POSITIVE OUTLOOK

It took just a few months for the military conflict in Ukraine to cause a serious crisis in the global economy. Rising energy, food and raw material prices, disruptions in the supply chain, increased risks to food security, introduction of tight currency policies with rising interest rates... All these realities make both reputable international organisations and national governments reconsider their expectations for 2022. Based on the results of the first half of 2022, Azerbaijan has adjusted its forecasts for the state budget. Revised consolidated budget revenues and expenditures are forecast at ₼36.7bn and ₼35.5bn, respectively: the consolidated budget previously approved with a deficit of ₼5.2bn is now in surplus.

External circumstances

According to the World Bank's Global Economic Outlook published in June 2022, global economic growth will slow down by 1.2 percentage points (pp) to 2.9% from the original forecast. At the same time in commodity-exporting countries, excluding Russia and Ukraine, it will accelerate by 0.3 pp (to 3.7%).

Rising geopolitical tensions and energy embargo have increased prices for these commodities in nine years. In January-May 2022, the average monthly price for Brent crude reached $102 (+60.9% compared to the corresponding period of the previous year). In the said period, the highest price was recorded in March—$112.5, which is 1.7 times higher than in March 2021.

Meanwhile, according to the World Bank, the natural gas price index rose 2.8 times during the first quarter of 2022 compared to the same period in 2021.

In addition to energy, the prices of other raw materials, as well as grain, metals, fertilizers, and so on increased because Russia and Ukraine are main exporters of these commodities. Thus, within the five months of this year, the prices of agricultural products, food and cereals went up by 19.5%, by 24.6%, and by 26.5%, respectively. The biggest increase in prices of raw materials was recorded for fertilizers—by 110.3%.

All this inevitably affects the economies of other nations, especially those who have established trade and economic relations with the both conflicting sides.

The impact on Azerbaijan has been twofold. On the one hand, there is a negative pressure from external inflation, while on the other hand, revenues from oil sales, the country's main export commodity, are rising.

Trends in Azerbaijan

The significant increase in oil prices has had an impact on nominal GDP. But there is an interesting statistic: while the growth of nominal GDP has mainly been possible thanks to the oil industry, its real growth has been almost entirely ensured by the non-oil sector.

Value added to the country's economy in January-April 2022 reached ₼39.6bn, which is 45.7% of the initial forecast. In the same period, the increasing oil prices increased the GDP up to ₼20bn, which is 76.6% of the initial forecast. As a result, the share of the oil component in GDP reached 50.8%.

The creation of additional value in the oil sector has also affected the state budget. Tax on profits from oil companies brought in ₼1.2billion by the end of April instead of the planned ₼239m.

Economic growth during the same period was 7.2%, the highest in 12 years. Amid the slight growth (0.2%) in the oil sector, the non-oil sector grew by 11.4%. This twofold increase in the non-oil GDP has been mainly ensured by the service sector, including transport, tourism, social and other services.

As a result, by the end of January-April the state budget received ₼1.1b against the previously forecast ₼898.5m thanks to VAT on goods, works and services.

Overall, except for the transfers from the State Oil Fund, all other revenue streams exceeded expectations in January-May 2022.

The highest record was observed in April: inflow of ₼3.7b, which is 42% more than estimated. This was mainly due to revenues from taxes (x2.1 times = ₼2.2b).

Thus, during the first five months of 2022, the state budget surplus was ₼2b, which is four times than planned. The consolidated budget surplus was about ₼4b (twice as much). One of the factors contributing to this surplus was the foreign exchange earnings from oil and gas exports, which have almost evened out. During this period, tax revenues exceeded the forecast by about ₼2b. All this prompted the government to revise the state budget and reallocate additional revenues.

The introduction of new options in the state budget is expected to improve various areas, including defence, security, reconstruction of liberated territories and the return of internally displaced persons to their homes as soon as possible.

Forecasts are good but inflation

Since most of the additional spending is investment-oriented, according to the updated calculations, the real growth rate of non-oil GDP would increase from 4.9% to 5.5% thanks to the construction and other sectors.

"Taking into account the positive dynamics of Azerbaijan’s economic indicators, with the state and consolidated budgets having received more revenues than originally forecast, President Ilham Aliyev instructed us to allocate part of the growing revenues to construction works on the liberated territories. President Aliyev also ordered more spending on social welfare, defence and security, additional provisions for food security and new infrastructure projects,” Finance Minister Samir Sharifov said in his keynote address to parliamentarians.

In the forecast, the average annual oil price is increased from $50 to $85 and average annual inflation from 4 to 12.5%, resulting in the increase in nominal oil and non-oil GDP. By the end of this year, it is expected that GDP reaches ₼115.4b for the first time. Again, the bulk of the expected additional GDP growth (₼28.8b) is planned to come from the oil sector.

According to Accounts Chamber, an average price increase of 2-2.5% is expected in September-December in order to meet the inflation forecast, taking into account marginal price rises in the summer season or deflation. However, since the lion’s share of state expenditures is usually spent in Q4, we can expect inflationary pressure next year as well.

What has changed in the state budget?

With the new amendments, state budget revenues and expenditures for 2022 have been increased by 8.9% (₼29.2b) and by 8.1% (₼32.3b), respectively. As a result, the state budget deficit was increased by ₼43m (to ₼3.1b, or 2.7% of GDP; -0.8 pp vs. the previous forecast).

As a result of revision, the share of oil and non-oil revenues will be ₼15.5b (53.2%) and ₼13.7b (46.8%) of total revenues, respectively.

The main income generator for the state budget will again be taxes, which will increase by another 33.1%, or 40.2% of total state budget revenues (₼11.7b). The State Customs Committee traditionally comes second—₼4.6b (+8,1%), or 15,8%.

As to transfers from the State Oil Fund, they have been reduced by 9.4%, or 39.4% of all budget revenues. This is an extremely positive decision in terms of increasing the accumulative function of the Fund—the less we spend today, the more will remain for future generations. By the way, this year SOFAZ expects to receive ₼15.8b and spend ₼11.6b, respectively.

Another important positive decision was the increased forecast for the oil sector (+5.8%), which means that the government already has the necessary growth potential in this segment. In other words, the higher the share of the non-oil sector, the lower the dependence on oil revenues.

As for spendings, expenditures for social protection will increase by 2.4%, and for education by 0.06%. Another ₼193m will be spent to increase funding for the food security, which is quite logical in the current conditions.

Most of the increase in expenditures accounts for the increasing government capital expenditures for various projects—by ₼1.3b, including an additional ₼470m to be allocated to projects in the liberated territories. That is, the largest investments will be made in construction projects in Garabagh (₼2.7b, or 21% more than the previously approved indicator).

The second largest item of state expenditures includes defence and national security—extra 13%, or ₼5b of the total expenditures. Even after two years after the military operations in Garabagh, the unceasing revanchist sentiments and indefinite stance of Armenian authorities between peace agreements and provocative statements force Azerbaijan to be ready for any turn of events. Fortunately, as the above figures show, Azerbaijan have enough economic resources to respond to them with dignity. 

GLOBAL ECONOMIC GROWTH OUTLOOK FOR 2022