MIRROR OF NATIONAL ECONOMY

Azerbaijan entered the new year of 2023 with another record budget. In fact, even during the most critical periods the government has traditionally maintained the level of state revenues and expenditures at an order of magnitude more than in the previous year. The state budget has withstood truly difficult and remarkable developments of recent years, including the pandemic, the war for the liberation of the occupied lands, and now the Russian-Ukrainian war.

This year, the state budget of Azerbaijan expects to receive ₼30.8b and to spend ₼33.4b. Internal and external borrowings and proceeds from privatisation will fill in the deficit of ₼2.6b, or 2.4% of GDP.

Azerbaijan has no problems with the state debt. As stated by the prime minister Ali Asadov, the country's strategic foreign exchange reserves reach $56 billion, which exceeds the direct foreign debt by more than seven times. However, in 2023 the volume of external governmental borrowings will also increase more than twice: up to ₼1.4b against ₼600m in the previous year due to active borrowing in the domestic market. Nevertheless, it is still a long way from the dangerous ratio to GDP, given that the repayment of borrowings is also taking place at the same time.

Income balance

It is clear that the oil industry continues to be a major contributor to state revenues of Azerbaijan. Azerbaijan has been frightened and warned for years about the imminent end of the oil era. However, realities show that this is going to happen in a very distant future. On the contrary, Azerbaijan is in the epicentre of important and long-term international fuel and energy projects. On the other hand, the global events only push fuel prices up. The state budget for 2023 stipulates a restrained price of $50 per barrel of oil, which is $35 less than in 2022. Apparently, the government, as usual, decided to insure itself against possible changes in the market. At the same time authorities explain this move with the current global trend of transition to green energy, which is going to reduce investments in oil and gas sector, as well as limit supplies. Despite the pleasant trend of the average oil price in 2022 (around $100 or more per barrel), the current geopolitical situation makes it impossible to predict how the situation with oil changes this year.

As for the balance of oil and non-oil sectors in the state budget revenues, in 2023 this ratio will be 53% to 47%. Compared to the revised 2022 forecast, the oil sector's revenues (including ₼11.3b as transfers from SOFAZ) will be higher by 4.9%, and non-oil - by 5.6%. In the meantime, revenues from non-oil and gas in 2023 will cover only 63.6% of current budget expenditures. The report of the Chamber of Accounts on the draft state budget for 2023 shows that, unfortunately, this is the lowest figure for the last 9 years.

Taxes will make the lion’s share of revenues to the state budget (43.6% of revenues, which means a growth rate of 12.7%). In addition, 36.7% of the state budget revenues will be transferred from the State Oil Fund (SOFAZ), 15.5% from the customs, 2.4% as extra-budgetary revenues of budgetary organisations and 1.8% as other revenues.

Interestingly, the state budget expects to receive ₼321.21m in dividends from state-owned companies and banks, which is three times more than in 2022. First of all, this points to the government's intention to improve the efficiency of state-owned companies, which until recently have survived mostly through state subsidies only.

Expenses: The Great Return

It is been the third year in a row that the funding the restoration and reconstruction of territories liberated from the Armenian occupation has been one of the main items of state expenditures.

In 2023, the government will provide ₼3b for these purposes, which is 12.4% more than the approved forecast for 2022 and is 9% of total state budget expenditures this year. Unfortunately, due to the scale of destruction, the government still refrains from renaming this budgetary item as ‘development’ instead of the currently used reference of ‘reconstruction’. This year the authorities plan to continue 48 projects in Garabagh and Eastern Zangezur.

Overall, Prime Minister Ali Asadov says that the implementation of the first phase of the Great Return programme as part of the Strategy for Socio-Economic Development of Azerbaijan in 2022-2026 will require ₼19.2b from the state budget, which is 58.7% of the total amount of ₼32.7b of all projects included in the strategy.

According to Asadov, it is planned to allocate ₼5.2b from the state budget for the implementation of socio-economic development of the country until 2027. "In general, over ₼5.8b has been allocated for the implementation of projects to restore Garabagh and Eastern Zangezur over the past two years," Asadov said.

Strategy of Socio-Economic Development of Azerbaijan for 2022-2026 was approved by President Aliyev on July 22, 2022. According to the programme, the average annual economic growth of Azerbaijan in the next five years will be 3-4%, including in the non-oil sector up to 5%.

As we can see from the events unfolding in Garabagh in recent months, it is too early for Azerbaijan to reduce the expenditures for defence and security purposes. Therefore, a 4.6 per cent increase (to ₼5.3b) in these expenses is justified. "Strengthening Azerbaijan's defence capacity is a top priority for the country's leadership. In 2023, 16% of state budget expenditures will be spent for these purposes. In absolute terms, this means ₼5.3b," Ali Asadov said.

It is a logical decision, as Azerbaijan should have enough economic resources to respond to any challenge with dignity.

Social orientation

Traditionally, the budget will again be socially oriented, with 9.2% more funds allocated for social programs than in 2022. As Prime Minister Ali Asadov said, it is planned to continue reforms, implement measures of social support for vulnerable groups, taking into account inflation. Thus, it is planned to spend ₼4.4b specifically for social protection and social security - 18.3% more than in 2022. It has already been announced that according to changes in the Law on Labour Pensions developed by the Ministry of Labour and Social Protection, from January 1, 2023 this amount will be calculated based on the mechanism of indexation of all types of pensions. Thus, the final amount of pensions will be indexed according to the annual growth rate of the average monthly wage.

Ali Asadov noted that social support for vulnerable groups will continue this year, and the state budget for 2023 is 67% (₼15.2b) socially oriented.

As part of social expenditures, it is planned to increase allocations for education, health, environmental protection, etc.

Agriculture is another important priority item of the new budget. The food crisis, which almost all international organisations are warning the world community with, is forcing governments to focus on self-sufficiency in essential agricultural products, and thus to address problems in this area as soon as possible. It is clear that this is impossible without additional investments. Therefore, the draft state budget allocated ₼1.2b for the development of agriculture, which is 20,5% more than in 2022.

Mr. Asadov said that Azerbaijan's unified land fund makes up 8.6 million hectares, of which only 4.8 million hectares (55.2%) are suitable for agriculture. "Recently there have been many appeals to change the category and purpose of land plots suitable for agriculture for non-agricultural purposes. However, given the great importance of farming lands for Azerbaijan’s food security, food supply and employment, this is undesirable and will remain under special control," Asadov said.

To withstand the pressure

As part of budget discussions at the end of the year, Tahir Mirkishili, chairman of the parliamentary committee on economic policy, industry and entrepreneurship, made another interesting proposal. He said the beginning of fiscal year in Azerbaijan must be moved from January 1 to April 1. He believes that this will solve the problems with financing of a number of sectors, as the peak of budget expenditures falls in the fourth quarter.

So far, the proposal is pending adoption. The year started with new budgetary concerns. As Mr. Asadov rightly pointed out, apart from being an annual financial plan, the state budget is a mirror of the economy. Every year the loading of the state budget increases, meaning that ensuring macroeconomic stability under the current external environment is not easy at all. "Recent international tensions, the collapse of the global production chain and other problems have increased food prices and the deficit of food globally. Weakening global economic growth coupled with high inflation is pushing the global economy into recession. Everyone knows that the world will not be the same as before," Mr. Asadov said.

Therefore, the availability of sufficient domestic resources during this period is the main factor of resisting external cataclysms and the guarantee of independent existence in the geopolitical arena. Another record-breaking state budget is a real indicator of how Azerbaijan is progressing in this area.