Azerbaijan to boost defence, social security, Karabakh development spending Analysis by Caliber.Az

A favourable external environment, high energy prices, and consistent growth in non-oil production and exports return Azerbaijan to the "rich" years of 2003-2014. At that time, the constantly growing revenues of the treasury allowed us to almost annually revise the parameters of the state budget towards their increase. Alas, such opportunities were not available during the energy crisis eight years ago and, of course, the recent pandemic. The only exception was the prosperous year of 2019. On the eve of the meeting of the Milli Majlis Committee on Economic Policy, Industry, and Entrepreneurship, the amendments to the Law on Azerbaijan's 2022 state budget, promising growth on a number of revenue and expenditure items, are being discussed again.

The changes observed since last spring and intensified in 2022 in the global economy have changed the global environment: a multiple increases in prices for oil and gas, as well as petrochemical products, electricity, construction materials, and industrial products, have played a key role in improving the foreign trade dynamics of Azerbaijan. Its biggest growth was ensured at the expense of exports - it accounted for almost 70 per cent of the country's total trade (over $11.823 billion) and provided 1.9 times growth, while imports accounted for a little over $4 billion, with a 14.5 per cent growth.

Such a ratio of exports to imports is a very positive factor: Azerbaijan's surplus in foreign trade for the four months of the year amounted to $7.782 billion, which is 2.7 times higher than last year. It is a guarantee of strengthening the balance of payments and monetary security of the country, and an increase in its foreign exchange reserves. Thus, for the five months of the current year, the strategic foreign exchange reserves of the republic increased by 1.9 per cent - to a record $54.2 billion, exceeding the indicators of the peak level of pre-crisis, prosperous 2014, when by early October the total reserves reached $53.7 billion. According to the estimates of the Central Bank of Azerbaijan (CBA), the current positive dynamics of the balance of payments have a positive impact on the currency market: in May banks have almost halved the purchase at currency auctions, while at the same time the volume of purchases of cash currency exceeded its sale to the population, which indirectly indicates a strengthening of confidence in the national currency and reducing the dollarisation of the economy.

"Strengthening of the manat's nominal effective exchange rate acts as the main reducing monetary factor for the decomposition of both actual and projected inflation," the CBA said in its information disseminated the other day which pointed out that amid the state budget surplus and the intensified process of sterilisation operations the manat monetary base shrank by 5.5 per cent in January-May 2022. As a whole, the CBA policy on sterilisation of excess liquidity is aimed at stabilising the currency market and curbing overheating of the financial sector under increased inflationary pressure.

Certain inflation risks certainly remain: by the end of 2022 the government forecasts average annual inflation of 12.5 per cent. However, at the current oil and gas prices, the threats of the monetary factor in Azerbaijan are close to zero, and the main drivers of further price growth are imported inflation, growth of government spending and overheating of the consumer credit market. Today the main task of the government and the Central Bank is to cope with the consequences of these risks.

However, despite the inflationary pressure, domestic industry, agriculture, trade and services, and other areas of the economy demonstrate the highest growth rates over the past eight years. In January-May 2022 Azerbaijan's GDP grew by 7.2 per cent and by 11 per cent in the non-oil sector. The country owes such high dynamics to a number of factors, including a package of anti-crisis assistance to SMEs, implementation of large-scale government projects on the revival of the Karabakh region, and the recovery of the non-oil industry, which has allowed to bring the leading sectors of the domestic non-oil sector out of the pandemic crisis relatively quickly. All this together with increased export revenues and additional fiscal revenues to the state treasury, taking into account the dynamically growing turnover of the domestic economy. On the whole, a favourable foreign trade environment contributes to the growth of state budget revenues through the State Customs Committee: during five months of the current year, there was a 20 per cent growth here. The State Tax Service (STS) under the Economy Ministry did even better: for the five months of 2022, it transferred 5.803 billion manats to the treasury, providing growth for the year by 52.3 per cent and the forecast target was exceeded by 49.3 per cent.

And apparently, this is not the limit. According to estimates of Bloomberg Agency and a number of other international analytical services, taking into account the war in Ukraine, the sanctions confrontation and transportation costs high demand for hydrocarbon resources will continue not only this year but also next year. Despite a slight decline in oil prices last Friday, oil prices of benchmark grades are rising again in trading, and the day before the price of August futures crossed $113.6 per barrel. The consequences of the ongoing gas crisis in the European Union and the multiple increases in prices and demand for "blue fuel" have led to the fact that for the first time in the years of independence, Azerbaijan's currency revenues from gas exports almost equalled revenues from oil sales. Thus, for the five months of this year, our country has received $3.8 billion from oil exports and $3.5 billion from gas supplies.

These figures will probably increase even more by late 2022 since the energy crisis is in full swing today and the demand for energy raw materials and fuel will only grow with the onset of autumn coldness. Accordingly, the average Brent price this year has been as low as $105 per barrel and is unlikely to fall below $100 by the end of this year. The situation is even better with the average price of Azeri Light oil: in January-May 2022 the average price was $106.3 per barrel, while the forecast included in the 2022 budget parameters was approved at $50 per barrel.

Given the estimates of international experts, the expected future dynamics of hydrocarbon prices will be significantly ahead of the "cut-off price" in the adopted state budget of the country, and the Azerbaijani government believes it possible to increase this figure from $50 to $70 per barrel, and this scenario still remains risk-free for the republic.

This issue, as well as the prospects to increase state budget revenues and expenditures for 2022, were the subject of discussions at the meeting of the parliamentary committee on economic policy, industry and entrepreneurship which was launched the day before.

"During the first five months of the year, the state budget revenues were executed for 12.442 billion manats or 110.8 per cent. It is by 28 per cent more than in the same period last year," Azerbaijani Finance Minister Samir Sharifov said during the parliamentary discussions on the amendments and additions to the state budget of the current year. According to the minister, revenues of the consolidated budget total almost 15.550 billion manats which are 24.2 per cent more than the last year's figures, and if initially the consolidated budget was forecasted with a deficit of 2.178 billion manats, in fact, there was a surplus of 3.9 billion manats.

According to the Finance Ministry forecasts, by the end of this year, Azerbaijani GDP in nominal terms will increase to 115.4 billion manats, the real growth rate will reach 5.5 per cent and non-oil GDP in nominal terms will increase to 65.7 billion manats.

All these indicators taken together give grounds to assert that the increased revenues from exports as well as the growth of the domestic production and trade turnover will tangibly increase the incomes of the treasury, and in Azerbaijan there are prerequisites for increasing the revenue part of the state budget and respectively, expanding expenditure items. In particular, at the meeting of Milli Majlis, it was noted that the revised budget revenues for 2022 are projected at 29.198 billion manats which is 8.1 per cent more than last year's approved figures of the budget law. Therefore, expenses of over 32.303 billion manats are forecasted to be approved within the amendments to the budget.

For what purposes will be directed additional 2.986 billion manats of budget funds? Finance Minister Sharifov noted that the bulk of funds - 1.447 billion manats - is planned to be used to finance projects on the creation of road infrastructure in the areas liberated from the [Armenian] occupation, as well as projects to improve transport and communications infrastructure in the country's other regions. A total of 588 million manats will be allocated for defence purposes, the army and activities in the sphere of national security. About 34 million manats will be spent on the restoration and reconstruction of dwelling houses and various objects affected during the Second Karabakh War in a number of districts and cities of the country. A considerable volume of means - 519 million manats will be spent on a package of social measures, including in the sphere of social protection, payment of salaries and social benefits, and labour pensions. About 193 million manats will be directed for the provision of food security measures, 163 million manats are reserved for the support of the entrepreneurship sphere and 42 million manats for the public utilities sector.

Commenting on the expansion of fiscal opportunities in the country, Deputy Economy Minister Sevinj Hasanova said that the removal of pandemic restrictions and comprehensive measures of state support of the non-oil sector led to rapid recovery and further growth of economic activity in Azerbaijan. And these trends will lead this year, which promises confident fulfilment of budget forecasts.