STATE BUDGET: FIGURES AND RISKS

One of the final documents approved by President Ilham Aliyev in the past year was the Law On the State Budget of the Republic of Azerbaijan for 2026.

Budget revenues for the current year are approved at ₼38.6 billion  (0.7% higher than the figure for 2025), and expenditures at ₼41.7 billion (+0.7%). As a result, the state budget is projected to have a deficit of slightly over ₼3 billion (1.4% higher year-on-year).

Revenues of Azerbaijan's consolidated budget are approved at ₼44.969,4 billion, and expenditures at ₼48.839,3 billion, representing increases of 2.3% and 2.5% respectively compared to the 2025 forecasts. The deficit will amount to ₼3.9 billion (5.2% higher year-on-year).

Calculations were based on an oil price of $65 per barrel.

Reducing the oil factor

The draft state budget for the current year is aimed at maintaining macroeconomic, fiscal, and monetary stability while simultaneously strengthening the social and defence components.

As Finance Minister Sahil Babayev stated, the document envisages corresponding measures to ensure the country's defence capability and security, as well as the full financing of social obligations, reconstruction work in the liberated territories, and more. During its preparation, the main direction of budgetary policy was the formation of a financial reserve for economic development.

Thus, in 2026, ₼25.2 billion (60.3%) will constitute current expenditures, ₼14.1 billion (33.8%) capital expenditures, and ₼2.5 billion (5.9%) expenditures related to servicing the state debt.

Regarding revenues, special emphasis is placed on the growth of non-oil revenues: in 2026, they will account for 57% of the state budget, and 63% of the consolidated budget, which will be a historical maximum.

Overall, reducing the influence of the oil factor on public finances and increasing the share of sustainable revenue sources remain the main benchmarks of Azerbaijan's financial policy. The existing budget rule is aimed at gradually reducing the basic non-oil deficit relative to the non-oil portion of GDP in the medium term.

In this context, one of the key points of the 2026 budget package is the expectation of reducing the consolidated budget deficit to 19% of non-oil GDP. According to the minister, this indicator previously exceeded 20%. "Reducing this indicator below 20% of GDP is a serious and important dynamic," he noted.

Furthermore, the government maintains clear benchmarks for a longer period. "By 2029, it is planned to reduce this indicator to 13%. The threshold for state debt relative to GDP will be maintained at 30%. Achieving these goals will create a foundation for long-term fiscal sustainability and macroeconomic stability, and will also provide a solid platform for implementing the country's strategic development agenda," stated Sahil Babayev.

The minister emphasised that in the medium term, the government has formulated strategic goals and a roadmap aimed at minimising the oil dependence of public finances and keeping state debt at a safe level.

According to him, two-thirds of the consolidated budget will be provided by the non-oil and gas sector. And this trend will continue. "Our forecast within the expenditure framework for 2029 envisages raising this figure to 69-70%," said Sahil Babayev, adding that consistent steps in this direction will create conditions for more sustainable and diversified economic growth.

How is the oil price determined?

During discussions of the draft, doubts were expressed regarding the proposed oil price for the budget. S. Babayev explained in detail the government's rationale for this figure. The average price of Azerbaijani Azeri Light crude oil for January-September 2025 exceeded $72 per barrel, which is noticeably higher than the baseline benchmarks set in budget planning.

According to him, consensus forecasts from 22 organisations put the oil price at $65 per barrel in 2026. Meanwhile, the current consensus for Brent is around $63, however, Azeri Light traditionally trades at a premium. "Azeri Light sells for $3 more. Over nine months, our oil sold at a price above $72," noted the minister.

Sahil Babayev recalled that the oil market has remained volatile since the start of the year: prices have repeatedly both fallen and recovered. Nevertheless, in his assessment, the current market situation does not create risks for Azerbaijan's economy. "We have defined our framework and want to continue working within it. What if the price falls? It has fallen and risen many times during 2025," he said, adding that the average annual dynamic remains comfortable for budgetary calculations.

The state budget for 2025 was based on an oil price of $70 per barrel, and for 2026, $65. The limited direct influence of oil prices on the budget was also noted by MP Heydar Asadov. According to him, a $10 decrease in the average annual oil price could reduce budget revenues by 250-300 million manats. At the same time, in 2026, oil and gas revenues are forecast at ₼16.4 billion, of which ₼12.8 billion is a transfer from the State Oil Fund of Azerbaijan (SOFAZ). "Regardless of whether oil sells for $1 or $100, this transfer is obligatory," he believes.

Thus, potential losses would constitute only 0.6-0.7% of budget expenditures. "The oil price should be discussed not in the context of its direct influence on budget revenues and expenditures, but in terms of the influence of the oil price on SOFAZ assets and their sustainability," summarised H. Asadov.

Expenditures: scale and priorities

The expenditure side of the 2026 budget clearly reflects both the expansion of the state's fiscal capabilities and a shift in emphasis towards social orientation and improved management of public finances. As S. Babayev stated, the draft budget envisages a record level of expenditures for Azerbaijan's consolidated budget—their share in GDP is estimated at 36.4%, and in non-oil GDP at 48%. "This is a fairly good indicator. In global practice, it reaches at best 56-57%, and at worst around 15%. That is, we have managed to maintain a balanced policy and hold a middle position," said the minister, emphasising the moderate nature of the budget expansion.

A key priority of the 2026 budget remains the social sphere. Minister of Labour and Social Protection of the Population Anar Aliyev reported that the share of social expenditures in the state budget will be 41.1%. Expenditures on social protection and social security are forecast at ₼4.87 billion, which is 121.2 million, or 2.6%, more compared to 2025. Over the past seven years, the volume of funding in this area has grown 2.1 times—from ₼2.3 to ₼4.8 billion.

Overall, asserts A. Aliyev, the total volume of social expenditures in 2026 will exceed ₼17.1 billion, which is 236 million, or 1.4%, more than in 2025. "Over the past seven years, Azerbaijan has implemented packages of social reforms covering 4 million citizens," the minister reminded.

Another critical direction of state investment remains projects for the restoration of Garabagh and Eastern Zangezur. As Prime Minister Ali Asadov stated, since 2020, over ₼25 billion have been allocated for the restoration of the liberated territories, ₼3.5 billion of which are allocated in this year's budget. These funds are primarily directed towards developing basic infrastructure, which is expected to generate significant added value for the economy in the medium and long term.

The scale of these investments was also noted by MP Tahir Mirkishili. According to him, the volume of funds directed to the liberated territories has already reached ₼22 billion, which "is twice the state budget revenues of Armenia and 1.4 times the state budget revenues of Georgia." "Over the past five years, the Azerbaijani state has done enormous work, transforming its military victory into a socio-economic victory in these territories," he said.

A priority of budgetary policy in 2026 also remains the sphere of defence and national security. Expenditures in this direction are envisaged at ₼8.7 billion, which is 3.8% higher than the 2025 figure. Chairman of the Parliamentary Committee on Defence, Security, and Combating Corruption, Arzu Naghiyev, called the increase in funding for the defence bloc a justified and timely step. The allocated funds will be directed towards enhancing the country's defence capability, strengthening the national security and intelligence system. In his opinion, "priority measures should include improving the technical and combat training of the army, updating weaponry and military equipment, developing unmanned aerial vehicles, communication and intelligence systems, as well as strengthening the defence industry and the potential of local military production."

Overall, 30% of all budgetary expenditures will be directed towards strengthening national security and restoring the liberated territories.

Expected risks

Naturally, as every year, certain risks with the execution of the state budget are also anticipated in 2026, which the Chamber of Accounts draws particular attention to. As indicated in its conclusion, one of the main factors putting pressure on budgetary expenditures remains the maturity structure of the internal state debt. The necessity of its regular refinancing could lead to an increase in interest costs, especially under changing market conditions. Additional risks are formed by the currency and interest rate structure of the debt: 85.2% of external obligations are denominated in US dollars, and about half of the total state debt has a floating interest rate, which increases the budget's vulnerability to exchange rate and interest rate fluctuations.

According to the Chamber of Accounts, in 2026, expenditures for servicing the state debt will amount to ₼2.46 billion, with 1.38 billion of that going towards interest payments. Furthermore, 68% of government securities (almost ₼8 billion) are placed in short-term bonds, which heightens liquidity risks. At the same time, the Chamber of Accounts notes that the gradual replacement of short-term obligations with long-term instruments partially mitigates this problem.

A separate set of remarks concerns the revenue side of the budget. In January-September 2025, the volume of tax overpayments increased by ₼290.2 million, which creates additional pressure on revenue forecasts and complicates the assessment of the revenue base's sustainability. During the same period, tax debt grew by 14.3%—to ₼452.6 million, primarily due to the non-oil and gas sector. The Chamber of Accounts emphasised the need to strengthen control over tax sanctions and the accrual of interest, which account for over a third of the total debt.

The document also touches on the issue of the long-term sustainability of the pension system. Despite improved indicators, in the Chamber of Accounts' opinion, a more flexible legal framework and the introduction of new regulatory mechanisms are required to maintain stability in the future.

Chairman of the Chamber of Accounts Vugar Gulmammadov drew attention to the issue of subsidies. "We believe there should be clear and understandable rules for distributing subsidies from the state budget. The absence of rules creates a risk that the criterion of providing subsidies only to cover operational expenditures will not be observed," he noted. The Chamber of Accounts recommended strengthening the coordination of the budget process with public procurement mechanisms to optimise the pace of budget execution.

The 2026 budget demonstrates the government's endeavour to balance fiscal sustainability, social obligations, and strategic development priorities against a backdrop of ongoing external volatility. Strengthening the role of non-oil revenues, controlling debt risks, and a cautious approach to oil price assumptions create an additional safety margin for the economy. The main challenges, however, remain not so much in planning, but in the quality of budget execution and the efficiency of using record volumes of state resources.