LIVING WITHIN MEANS

The Azerbaijani Finance Ministry has unveiled the parameters of the country's draft state and consolidated budgets for 2016. Initially, the 2016 budget was positioned as a cost-effective one, taking into account the realities of the economic situation in the world, but at the same time, as one that preserves its social orientation.

Oil factor

First of all, we should note that the earlier reports that the budget has been drafted on the basis of an oil price of 50 dollars per barrel turned out to be justified. However, according to Minister of Finance Samir Sarifov, there are, as always, two more scenarios in store - 40 and 60 dollars, but, as the experience of recent years shows, even with critical changes in world oil prices, the government prefers to keep to the originally approved plan. The rate of the manat against the US dollar in the budget is set at 1.05 manats.

Naturally, the decline in projected oil prices could not but affect the economic indicators of the country's main economic document. Budget revenues are projected at 14.566bn manats, which accounts for 25.2 per cent of GDP, expenditure - 16.264bn manats (28.2 per cent) and the deficit - 1.698bn manats or 2.9 per cent of GDP (its volume is set at 57.7bn manats). At the same time, in comparison with the forecast budget, revenues will decrease by 25.1 per cent and expenditure - by 22.9 per cent.

As stated in the preamble of the document, the main directions of the budget and tax policy on revenues for 2016 are increasing the share of non-oil revenues and gradually reducing transfers from the State Oil Fund. This is confirmed by figures - in the coming year the share of the oil sector in general revenues is expected to fall to 53.5 per cent compared to 65.3 per cent expected in 2015.

With regard to transfers, the decline is significant enough here - in 2016 it will amount to 6bn manats, i.e. 42.2 per cent less than in 2015 (8.1bn manats). However, against the background of the expected decline in SOFAR revenues, the figure is quite logical: the revenues of the Fund in 2016 are projected at 6.71bn manats, which is 3.53bn manats (34.5 per cent) less than the forecast for 2015. At the same time, its expenses are set at 8.2bn manats (33.4 per cent less) and transfers to the state budget account for 73.2 per cent of this amount. According to Finance Minister Sarifov, the decline in transfers is the right policy because "we are facing the task of maintaining foreign exchange reserves in the medium-term and using them effectively".

This significant decline is related, of course, to the fall in oil prices on the world market. "We expect that this situation (low oil prices) will continue for another few years, and then maybe the prices will rise. As you know, the world economy develops in cycles, and the period of high prices for raw materials has ended and a time of great recession has started," Sarifov said, adding that the decline in the price of oil is associated with a significant increase in production, particularly in the United States. "Along with this, OPEC countries declined to cut production. As a result, supply on the market exceeds demand. At the same time, we do not exclude political games that are contrary to economic logic here. However, the reality is that oil prices have dropped substantially, and we need to build our economic model in line with this reality," the minister of finance said.

Revenues: less benefits, more taxes

The main reason for the fall in budget revenues in 2016 will be the decline in the amount of income tax collections, most of which are formed by transfers from the Azerbaijan International Operating Company (AIOC), which operates oil production at the Azari-Ciraq-Gunasli [Azeri-Chirag-Guneshli] block, and SOCAR.

We must say that in general, revenues from the Ministry of Taxes in 2016 will be 5.8 per cent lower than the expected actual figure for 2015 and amount to 6.6bn manats.

At the same time, some changes are planned in the Tax Code - individual privileges may be limited or even cancelled.

For example, "surprises" can await those who pay taxes under the simplified system: according to the draft state budget of 2016, it is planned to improve it, and therefore, there will be changes to the existing legislation. Measures to improve the collection of taxes are also planned.

Innovations will also affect the work of customs authorities, which have been instructed to provide 1.59bn manats in budget revenues in 2016. In principle, this index is maintained at this year's level, but it will be much harder to implement it in current economic conditions. And therefore, it was decided to accelerate work towards transition to a phased system of customs duties; Judging by the words of the chairman of the State Customs Committee, Aydin Aliyev, we can also expect new restrictions in the area of e-commerce, etc., as well as the complete abolition of a number of customs privileges.

As part of the draft state budget of 2016, activities are also planned to increase revenues to the state budget from the renting of state-owned lands and privatization. In addition, work will continue on the gradual limitation of government funding for many sectors of the economy in order to replace it with private investment.

Costs: savings and efficiency

So, it is more or less clear with revenues. How will "savings" of public fund be expressed and how will it affect the population?

Let's start with the answer to the second part of the question. President Ilham Aliyev has repeatedly stated that the state budget of 2016 retains its social orientation. Moreover, the share of spending in this area, which includes salaries, pensions and allowances, the purchase of medicines, food, etc. has increased by 8.6 percentage points, reaching 36.1 per cent of total expenditure. That is to say there can be no talk about cutting or delaying the financing of the above articles.

Defence spending will also increase - by 3.3 per cent compared to the forecast for 2015, and as a whole, funds provided for spending on defence and security, the judiciary, law enforcement agencies and the prosecutor's office in 2016 will amount to 18.3 per cent of the total amount of state budget spending.

Among the areas on which more money will be spent from the state treasury in 2016 are also education (0.1 per cent), culture, art, information, physical education and so on (1.9 times more), and agriculture (0.1 per cent).

At the same time, expenses on investment (48.7 per cent), industry and construction (48.5 per cent), and fuel and energy (25.8 per cent) will be significantly reduced. At the same time, health care costs will decrease by 4.2 per cent, transport and communications - 10.6 per cent, social protection and social security - 7.1 per cent, science - 12.5 per cent, the prosecutor's office, judicial and law enforcement authorities - 7.2 per cent, etc. In 2016, the cost of financing public debt will increase, which is due to the devaluation of the manat.

"Implementation of major government programmes will be continued. But it is possible that in order to save money, the deadline for the implementation of infrastructure and other major projects that have already been launched will be extended. At the same time, we will optimize the operating costs of the budget," Sarifov said. He added that over the past years, a lot of work has been done in the area of infrastructure improvement and electricity, gas and water supply in the country, which makes it possible to implement the planned savings painlessly. On the other hand, it is time to replace state investments with private ones in many areas and involve foreign and local investors in them. "This will contribute to the development of entrepreneurship," the minister said.

Thus, the effect of the economic and political situation in the world, of course, could not but affect the budget of Azerbaijan, which resulted in a decrease in budget revenues and spending for the first time in recent years. Perhaps, next year it will affect the credit rating of Azerbaijan. According to Sarifov, "while compiling the rankings, along with the fall in oil prices, the steps taken by the government are also taken into account. Despite the decline in energy prices, our government took the necessary measures, and this factor led to the preservation of our international credit rating at the B- level. Nevertheless, oil is getting cheaper, and, of course, it affects our revenues. Along with this, there are geopolitical tensions, and these two factors could adversely affect our rating."

Along with that, the economic foundation laid in previous years allows us to hope that the downward cycle of the global economy will pass painlessly. Investments in infrastructure and the creation of large enterprises in various sectors of the economy should already have their effect.