GROWTH PARAMETERS

Comparatively high prices for energy resources and stable non-oil sector development dynamics during 2004-2014 contributed to the growth of state treasury revenues. Consequently, Azerbaijan's state budget underwent upward revisions almost yearly. After a tumultuous decade, this tradition is resurfacing. A favourable external environment, increased fiscal revenues in January-May, and positive GDP forecasts have created prerequisites for updating the state budget parameters from July this year.

GDP Exceeding Forecasts

The beginning of 2024 was marked by improving economic indicators in Azerbaijan. According to the State Statistics Committee, the nominal GDP volume in January-April totalled nearly ₼38.182 billion, ensuring 4.3% real economic growth. Overall, this is quite commendable, especially compared to the extremely low 1.1% economic development dynamics at the end of last year. As before, the non-resource sector, providing 7.7% growth in the first third of the year, was the driving force.

It would be imprudent to speculate on the global energy market's trajectory by year's end, especially given the new wave of oil price volatility observed since May. However, according to foreign experts' estimates, the average annual Brent prices will remain within the $80 per barrel range. The oil and gas sector still plays a pivotal role in our economy's development, given the volume of export revenues. However, the non-resource sector is today's locomotive, ensuring not only steady production and service growth but also maintaining high export rates.

Given the above, the government's expectations regarding the year's economic results are generally positive. Thus, the Central Bank of Azerbaijan forecasts economic growth rates in 2024 within the range of 3-3.5%, the Ministry of Economy - 2.4%. Experts from the UN, World Bank, International Monetary Fund, European Bank for Reconstruction and Development, and the international rating agency Fitch Ratings estimated our country's GDP growth within the same range (from 2.4 to 2.8 percent).

S&P Global Ratings has affirmed Azerbaijan's long-term and short-term foreign and local currency sovereign credit ratings at 'BB+/B' with a stable outlook. This suggests that despite a possible medium-term decline in oil production, Azerbaijan's significant budgetary and external buffers will help protect the economy from any new shocks to the foreign trade environment. S&P experts believe the government will have access to liquid assets of almost 70% of GDP until 2027. Also, the double surplus of the state budget and current account (1.7 and 7 percent of GDP, respectively) will be maintained during 2024-2027. Such S&P estimates are based on a forecast of oil prices in the range of $85 per barrel on average until the end of 2024 and $80 per barrel in the next few years.

Revenues and Expenditures

Thus, according to the government's forecasts and assessments of international expert structures, the favourable external environment and high non-resource sector development dynamics will ensure robust indicators of domestic economic development. It should be noted that in January-May, more than ₼7.5 billion was received through the State Tax Service alone, with over ₼1 billion in excess taxes paid compared to the plan. The non-oil sector accounted for more than ₼5.2 billion, or nearly 70 percent of all fiscal revenues. Accordingly, the additional fiscal revenues created conditions for revising the estimated state budget revenues for 2024.

"Actual receipts for the past period of 2024, expected macroeconomic indicators at the end of the year, as well as the expansion of the tax base and strengthening of administration have created favourable conditions for increasing the forecast figures for budget revenues both by tax and customs authorities," said Vugar Gulmammadov, Chairman of the Chamber of Accounts, while discussing amendments to the Law on State Budget of Azerbaijan for 2024.

Finance Minister Samir Sharifov, in turn, noted that the price of a barrel of oil on the world market in 2024 is on average $27.3 more than envisaged in the state budget. He stressed that in January-April, the share of non-oil sector revenues increased by 51.8%, which is 1.5 percentage points more than expected. This is quite natural, as non-oil revenues reached ₼6.9 billion, which is 6.8% more than the same period last year. During the reporting period, the total revenues of the country's state budget totalled ₼13.3 billion, while expenditures reached ₼10.75 billion, which is respectively 9 and 20.4% more than in the same period of 2023. As a result, a surplus of ₼2.509 billion was formed in the budget for four months.

Thus, the updated macroeconomic forecast and favourable dynamics of world oil prices since the beginning of the current year allow the utilization of additional fiscal space in the state budget. All of the above is recognized as a solid basis for further growth of tax revenues in the non-oil sector as well. As a result, the updated GDP figures are expected to be ₼121.3 billion, which is ₼3 billion more than last year. In this regard, in the baseline scenario, the average annual budget price of 1 barrel of oil is raised from $60 to $75. "In the state budget of Azerbaijan for the second time in the last 10 years, the minimum oil price is set at $75 per barrel," Gulmammadov said.

As a result, based on a combination of factors, the revenue forecast of the revised state budget for 2024 increases from ₼34.173 billion to ₼36.353 billion, while the expenditure forecast increases from ₼36.763 billion to ₼39.707 billion. The Finance Ministry estimates that this year's expenditures will be 8 percent higher than in 2023. At the same time, in the revised version of the state budget, the deficit increased by ₼764.3 million to more than ₼3.4 billion. However, Gulmammadov said: "The possibility of realising the budget potential in both oil and non-oil sectors, as well as the low probability of full implementation of projected expenditures, allow assuming that the budget deficit will be less than expected."

Additional Funding

For what purposes are the additional revenues to the state treasury planned to be directed? Tahir Mirkishili, Chairman of the Milli Majlis Committee on Economic Policy, Industry, and Entrepreneurship, noted that an additional ₼3 billion 796 million was needed to accelerate works in Garabagh and East Zangezur, increase the country's defence capacity, cover expenses related to infrastructure projects, international events held in Azerbaijan, as well as subsidies for some services, and fulfil tasks in social directions. Thus, after the revision of budget expenditures, it is envisaged to provide additional financial support in the amount of ₼1.160 billion for projects in the territories liberated from occupation, including those envisaged in the state program Great Return. The most important direction is the continuation of measures to strengthen the defence capacity and national security of the state (₼807 million). ₼1.184 billion is reserved for the construction of roads, modernization of irrigation systems, etc.

The positive economic dynamics and the expansion of the state budget expenditure part had a favourable impact on the financing of the social sphere. As an important component of the consolidated budget, additions and amendments will be made to the law on the budget of the State Fund for Social Protection of the Population for 2024. In particular, the average monthly wage is expected to increase to ₼990 this year based on the revised macroeconomic indicators. In general, taking into account the growth of wages in the private sector, as well as a result of transparency measures, subsequent expectations, and possible risks, the draft amendments increase the amount of receipts on mandatory state social insurance contributions for the off-budget sector. As a result, in the budget of the State Fund for Social Protection of the Population (SFSPP) for 2024, the amount of revenues under this item is increased by an additional ₼190 million. All this contributes to the revision of expenditures and an increase in the payment of labour pensions through the SFSPP by ₼25 million - up to ₼6.5 billion.

Positive developments have also been observed in the sphere of replenishment of the budget of the Unemployment Insurance Fund. Analysis of the indicators gives grounds to expect an additional ₼4.7 million by the end of the current year, which will increase the revenues to more than ₼184.6 million by the end of the year. Another step in the expansion of the state's social functions should be the increase of the budget of the Compulsory Medical Insurance Fund: due to ₼38.9 million (1.4 percent growth), the Fund's budget will exceed ₼2.850 billion.

Current external and domestic financial environment has improved the government's ability to implement strategically important tasks, which undoubtedly contributes to the country's long-term economic sustainability and stability.