uncertain and is continuing its downward trend. The average price for Azerbaijani oil in the first 10 days of November hovered around 58 dollars a barrel, while the price set in the state budget for 2008 was 70 dollars.

Against this backdrop it would appear wholly logical to change this figure and some other forecasts in the draft state budget for 2009. However, this has not happened. Representatives of the economic bloc in the government and the Milli Maclis say it's not worth worrying about how the state's coffers will be filled next year - Azerbaijan's prevailing economic realities allow stable growth in budget revenue and expenditure to be maintained.

Headline figures

Azerbaijan's state budget for 2009 has been drawn up with a price of 70 dollars for a barrel of oil.

According to the draft submitted for discussion to parliament, the state budget in 2009 will have a deficit (the deficit will be 178 million manats, 0.4 per cent of GDP). Revenue will be 12,177 million manats and expenditure 12,355 million manats. Compared to 2008, budget revenue in 2009 will increase by 16.1 per cent and expenditure by 11.7 per cent.

The tax bodies will provide 48 per cent of budget revenue (six billion manats), while contributions from the non-oil sector will outstrip those of the oil sector. Revenue of 2,680 million manats is planned from the oil sector via the Tax Ministry (a fall of 7.6 per cent compared to 2008) and 3,070 million manats from the non-oil sector (a growth of 23.8 per cent). Revenue from the State Customs Committee next year is expected to be 1.3 billion manats (17 per cent of income), transfers from the State Oil Fund will be 4,915 million manats and the rest will be other revenue.

The growth in revenue broadens the government's opportunities for spending. As in previous years, tackling social problems remains the main area here, with 4,024 million manats to be spent on them (33 per cent of budget expenditure). This article of the budget will have a real effect on the pockets of ordinary Azerbaijanis, especially the socially vulnerable: the basic pension will reach 80 manats in 2009 (an increase of 10 manats) while the "criteria of need", which is taken as a base in issuing targeted social assistance, will be 60 manats (an increase of five manats). 

Economic Development Minister Shahin Mustafayev said that the government is proposing to increase the subsistence level for one person to 84 manats; for citizens able to work it will be 92 manats, for pensioners 65 manats and for children 69 manats. 

As for strategically important expenditure, such as Azerbaijan's defence spending, it will be more than two billion dollars in 2009. Azerbaijani Finance Minister Samir Sarifov said that as well as articles on expenditure on defence, certain sums would be allocated to this area from the state investment programme too.

Significantly, budget funding of science is increasing by 47.6 per cent, with the state planning to allocate 105.8 million manats. Of these funds, seven million manats will be spent on drawing up a new mechanism for the funding of science and 10 million manats on providing modern equipment for various laboratories of the Academy of Sciences.

The state budget will allocate 117 million manats to fund targeted programmes in education (an increase of 52.1 per cent). Overall spending on education will be 13.2 per cent of all expenditure. A further 5.2 per cent will go on health. More than 400 million manats are allocated to agriculture, 2.8 million to support non-governmental organizations, 1.3 million to support the media, 14.5 million to social mortgages and 334 million to improving the roads.

The volume of state capital investment next year will be 4.7 billion manats overall.

As for macroeconomic indicators, which are also forecast in the budget package, next year GDP in Azerbaijan is expected to be 43.6 billion manats with a real growth rate of 18.9 per cent. In the non-oil sector GDP next year will increase by 10.5 per cent. The volume of investments in the Azerbaijani economy from all sources is forecast to be 8.4 billion manats, of which 6.5 billion manats will be internal investment. "For 2009 we are forecasting inflation at a level of 12-14 per cent on condition that no external factors have an undue influence. In the medium-term we expect a fall in inflation to single figures," Sahin Mustafayev said.

Seventy dollars per barrel is realistic

These figures are bound to make us feel optimistic and proud about the capacity of the Azerbaijani economy. However, how realistic are these forecasts with the world crisis and falling price of oil? Nobody has yet removed the state budget's dependence on oil. Against the backdrop of gloomy predictions for the world economy in the near future, why is the government of Azerbaijan continuing to insist on high rates of growth in the domestic economy and is it going to bring into play to this end the accumulated reserves? 

The list of questions could go on. However, the Azerbaijani government's economic wing is confidently and with good reason rejecting any possibility of world processes having a negative effect on their forecasts. "The reforms we have conducted and the current financial and economic potential allow all the problems to be kept to a minimum, including those linked with the world economic crisis. If necessary, we can make proposals on adjustments to the state budget, but we think that there is no need," Samir Sarifov said.

It's interesting that the economic wing of parliament, led by the chairman of the parliamentary commission for economic policy, Ziyad Samadzada, supports the government's position. "The draft state budget for 2009 has been drawn up in conditions of world financial and economic crises, falling oil prices and instability in the leading currencies. Overall, we think that the draft state budget for next year will allow us to achieve all the objectives facing Azerbaijan," he said during the discussions in parliament.

His confidence, in particular, rests on the following factors: in 2002, the world average oil price was 27 dollars per barrel, in 2007, 71 dollars and in 2008, above 100 dollars. This is significantly more than was envisaged in the state budgets for these years and, as a consequence, Azerbaijan received sufficient revenue to insure the budget against force majeure.

The commission chairman stressed that in January-September 2008 the Azerbaijan International Operating Company (AIOC) exported oil at an average price of 111 dollars per barrel, which is also significantly higher than the predicted figure. "In the fourth quarter Azerbaijan will receive revenue from oil exports which will allow significant currency reserves to be created to protect the economy from a fall in oil prices," he said. The State Oil Fund (SOFAR) is already playing the role of a stabilizing force in the state budget and "regardless of the price of oil on world markets, next year we shall receive from the fund transfers of 4,915 million manats".

The head of Azerbaijan's Audit Chamber, Heydar Asadov, said that the budget would not experience problems, even if world oil prices drop to 50 dollars. "More than 80 per cent of revenue to the state budget is fixed - these are transfers from the State Oil Fund, profit tax (one billion manats), etc. This means that there will be no problem with revenue to the state budget," Heydar Asadov is convinced. Moreover, the Finance Ministry has already accumulated more than one billion manats in a special deposit account.

As for potential problems with funding from the state budget for investment projects, "prices for various types of equipment and raw material fall in line with the fall in oil prices and the cost of projects automatically falls too". In other words, projects' dependence on the oil price protects the budget from overload.

Liquidity from the state budget

The arguments of the government, parliamentarians and neutral experts appear convincing, but they still need to stand the test of time and reality. Today's reality, as has already been said many times, is financial crisis and low oil prices. As a consequence, precautionary measures and support for the more vulnerable areas of the economy, exposed to external influence, are in any case needed. At present, these areas include first of all the banking sector, of course, which is experiencing tangible liquidity problems, though these are neither threatening nor of crisis proportions. 

The government is therefore compelled to earmark a special article to support banks, which is already common practice in most countries. The state budget will allocate 50 million manats to ease banks' liquidity problems and another 120 million manats will be spent on increasing the authorized capital of joint-stock societies in which the state has a share.

"At present the banking system's external borrowing is around two billion dollars. We are monitoring the situation in the banks and can say with certainty that the banks are not experiencing problems in repaying funds," the chairman of the National Bank's board, Elman Rustamov, said during the parliamentary discussions on the 2009 state budget. "However, in 2009 they will have to repay 70 per cent of the two billion dollars, which will mean this sum being taken out of circulation in Azerbaijan. And during a global economic and financial crisis it will be impossible to receive this volume of funds again." 

He said that in these conditions a fall in business activity must not be permitted and support for the small and medium-sized business sector and the agro-industrial complex must continue. "In this regard, I think that 2009 will be very interesting. The macroeconomic lines have been drawn correctly, structural and institutional reforms must be continued," he said.

To sum up, although there is a degree of uncertainty over whether the headline figures in the state budget for next year will be met, the determination of the government and state to protect the private sector and indirectly the public from the influence of the international situation is what is most important in the budget. This means maintaining stability, which is so important for the sustainable, continued development of our economy.