STABLE POSITION

Stable high oil prices in the global markets this year prompted the Azerbaijani government to revise the parameters of the state budget in the summer: amendments approved by President Ilham Aliyev raised the revenue target by 9.8% of the original forecast (₼33.8b), and expenses by 9.6% (₼36.6b). Accordingly, the deficit is expected to be ₼2.8b, or 2.5% of GDP. In the first version of the budget it was projected as a deficit. But following the results of the first five months, it became clear that the situation is very positive: the January-May period saw a surplus of ₼2,8b, or 41,5% more than a year ago.

In contrast to the state budget, the consolidated budget is expected to be in surplus, with revenues of ₼43b (+30.4% more than in the baseline) and expenditures of ₼41.3b (+8.7%).

Oil revenues rule

According to amendments, a more ambitious oil price has been budgeted ($60/barrel versus $50 previously), thanks to which revenues and expenditures are progressing towards another record.

As Finance Minister Samir Sharifov pointed out in his address to the parliament, the new target may seem risky, but it is "quite realistic" given that the average price per barrel of Azeri Light this year was $80-85.

Energy revenues continue to dominate the revenue side of Azerbaijan's state budget with a share of 52.5%. It is encouraging that the gap with the non-oil sector is narrowing every year, while the latter's revenue trend is rising - 10.8% against an 8.9% increase in oil revenues.

Remarkably, most of the increased revenues will be provided by the State Customs Committee (+20.6%). The State Tax Service will provide an additional 11.4%, while the extra-budgetary revenues of budgetary organisations are expected to be 10.3% higher. Transfers from the State Oil Fund (SOFAZ) will also be higher, but only by 4.1%.

In the annual report published by the fund for 2022 the share of transfers from SOFAZ in total state budget revenues in 2010-2021 varied between 40-50%, being 25.8% in 2022.

Capital expenditures

The lion's share of additional expenditure is planned for defence and the rehabilitation of the liberated territories of Garabagh and Eastern Zangezur.

"This year's state budget is a record in the history of independent Azerbaijan. Nevertheless, as soon as we had additional funds, we allocated a new large sum to increase the budget. There are two main directions: one of the priority issues for us is the army construction, while the other is the reconstruction of Garabagh and Eastern Zangezur," President Ilham Aliyev said.

It is quite logical and natural to make the two areas the most important items of state budget spending, given the tensions in relations with Armenia and the need for the speedy reconstruction of liberated territories to ensure the return of internally displaced people there. "Threats and dangers are on the rise, and we must be capable of overcoming any threat," President Aliyev said in one of his speeches. An additional ₼0.7b has been allocated for defence purposes.

Another ₼6.5b of state funds have already been invested in the reconstruction works. Initially, it was planned ₼3b for this purpose, but since in five months 60% of this money has already been spent, more funds are required. Finance Minister Samir Sharifov said that the government seeks to achieve rapid reintegration of these territories in the economy of Azerbaijan. In this case, they will also become profitable and will be able to start recouping the investments made.

According to Deputy Economy Minister Sahib Alakbarov, some 1,500 investors have already applied for assistance to carry out activities in Garabagh, including foreign investors, with some 100 entrepreneurs having already started operations. There is no doubt that this number will grow, because in both local and foreign investors are exempted from all taxes for ten years in these territories, which makes making business here very profitable.

Inflation

An interesting point in the new amendments was the reduction of forecasts for social protection and social security by almost ₼100m. Although the overall volume of expenditures remains unchanged, authorities reduced only the spending on "other social protection and social welfare enterprises and activities". During the parliamentary hearings, MPs urged the government to take into account the global inflationary processes and their impact on domestic consumer prices. For example, MP Ali Masimli argued that the updated inflation forecast for 2023 (10.4%) is unrealistic and should be higher; hence it is necessary to review the possibility of increasing wages, pensions, benefits, etc. However, Minister of Labour and Social Protection, Sahil Babayev, argued that Azerbaijan was the leader in terms of purchasing power among the CIS countries.

The Central Bank of Azerbaijan (CBA) announced that it maintained the 2023 inflation forecast at 8.3%. "There remains uncertainty about inflation factors in the global economy. Azerbaijan recorded deflation of 0.4% in May and annual (12-month) inflation at 11.5%, 4.1 percentage points below the peak of 15.6% in September 2022. Annual food inflation was at 12.7%," the CBA noted, adding that it will continue to make an impact through monetary policy to reduce inflation.

By the way, thanks to the CBA's decision adopted in June, it was possible to keep the discount rate at 9% for the first time in recent months. "If inflationary pressure continues to weaken, we can consider pausing the tightening of the current monetary policy until at least September 2023 and easing it in subsequent phases," the CBA officials stated on the discount rate.

It is true that the global situation is also affecting other macroeconomic indicators of the country. In particular, as Chairman of the parliamentary Committee on Economic Policy, Industry and Entrepreneurship, Tahir Mirkishili, pointed out, this year the global and Azerbaijani GDP growth rates are expected to decline. According to the updated forecasts of the Azerbaijani government, in 2023 nominal GDP is estimated at ₼111.3b (₼106b previously), real growth at 1.8% (versus the forecast 2.7%). However, any growth under the current difficult external conditions is already an achievement. The key thing in this period is the availability of sufficient domestic resources. Thus, another record growth of the state budget is a confirmation of Azerbaijan's stable position.