LOANS ON TRUST

In many countries, budget lending is used as a tool to support priority industries and to stabilize state or quasi-state structures facing financial difficulties. However, internationally, such loans—especially when granted to organisations to meet external obligations—are strictly regulated: clear criteria are established for selecting borrowers, as well as for the terms and purposes of fund utilisation.

In Azerbaijan, as the analysis by the Accounts Chamber has revealed, the mechanism for granting budget loans to organisations with external debt obligations remains outside a fully developed regulatory framework. The absence of clear procedures and weak control over the repayment of previously issued loans create risks of inefficient fund usage, reduce fiscal policy transparency, and limit opportunities for a systematic assessment of budget investment repayments.

System gaps and risks

According to the Court of Accounts’ opinion on the draft law "On the Execution of the State Budget for 2024," a budget loan of €4.1 million was granted to an organisation for six years at an interest rate of 2% per annum. The loan’s purpose was to cover the 2023 liabilities related to external borrowings from foreign banks.

However, this is not an isolated case: in previous years, the same organisation received loans amounting to $36.8 million and €8.3 million at 0–1% interest rates for periods of 7, 10, and 12 years. It is also noted that no repayments on these loans have been made to the state budget.

In 2024, the principal balance of budget loans issued in prior years decreased in only 4 out of 16 cases involving three organisations. The total reduction amounted to ₼4.2 million, $226.7 million, and €67.3 million.

As of January 1 of this year, the debt on issued budget credits included $61.8 million and €15.3 million—loans provided to cover annual payments on external loans attracted from foreign banks; ₼90 million—credits aimed at repayment and restructuring of debts owed to several financial institutions; ₼148.8 million—funds allocated for fulfilling obligations under state guaranteed bonds; and ₼4.8 million—the amount to be returned to the budget due to compensation paid by an international organisation instead of the borrowing organisation.

Despite budget reports containing data on loan amounts and receipts, the mechanism for issuing these loans remains unregulated. The absence of a clear regulatory framework, according to the Accounts Chamber, leads to reduced transparency and efficiency in managing public funds.

International practice demonstrates the presence of clear procedures covering loan purposes, repayment periods, admissibility of depositing received funds, and regulation of interest rates. Azerbaijan lacks such a framework, which increases the risk of selective or inefficient use of budget borrowings.

"Dead" money

The analysis of state budget execution uncovered another important problem—the storage of substantial budget funds in state institutions’ bank accounts without actual utilisation. According to the Accounts Chamber, the volume of such balances exceeded ₼500 million in selected structures alone, with more than ₼150 million accounted for expenditures recorded in 2024 for capital investments and rehabilitation works in liberated territories.

This practice distorts the true picture of cash execution of the budget on one hand, and delays the actual use of allocated resources on the other, thereby hindering economic activity. The Accounts Chamber recorded that some organisations’ account balances systematically carry over from year to year without appropriate spending dynamics. A paradox emerges: these amounts are accounted for as executed expenditures by the state, even though they were not spent and remain within the banking system.

This situation calls for increased control over cash transactions and possibly introducing an obligation to refund or reallocate unutilised funds if they are not used during the budget year. Such measures would ensure more effective planning and incentivise implementers to complete projects on schedule.

At the same time, positive developments in debt sustainability are notable. In 2024, the public debt-to-GDP ratio was 21.7%, significantly below the mid-term limit of 30% and 0.1 percentage points lower than the previous year. This improvement was achieved due to GDP growth of ₼3.2 billion and a reduction in external debt by more than ₼2.3 billion.

Despite these positive macro-financial indicators, the Accounts Chamber’s conclusion highlights several systemic imbalances requiring revision of the institutional framework governing budget lending and cash execution.

Although external debt overall decreased, total state debt increased by ₼529.8 million due to growth in domestic debt arising from government securities placement in domestic financial markets. While this supports domestic capital market development on one hand, it may impose a future burden on the budget—especially if revenue growth fails to keep pace with debt servicing.

It is important to note that nominal GDP growth is driven by the non-oil and gas sector, indicating a strengthening economic base independent of commodity market fluctuations. Additionally, the actual government debt-to-GDP ratio was 1.5 percentage points lower than forecasted during the 2024 budget revision. This resulted from both higher actual GDP compared to forecast and lower-than-expected debt levels—reflecting a more favourable fiscal position than initially anticipated.

The situation described in the Accounts Chamber’s report calls for a systematic review of institutional frameworks governing budget lending and cash execution. Key reforms may include creating a regulatory mechanism for issuing budget credits that defines purposes, interest rates, terms, limitations, and repayment obligations; introducing a single register and standardised reporting on all issued credits including payment schedules; revising cash execution accounting procedures to prevent unused balances being counted as executed expenditures; and strengthening control over capital investment efficiency—particularly in sensitive areas such as territorial rehabilitation and infrastructure projects.

Furthermore, assessing fiscal risks linked with domestic borrowing and preparing medium-term debt hedging mechanisms would be advisable.

Ultimately, the Court of Accounts’ opinion serves as an important signal for improving fiscal management mechanisms, enhancing transparency of budget lending, and reinforcing discipline in public fund utilisation.