STRATEGIC REDUCTION

The development of the Azerbaijani economy will still focus on reducing external public debt, which is a traditional practice in many countries. This position was once again reflected in the Strategy for medium- and long-term management of the public debt of the Azerbaijan, approved by President Ilham Aliyev. In the coming years, the government plans not only to maintain the ratio of external borrowings to gross domestic product (GDP) at a safe level (up to 25-50%) but to reduce it significantly too.

Good forecasts

At the end of 2017, Azerbaijan's foreign borrowing reached $9.4 billion, or 22.8% of GDP. For comparison, the American public debt reached $20.5 trillion, which is 105.6% of GDP. The situation is somewhat better in the EU countries, in particular, Germany - 64.1%, Ireland - 68%, Hungary - 73.6%, etc. Although there are countries such as Greece, which recently was experiencing acute debt crisis and had a ratio of debt/GDP ration at 178.6% by the end of 2017. Slightly better, but still unoptimistic is the situation in Italy (131.8%), Portugal (125.7%) and even Belgium (103%). According to Eurostat, on average, the state debt for 19 Eurozone countries reached 86.7% of GDP, and for 28 EU countries - 81.6% of GDP.

As for Azerbaijan, at present 35.5% of the external state debt is held in government securities in foreign currency, an impressive 58.6% are loans directly attracted by the government, and 5.9% are contingent liabilities.

The rapid increase in the national debt of Azerbaijan happened exactly at the end of 2017, which was almost 35.9% more than in 2016, which is objectively connected with the completion of a number of large regional and domestic projects. For example, in recent years, foreign financial resources ($3.2 billion) have been attracted for the implementation of the Southern Gas Corridor Project; Azerenerji OJSC borrowed $928.2 million, Azerbaijan Railways CJSC - $478, 9 million, SOCAR - $460.6 million, other state-owned companies - $778.3 million.

As a result, the Azerbaijani government fulfilled its financial obligations to foreign partners in regional projects in the oil and gas industry and transport, despite the unfavorable external situation due to low oil prices in world markets in 2015-2016. The foreign loans taken under the state guarantee were transferred directly to the real sector of the national economy, which ultimately contributes to the growth rate of the economy.

At the same time, if in 2017 the nominal growth of country's GDP was 0.1%, according to the government's forecast, this year the national economy will grow by 2%, and by 2021 - 2.4%. In theory, the growth of the GDP can cause growth of public debt but to a non-dangerous level. However, the government has chosen a fundamentally opposite path and is pursuing a policy of reducing external borrowing to 12% by the end of 2025.

Restrained dynamics

So, according to the government's forecast, after reaching its peak of $10.1 billion by the end of 2019, external debt will drop to $6.5 billion by the results of 2025. According to the State Debt Management Strategy, the Azerbaijani government plans to implement external borrowings for a total of $2.075 billion over the next 8 years (2018-2025), which is less than the amount of attracted funds in 2017.

"Unstable oil prices and the resulting decline in revenues of the consolidated budget of Azerbaijan make it necessary to take a closer look at the creation of new debt obligations in foreign currency. Therefore, in 2018 and subsequent years it is planned to attract loans only for priority projects," the strategy indicates.

One of the areas of spending state-guaranteed funds will be the transport sector, considering the implementation of the international transport corridor North-South. In particular, it is planned to invest $325 million in improving the Azerbaijan Railways CJSC and the construction of the Baku-Yalama railway bordering with Russia. Also, attracted loans of $500 million from the Asian Development Bank (ADB) will be directed to economic reforms.

Such a cautious policy towards the national debt pursued by the Azerbaijani government is associated with an ever-increasing burden on the state budget. In particular, the expenses for servicing the public debt (payment of the principal debt and interests) in 2018-2021 in the state budget will reach 10.1-11.3%.

In 2024, the expenses for servicing the signed loan agreements will sharply increase because the government should implement a one-time payment for the return of securities ($1.25 billion) issued by international financial markets in 2014. Nevertheless, as a whole, the annual dynamics of servicing the external public debt is rather restrained, which prevents the growth of state budget expenditures.

Domestic debts

However, domestic loans has their own share in the national debt as well. Thus, the government issues state securities annually to finance the state budget deficit and to develop the domestic financial market. These bonds are sold to investors based on market principles. Currently, the government issues short-term (for a period of 1 year) and medium-term (2 and 3 years) state bonds. It is assumed that all these securities will be fully repurchased before 2023, but their emission will continue in parallel in amounts that will reimburse the expenses for their servicing, and an additional 100 million manats. Thus, the government intends to increase the amount of domestic debt, but without risking the budget expenditures.

Meanwhile, it is known that the payment of the main debt on bonds issued under the state guarantee (₼10 billion) for financing redemption and management of the troubled assets of the International Bank of Azerbaijan (IBA) will begin in 2020. The strategy assigned this function to Agrarkredit CJSC, but the facilities of this organization to cope with these obligations cause doubts, and it is more likely that it will have to be done at the expense of the state budget...

In any case, the government aims to support local financial markets, the establishment of a secondary securities market, increase in the government securities issue, etc. In the long run, all these measures should lead to decrease in external borrowing.

Thus, the state debt (external and internal) of Azerbaijan, which according to the results of 2019 will reach $10.9 billion (24.7% of GDP), will decrease to $7.7 billion in 2025 (14.1%).

Main objectives

The main objective of the Strategy for Management of the National Debt until 2025 was to ensure the government's sustainability and gradual decline of debt amount in GDP. Negative implications of debt burden can be seen in Greece, which, despite all the sacrifices made to curtail social programs, continues to have the highest public debt in the EU (180% of GDP). 60% of young Greeks are unemployed, and in general this figure is kept at the level of 20%. The Italian economy is facing the same financial turmoil, and the announcement of default in this country may lead to the collapse of the Eurozone. A number of Italian political experts already suggest returning the Italian Lira back.

Azerbaijan is far from such a pessimistic development of the national economy due to the rational use of foreign exchange earnings in the country from the sale of oil and natural gas on world markets. In August 27, 2018, the financial report for 2017 of the State Oil Fund of the Republic of Azerbaijan (SOFAR), confirmed by the international audit company PWC, the fund's assets increased by $2.7 billion, or 8.02%, to $35.8 billion.

According to the Azerbaijani government, due to high oil prices, the State Oil Fund's funds will grow by more than $4 billion in 2018 and reach $40 billion. Taking into account the currency reserves of the Central Bank of Azerbaijan, which reached $5.546 billion as of July 31, 2018, Azerbaijan's total debt by 2018 will be 4.5 times lower than the country's foreign exchange reserves in SOFAZ and the CBA.

In other words, the government once again declares that Azerbaijan will not accelerate the growth of its national economy to achieve immediate benefits, using the opportunities to increase the debt burden or accumulated funds in SOFAZ. The goal of the strategy is to ensure that the future generations live within a stable national economy without any threats to be in debt bondage.