Azerbaijan earmarks extra revenues in growing budget for Karabakh revival

ANALYTICS  01 June 2023 - 14:46

A favorable external environment, steady demand for energy resources as well as sustainable growth of production and export of non-oil products contribute to boosting GDP and tax revenues in Azerbaijan. The economic growth rates accumulated last year were generally maintained in the first third of this year, which created the preconditions for the improvement of the country's budgetary framework for 2023. The Ministry of Finance has recently submitted the amendments to the Law on State Budget of Azerbaijan for 2023, promising growth on a number of revenue and expenditure items for consideration of the Milli Majlis.

The changes observed since the second half of last year and even more intensified in 2022 in the global economy have altered the global environment. Multiple rises in oil and gas prices, prices of petrochemicals and fertilizers, electricity, construction materials, and industrial and agricultural products have played a significant role in improving foreign trade dynamics. In the last two years, the country has demonstrated unprecedented growth of non-oil exports: in 2021, the total supply of non-oil and gas products exceeded $2.713 billion, having increased by a record 47.2%, this positive trend continued in 2022 - the country sent abroad more than $3.047 billion worth of goods, which exceeded the previous year's figures by 12.3%. In the same period of time, there was a dynamic development of the domestic market, supported by huge construction works in the reviving Karabakh region, which provided multibillion contracts to domestic producers of construction materials, equipment, as well as design, construction, transport companies, and other business entities.

It is noteworthy that despite the recession observed in the USA, European Union, and many other regions of the world as well as the reduction of prices at the energy market that led to a slight decrease of surplus in foreign trade of Azerbaijan, in general, the economic development of our country has not lost the gained momentum in the current year. So, according to the State Customs Committee (SCC), in January-April Azerbaijan's foreign trade turnover exceeded $17.882 billion, ensuring growth of 12.7% as compared to the same period last year.

Moreover, the rate of exports of Azerbaijani non-oil products in the reporting period increased by 21.2%, reaching $1.2 billion, according to the Centre for Analysis of Economic Reforms and Communications (CAERC), and it gives grounds to hope for full implementation of the government's forecasts on non-oil exports in 2023 at $3.5 billion.

At the same time, in the reporting period, the State Tax Service under the Ministry of Economy collected over $4.5 billion to the state budget, which indicates a comparable growth of 52.4%. At that, Economy Minister Mikail Jabbarov said recently that most part of the fiscal revenues - over $2.3 million - was formed in the non-oil sector, and here growth of 16.7% was registered.

Increasing raw materials exports and acceptable price for Brent oil with an average of $82.1 per barrel in Q1 2023 have contributed to the dynamic growth of the gold and forex reserves of the state which reached $62.6 billion by the end of Q1 2023. Thus, at present the total volume of gold and forex reserves is close to 80% of the GDP of the country providing almost 47 months of import coverage.

In other words, our republic retains the status of one of the best endowed with international reserves in the post-Soviet countries. And this position will only grow stronger: according to updated calculations, in 2023 revenues of the State Oil Fund of Azerbaijan (SOFAZ) will exceed $9.6 billion, and this growth will exceed forecasts approved late last year by 81.7%, and SOFAZ budget surplus will hit $2.6 billion.

Global expert structures forecast a rise in oil prices this year in light of decisions of OPEC+ and Russia to voluntarily reduce oil production by 1.7 million bpd in a coordinated manner, as well as an increase in demand for hydrocarbons in China and Asian countries. Despite high volatility in commodity prices in the first quarter, analysts at US investment bank Goldman Sachs have revised their previous estimates, raising their forecast for Brent for December 2023 from $90 to $95, and for December 2024 from $95 to $100 per barrel. In this context, the probability of risks associated with a possible drop in demand and prices for hydrocarbons is much lower than at the end of last year. Accordingly, the Azerbaijani government also plans to increase the benchmark oil price in the 2023 state budget from the current $50 to $60 per barrel.

Meanwhile, the favourable oil and gas environment and growing exports are complemented by increased freight traffic through Azerbaijan due to the reorientation of transport and logistics chains in the post-Soviet space towards the Middle Corridor. All this contributes to income growth and in total increases the country's balance-of-payments surplus, which could reach $19.3 billion by 2023, or 22% of the country's GDP.

"In January-March of this year, the tax and customs authorities collected over $883,000 beyond the forecast and it is obvious that by the end of the year, this figure will be even higher. The successes achieved in the first quarter enable us to revise the parameters of the state budget in order to accelerate a number of activities and meet the challenges facing the country," President Ilham Aliyev said recently, who instructed the government to prepare a draft amendment to the state budget parameters for 2023. The head of the state underlined that the main part of additional funds will be directed to finance the reconstruction of Karabakh and East Zangazur, and another important direction is expected to be the growth of defence spending.

The draft amendments to the state budget 2023, developed by the Ministry of Finance, were recently submitted to the Parliament: in particular, it is expected that the additional revenues will amount to $2 billion, thereby the original forecasts for the revenue part of the state budget will increase by an additional 9.8% and make $20 billion.

The oil and gas sector will provide 52.5% of revenues in the structure of the updated budget layout - it will account for over $11 billion and an increase of 8.9%. The rest will be provided by the non-resource sector: its revenues will be a little less than $9.4 billion, and compared with the initial forecast, an increase of 10.8% is expected here.

The State Tax Service (STS) is, as always, the main body responsible for replenishing the state budget revenues. According to the updated forecasts, the STS will provide $8.8 billion, including an additional 11.4% to the initial plan. The next biggest contributor to the budget is State Oil Fund, whose transfers will provide $6.8 billion (+4.1%), followed by State Customs Committee - $3.3 billion (+20.6%). The growth is also expected in extra-budgetary revenues of budgetary organizations and other revenues, which as a whole is slightly less than $811,000.

According to the Ministry of Finance, the expenditure part of the state budget increased by 9.6% due to additional revenues is planned to be used for the implementation of reconstruction projects aimed at revival of the territories released from the occupation. In particular, $1.3 billion will be attracted there from additional revenues, and thus the total expenditure in the Karabakh region will reach $3 billion.

At the same time, expenditures for strengthening the country's defence capability, as well as the servicing of public debt, implementation of infrastructure projects in the field of transport and energy, economic support measures, etc., will increase significantly. It is expected that the relevant parliamentary committees will discuss the draft amendments to the state budget for 2023 and next week the document will be submitted to the Milli Majlis for consideration.

Caliber.Az