MINIMUM DEBT

Global public debt continues to rise, surpassing 93% of global GDP ($100 trillion) in 2024, with projections indicating it could reach 100% of GDP by 2030. The International Monetary Fund (IMF) has cautioned that, without strong debt discipline, the debt burden could escalate to 115% of global GDP within the next three years.

Azerbaijan, which has adopted a moderate approach to borrowing under state guarantees, has maintained its position for many years, boasting one of the lowest levels of government debt among developing countries.

Peculiarities of the Debt Policy

Attracting funds from international donors to finance large infrastructure and economic projects is a common global practice. Such projects typically require significant capital investments and yield returns over the long term.

Azerbaijan has also relied on external borrowing, but in recent years, the government has pursued a cautious debt policy. This strategy, first implemented during the global financial crisis of 2008, emphasises strict control over external borrowing and a focus on domestic financing.

Key steps taken by the government include tightening regulations for external borrowing by state organisations and establishing clearer commitments from private banks and companies regarding the amount of funds to be raised and repayment terms. Earlier, in 2005, the government limited its cooperation with the IMF, the world's leading donor, reducing interactions to advisory and technical assistance while ceasing borrowing from the fund.

These measures have solidified Azerbaijan's position as a leader in the post-Soviet space in terms of total external debt to GDP over the past decade. Notably, the country's performance in this area has been among the best in the Central and Eastern European region. Azerbaijan's conservative approach to financial management, centred on maintaining the sustainability of the national economy and a low external debt-to-GDP ratio, has contributed to its financial stability, positioning it among the most financially sound nations globally.

As of January 1, 2025, Azerbaijan's external public debt stood at $5.129 billion, representing 6.9% of GDP. This marks a 20.4% decrease compared to the same period the previous year. Concurrently, domestic public debt rose by 17.6%, reaching ₼18.659 billion (14.8% of GDP).

The total state debt at the end of 2024 was ₼27.43 billion, reflecting a 2% increase compared to the previous year. The strategy of replacing foreign borrowings with domestic resources has driven the growth of domestic debt while reducing external debt. This approach is expected to enhance the country's financial stability and mitigate currency risks associated with exchange rate fluctuations.

Eurobonds represent a significant component of the country's external borrowing strategy. As of 1 January 2025, Eurobonds constituted 27% of the total external debt, amounting to $1.387 billion. Repayments of $310.7 million are scheduled for 2029, with a coupon rate of 5.125%. The remaining amount is set for redemption in 2032 at a rate of 3.5%.

In 2024, $1.324 billion was allocated for foreign debt repayment, of which $900 million was designated for Eurobond payments and $161.9 million for interest payments. By comparison, in 2018, these expenses totalled $1.2 billion, and in 2024, they reached $1.5 billion.

The portfolio of external state debt consists of two parts: debt borrowed on behalf of the state by the Ministry of Finance and loans guaranteed by the state. The State Agency for Roads, the State Agency for Water Resources, Azerbaijan Railways LLC, the Nakhchivan Agency for Land Reclamation and Water Management, and the Ministry of Agriculture are among the largest borrowers.

Since 2018, the portfolio of government securities has grown exponentially, reaching ₼9.5 billion as a result of the replacement of external government debt with domestic debt. The maturity profile of these securities is as follows: 17.5% are for one year, 72.4% for two to three years, and 10.1% for five or more years. As of 1 January 2025, the average maturity of the debt was 1.47 years, while the maximum maturity was recorded in 2021 at 1.86 years.

According to published statistics, ₼1.9 billion of principal and ₼170.3 million of interest have been paid to investors on maturing government bonds. Furthermore, a total of ₼230.7 million has been allocated from the fund for ensuring payments on domestic debt.

It is also noteworthy that expenditures on servicing domestic debt have increased significantly, highlighting the growing role of the domestic capital market in financing government needs.

As of 1 January 2025, the volume of state guarantee debt was ₼11 billion (8.7% of GDP), of which ₼9.2 billion was for foreign loans and ₼1.8 billion for domestic loans. In 2018, for comparison, the debt on state guarantees was 29.6% of GDP: liabilities on foreign loans amounted to $7.1 billion, while domestic loans totalled ₼11.7 billion.

Global Context and Perspectives

As evident, unlike many developing countries that rely on external borrowing to finance infrastructure and social projects, Azerbaijan depends on domestic resources and market mechanisms, such as the issuance of government securities.

Effective management of budget expenditures and control over government liabilities are essential to ensure the economy does not bear an excessive burden in the future. This policy also minimises dependence on global financial institutions and preserves macroeconomic stability.

Azerbaijan's strategic foreign exchange reserves, including those of the State Oil Fund and the Central Bank of Azerbaijan, amounted to $71 billion by January 1, 2025, which is 14 times higher than the external state debt.

This ratio clearly demonstrates the relatively low level of debt in relation to the country's available resources. Furthermore, the majority of these funds are borrowed for periods of up to 10 years, with some loans extended up to 35 years. This, when considering currency fluctuations, makes it more feasible for the state budget to repay these loans on an annual basis.

According to the payment schedule for existing loan agreements and Eurobonds, the average repayment period of external debt in 2024 was 5.4 years, compared to 6.1% in 2021. The data indicates that 86.1% of the debt is denominated in US dollars, 5.8% in euros, 3.4% in SDRs (IMF Special Drawing Rights), 3.1% in Japanese yen, and 1.6% in other currencies.

The maturity profile of external government debt is as follows: 49% must be repaid within five years, 44.9% between five and 10 years, and 6.1% over 10 years.

The largest lender is the Asian Development Bank (35.1%), followed by Eurobonds (27%) and the World Bank (15.8%).

The structure of external debt is diversified by currencies and creditors, which reduces risk, and the fact that most of the external debt is owed to multilateral financial institutions demonstrates these organisations' confidence in Azerbaijan.

Azerbaijan's experience underscores that prudent public debt management and avoidance of excessive borrowing enable the country to remain sustainable even amid global economic challenges. This policy provides a strategic advantage by reducing the risk of default and creating a solid foundation for long-term economic growth.