THE BUDGET HAS BEEN REVISED

Following the practice of recent years, the Azerbaijani government has reviewed budget forecasts for the next year. After discussions in parliament, the draft changes were unanimously approved by deputies and endorsed by the head of state.

As a result, the revenues in the combined budget for 2008 totalled 17.5 billion manats, an increase of 66.4 per cent on the forecasts endorsed earlier this year and 120 per cent on actual revenues in 2007. Expenses in the combined budget have been endorsed at 12.8 billion manats, which is an increase of 25.3 per cent on previous predictions for 2008 and 72.9 per cent on actual expenses in 2007.

Revenues growing faster than expenses

Following the revision of forecasts, revenues in the state budget were set at 10.5 billion manats (an increase of 74.5 per cent on 2007 and 41.8 per cent on previous forecasts for 2008), the budget of the Naxcivan Autonomous Republic - about 219 million manats (a drop of 4.3 per cent compared with 2007 and an increase of 1.4 per cent on previous forecasts for 2008), the revenues of the State Oil Fund - about 10.2 billion manats (an increase of 5.4 times and 2.8 times respectively) and the State Social Security Fund - 1.4 billion manats (30.1 and 10.8 per cent).

Let's dwell on the state budget. The extra revenues in the state budget come from four directions. The forecast on the collection of taxes by the Tax Ministry has increased by 7.6 per cent (380 million manats), up to 5.4 billion mantas; by the State Customs Committee - by 0.9 per cent (10 million manats), up to 1.1 billion mantas; transfers from the State Oil Fund - 2.7 billion manats (up to 3.8 billion manats) and revenues from paid services provided by public sector organizations - 1.5 million (up to 137.5 million manats).

State budget expenses increased by 81.7 per cent on 2007 and by 29.8 per cent on forecasts for 2008 - up to 11.1 billion manats (34 per cent of GDP). Extra money will be spent on current budget requirements - 983 million manats (38.1 per cent); capital investment - 1.5 billion manats (60.7 per cent); the servicing of foreign debt - 17 million manats (0.2 per cent); diplomatic services - 3 million mantas and payments of membership fees to international financial organizations - 2.8 million manats. Another 276 million manats are earmarked for improving the country's defences. Expenses on the law-enforcement agencies also increased, by 4.8 million manats.

Oil matters most

These revisions place the main emphasis on increasing the volume of Azerbaijan's oil revenues, against a background of favourable oil prices on the world market, which will boost state budget revenues. For example, this year the oil sector "supplied" 6.7 billion manats to the state budget (including transfers worth 3.8 billion manats from the State Oil Fund), which is 63.9 per cent of overall budget revenues. For comparison, in previous forecasts the share of oil revenues was 51.9 per cent (3.83 billion manats).

Expanding on the subject of oil, we should point out that the government has also decided to review the price of oil set in the budget in order to calculate its revenues and expenses, and to increase it from 50 to 70 dollars. This made it possible to increase the size of transfers from the State Oil Fund to the state budget by another 2.7 billion manats. Transfers from SOFAR had been set at 1.1 billion manats; following the review they were increased to 3.8 billion manats, which will raise the combined budget surplus to 4.7 billion manats.

Meanwhile, the changes did not affect the forecast on transfers from the State Oil Company, which remained at 1.35 billion manats. However, the growth in state budget revenues will be secured by the profit tax paid by the AIOC on its exploitation of the Azari-Ciraq-Gunasli oil fields. This profit tax is expected to be 1.55 billion manats. These calculations were made on the basis of the price of oil set in the state budget - 70 dollars per barrel. If oil prices stay high, the state budget may receive 1.75-1.8 billion manats from oil companies, said Deputy Minister of Finance Azar Bayramov.

In 2008, the state budget will get, not 25 per cent, but 30 per cent of income from the difference between the contract (export) and domestic wholesale price of oil.

Meanwhile, in connection with the large-scale work being carried out in the country to develop the non-oil sector of the economy, the forecast on revenues from this sphere is up to 2.48 billion, against the 2.27 manats forecast earlier.

156.6 million manats for food security

In the new forecasts for 2008, state capital investments increased by 53.3 per cent on previous forecasts and totalled 4.3 billion manats. Another 1.5 billion manats of capital investments are earmarked to implement energy projects, improve energy supplies to Baku, reconstruct roads, buy carriages for the Baku metro, capitalize the Caspian shipping company, infrastructure projects and so on.

The dynamics of capital investments in the country are improving. Of the overall volume of investments, worth 6.8 billion manats, 59.6 per cent are secured by domestic investment, which is explained by the development of the private sector and the strengthening of the financial base. About 10 or 12 years ago, the domestic element in general capital investment in the country's economy accounted for only 1-2 per cent.

Since Azerbaijani President Ilham Aliyev identified the development of the non-oil sector, the creation of reserves to ensure security of food supply and the acceleration of the implementation of investment projects as the main priorities for this year, expenses in these areas have been increased.

For example, in order to take measures to ensure food security, it is planned to allocate another 156.6 million manats from the state budget. This money will be spent on increasing state support for agriculture, accelerating melioration and irrigation work and building new grain depots. The minister also stated that the government is considering additional measures to increase the volume of the grain harvest, which is why greater attention will be paid to the development of seed growing.

The impact of the rate

Returning to the subject of oil, we have to touch on a further aspect. Taking into account the considerable influence of oil revenues on Azerbaijan's economy, the introduction of correct rates in the state budget is acquiring special importance.

It must be noted that the government expects the exchange rate of the national currency against the US dollar to increase by 5 per cent this year - to 0.81 manats per dollar. Although this is a factor that, on the one hand, contains inflation, on the other quite serious developments took place around the world last year (when the forecasts were made) - the dollar depreciated against leading world currencies. In this respect, the value of dollar assets was being reassessed around the world.

Moreover, this year the government expects quite a significant number of oil dollars to be set in the revenues of the combined budget. Major foreign investments in the Azerbaijani economy are also expected. Against this background, it is expected that the US Federal Reserve System and the European Central Bank will reduce interest rates, which will reel the dollar back from freefall.

According to Minister of Finance Samir Sarifov, the government is most concerned about the fact that Azerbaijan's foreign trading partners do not stipulate the contract cost of goods imported into Azerbaijan in US dollars.

"The country is receiving US dollars from the sale of oil and, as result of fulfilling our obligations on imported goods, there is a risk of losing out from the difference in rates, against which we cannot insure ourselves," the minister said. Further, a sharp change in the rate of the dollar against other convertible currencies increases the price of goods imported into Azerbaijan, i.e. it boosts inflation. But this does not mean that the government is going to take a wait-and-see position on this issue. According to the minister, there are already certain plans to reduce the negative effects of global inflation. These measures are aimed mainly at protecting the needy strata of the population and, after correcting the forecasts for 2008, another 400 million manats were earmarked in the state budget to increase pensions, wages and social allowances.