2018 Budget Amendments: There and Back Again

For a couple of years now the Azerbaijani state budget has developed the habit of being subject to amendments, especially when considerable variations in price of oil is at hand. Amending the state budget itself is a natural process, allowing the government to match (!) revenues and expenditures. However, as we will soon see, the nature of budget revisions in Azerbaijan is fundamentally different.

Firstly, let me give you a brief overview of what has changed in June:

(Million AZN) Revenues Expenditures Deficit SOFAZ Transfers
Before 20,127 21,047 -920 9,216
After 22,110 23,061 -951 10,966
Change 1,983 2,014 31 1,750
Change (%) 9.85% 9.57% 3.37% 18.99%
(Million AZN) Construction Fixed Capital
Investments
Other Economic
Activities
Social
Security
Before 4,827 4,824 49 2,197
After 5,097 5,085 1,194 2,343
Change 270 261 1,145 146
Change (%) 5.59% 5.41% 2334.49% 6.64%

Source: Ministry of Finance of the Republic of Azerbaijan[1]

The overall increase in revenues is equal to 1.983 billion AZN, of which 1.75 billion comes from the State Oil Fund (SOFAZ). Prior to the amendments, 43.79% of the expenses were financed by direct transfers from SOFAZ compared to 47.55% after the amendments. Apart from SOFAZ, another source of increasing revenues is the Ministry of Taxes, as the revenues from Product Sharing Agreements hiked by 450 million AZN. On the other hand, earnings from sources such as Value Added Tax (VAT), Corporate Tax of Residents experienced a drop. At the end, when considering all of the changes mentioned above, there is no doubt that the amendments escalated the budget dependency on the oil sector.

But budget dependency on oil is nothing new for Azerbaijan. So let’s talk about the other problem here: the expenditures… There was a brief hope for the Azerbaijani economy up until the end of 2017 that the government might pursue a policy of fiscal consolidation  by cutting expenses amidst the high inflation and low oil prices. Many argued that such a shift has the potential to hurt the economy in the short run as it would be likely to experience negative growth for a longer period of time. That is most probably true, but nevertheless, it is a step that we have to take sooner or later, if we wish to have a stable economy independent from price fluctuations in international commodity markets. With the publication of 2018 budget project by Ministry of Finance,  however, all the remaining hopes perished.

The state budget expenditures of 2018 were going to be 19.7% higher than the executed amount of 2017, but with the new amendments that number has increased to 31.1%! The government has clearly revealed in the first chance that it has no intention of reducing the public sector any time soon. It is now evident that the only thing keeping the ever-increasing trend of budget expenditures during 2014 – 2017 period was the excessive inflation and lower than expected oil revenues. Now, with inflation levels under control (according to Central Bank of Azerbaijan, monthly inflation rate was 3.2% on May 2018[2]) and crude oil prices more or less recovered towards their average price range, the government can restore the expansionary fiscal policies. It all sounds great, until the music stops playing.

Figure 1: Expenditure categories after the June amendments

2.png

Source: Ministry of Finance of the Republic of Azerbaijan

From the figure above, it is easy to observe that the largest single category in 2018 is “Construction, Industry and Mining”, which accounts for 22.2% of total expenses. The amount is so large that it is 41.1% higher than the “Overall Government Services.” Yet don’t let the name fool you, the words “Industry and Mining” are merely an illusion as 99.6% of the expenditures belong to a single sub-category, Construction. Construction expenditures, on the other hand, is globally renowned for its corruption capabilities.

According to Azerbaijan Chamber of Accounts, the share of government expenditures in GDP will reach 30.9% after the amendments[3]. I have no doubt that at the end of the year the State Statistical Committee is going to announce a GDP growth of something like 3 – 4%, which will be deemed as the end of economic “stagnation” despite knowing that expansion is fueled only by higher budget expenditures towards construction and is highly vulnerable.

And now let’s note the “other” elephant in the room: “Other Economic Activities”. This expenditure category rose from 49 million to 1,194 million AZN, a whopping 23.4 times increase! Inside that amount, there are 3 large subsidies. For the sake of simplicity, I will be ignoring the 963.2 million AZN that is allocated for State Oil Company (SOCAR) as well as the 100 million AZN allocated to State Rail Company and will rather talk the 3rd absurd subsidy.

After the amendments, 81.4 million AZN is allocated to “Azerenerji” OJSC for its liabilities against Wartsila, a Helsinki based manufacturing company. This State-Owned Enterprise (SOE) has been on the spotlight lately, due to the humiliating event which occured on July 2 – 3 as the majority of Azerbaijan went into the darkness directly as a result of irresponsibility of Azerenerji. This is a prime example of how SOEs are operating in Azerbaijan: drawing subsidies from the state budget every year without delivering any improvement or whatsoever in their services. I hope that this recent incident will be enough for everybody to realize that majority of large SOEs are nothing but a huge burden on the state budget. I will most probably write about them in greater detail soon.

All in all, it can be concluded that the recent amendments is grim news for the future of Azerbaijani economy.

Footnotes

[1] http://www.maliyye.gov.az/sites/default/files/Qanun_2018%20%28d%C3%BCr%C3%BCst%29%20%282%29.pdf

[2] https://www.cbar.az/assets/3566/1.1.pdf

[3] http://sai.gov.az/1/rey/58

3 thoughts on “2018 Budget Amendments: There and Back Again

  1. Elmaddin Abdullayev

    Thank you for your analysis!
    I just want to mention that State owned Enterprises can’t be replaced with Private companies at the moment. To be more clear, it would not make a difference, the burden of subsidies on state budget will be shifted towards the people. And If you assumed that “Private means more efficient”, I have to disagree- in case of Azerbaijan…

    Like

    1. mukhtaroffelmir

      My pleasure!

      When it comes to State Owned Enterprises, by no means I was trying to imply that we should privatize the SOEs altogether. There are certain natural monopolies that are too hard to privatize, especially given the current regulations that surround our economy. However, I highly believe it is time to bring some new mechanism in these enterprises which continue to operate with loss year after year… I will write more about them maybe next week….

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s