Budget 2023: What expects Azerbaijan next year? Analysis by Caliber.Az

Despite the geopolitical instability, the threat of a global recession and the volatility of commodity prices, the Azerbaijani government expects positive development of the domestic economy in the current and next year. These expectations are reflected in the draft law "On Azerbaijan's state budget for 2023", which provides for an increase in income, as well as expenditures in a number of social areas, and a reduction in the budget deficit relative to GDP indicators. This message was also voiced in the speeches of the heads of the country's economic agencies during the state budget discussions held on the eve of the parliament's economic policy, industry and entrepreneurship committee meeting.

A little more than a month and a half ago, the Azerbaijani Finance Ministry submitted to the government the draft state budget and the consolidated budget for 2023, the corresponding budget indicators for 2024-2026 and published a number of forecast data for next year. The document has already been submitted to parliament for consideration, and on November 3 discussions were held in the parliamentary committee with the participation of senior officials from the finance and economy ministries, the Central Bank, the State Customs Committee, as well as the Oil Fund and the Audit Chamber.

Judging by the statistics of the last period, Azerbaijan is successfully completing the current budget year, and forecasts for the coming year also inspire optimism. According to leading international financial organisations and rating agencies, our country's resilience to crises is based on a low level of public debt, growing foreign exchange reserves and a positive foreign trade balance. And these are quite effective fundamental factors that ensure the sustainable development of the republic's economy in the medium term. In particular, for the second year in a row, Azerbaijan has been dynamically increasing its foreign trade turnover, the global shortage of energy resources, the gas crisis in Europe and, in general, the rise in prices for oil, gas, electricity, and petrochemical raw materials act as a driver here. Thus, in monetary terms, in January-August, Azerbaijani oil exports exceeded $13.724 billion, an increase of 61.5 per cent, and gas supplies by the end of the year will exceed 22 billion cubic metres, of which 11.5 billion cubic metres (an increase of 40 per cent) will be delivered to consumers in Europe.

At the same time, as part of the export diversification policy, the government of the country is strengthening support for the local non-oil sector in foreign markets through advertising, promotion and, in particular, the introduction of various export incentives and preferences, expanding the supply of domestic industrial and agricultural products abroad. These efforts are very effective, as the factor of global inflation has played the role of a catalyst for demand for raw materials, increasing demand on international markets for Azerbaijani fuels and polymers, fertilisers and methanol, aluminium rolled products and copper concentrate, building materials and various agricultural and food products, as well as other non-oil goods. Thus, for the three quarters of this year, the total non-oil exports amounted to $2.1 billion, increasing by 17 per cent year-on-year. In some positions, external supplies of non-oil products were even higher: in nine months, exports of chemical industry products increased by 2.4 times, aluminium and products made from it - by 38 per cent, and ferrous metals and products made from them – by 20.7 per cent.

It is not surprising that against this background, already in the first half of the year, the republic achieved a current account surplus of the balance of payments at the level of 27.6 per cent of GDP, thereby the surplus on the balance of payments increased 5.5 times compared to last year's figures. In turn, according to the updated government estimates, the forecast indicators of real GDP growth in Azerbaijan in 2022 have increased from 3.4 to 3.5 per cent, and by the end of the year, the volume of gross domestic product will significantly exceed the forecast indicators. "If the current world oil and gas prices continue in the future, Azerbaijan's GDP is expected to reach 130 billion manats by the end of the year, which will be the highest figure in the country's history," Economy Minister Mikail Jabbarov said at a meeting of the Milli Majlis committee held on November 3. The economy minister also noted that the share of the non-oil industry in the structure of the country's GDP is dynamically increasing, and tax revenues are growing, including fees for mandatory state social insurance. Of course, increased export revenues have also become a significant factor in the growth of fiscal and customs contributions to the country's budget.

Accordingly, the republican government believes that next year our country will not only maintain its enviable crisis resistance but will also ensure the growth of budget indicators in a number of important positions. In particular, export growth, supported by a favourable external environment, as well as large-scale contract work in the Karabakh region, supporting the rise of industry and the agricultural sector, will contribute to an increase in state budget revenues in 2023 to 30.720 billion manats [$18 billion] with an increase of 5.2 per cent relative to the current year.

In general, next year, Azerbaijan's GDP growth is estimated at 2.7 per cent, having increased markedly in 2024 - 4.1 per cent, and will maintain moderate growth in 2025-2026 - 3.7 and 3.4 per cent, respectively. If we compare these figures with the forecasts of leading micro-financial organisations, on average, the growth rates of the domestic economy will not be lower than the global average and will significantly exceed expectations for the EU and US markets. For comparison: according to the rating agency Fitch, the US GDP growth indicators for 2023 have been reduced to an extremely low 0.5 per cent.

Finance Minister Samir Sharifov, who participated in the budget hearings in parliament, noted that next year Azerbaijan is expected to reduce the ratio of the state budget deficit to GDP, which will amount to 2.4 per cent. For comparison, the state budget deficit in 2022 is projected at the level of 3,106 billion manats [$1.8 billion], or 2.7 per cent of GDP.

These are very positive expectations, given the fact that the share of the expenditure part has significantly increased in the structure of the state budget for 2023: in particular, spending on housing and communal services is planned to increase by 30.2 per cent, budget investments in agriculture by 20.5 per cent, spending on social protection will increase by 18.3 per cent, education - 13.3 per cent, for healthcare - 11.5 per cent, for defence and national security - 4.6 per cent, etc. Increasing budget expenditures is an extremely important task for Azerbaijan, including taking into account the implementation of large-scale infrastructure and rehabilitation projects in the Karabakh and East Zangazur economic regions. According to the Audit Chamber, 48 projects are planned to be implemented in the liberated territories next year, for which budget financing will be increased from 2 to 3 billion manats [$1.1 billion to $1.7 billion] (+12.4 per cent of the plan for 2022 and +37.7 per cent relative to 2021).

Nevertheless, at a meeting of the committee, the finance minister urged deputies and government members to be careful about increasing budget expenditures, noting that the growth of expenditures in conditions of high inflation could further accelerate price growth and lead to an inflationary spiral. Reducing inflationary pressure is designated the government's main task for next year, and Samir Sharifov stressed that in the draft budget of 2023, the annual inflation rate is projected to be within 6.3%, that is, an order of magnitude lower than the current year.

The fight against inflation and the strengthening of monetary stability is also identified as the main goals of the Central Bank of Azerbaijan, and this message was voiced by the chairman of the Central Bank Taleh Kazimov, who participated in the discussion of budget policy for 2023 at a meeting of the parliamentary committee. "The Central Bank will continue the policy of a stable monetary policy next year. Our mandate is to ensure macroeconomic stability, price stability," the CBA chairman stressed.

The very cautious, often conservative approaches of the Finance Ministry and the Central Bank in the formation of the state budget are quite justified, given the ongoing energy and food crises in the world, the negative impact of imported inflation, and most importantly, the threat of a global recession. The probability of negative scenarios has increased due to the tightening of the monetary policy of the US Federal Reserve System (FRS), which raised the discount rate by 75 basis points on the eve, and now its range is 3.75-4 per cent per annum. The European Central Bank (ECB) is moving along a similar path, having increased the refinancing rate by 75 basis points a week ago, to 2 per cent, and planning its further growth in the next six months. All these measures in the US and the EU are aimed at reducing the inflation rate but indirectly lead to an increase in the cost of credit resources and, as a result, to a decrease in economic growth, which leads to a decrease in global demand for raw materials, including energy resources.

So far, this has had little effect on the decline in oil prices, moreover, on November 3, a barrel of Azerbaijani Azeri Light oil rose by 2.02 per cent to $99.54. And apparently, the high demand for gas and oil will continue next year. This is also evidenced by the forecasts of experts from the International Monetary Bank (IMF), the World Bank (WB), and the European Bank for Reconstruction and Development (EBRD), where, in particular, they believe that high energy prices will support Azerbaijan's economic growth shortly.

However, for this scenario to remain risk-free for Azerbaijan, the global average oil price should be as high as possible above the budget cut-off price in the country. In its forecasts for next year, the Finance Ministry took into account the risks of recession, and in the event of a decline in world oil prices in the parameters of the draft state budget, the projected average annual oil figure was reduced from $70 to $50. This is quite a safe level, as evidenced, in particular, by the data of the October regional review of the IMF: the fiscal "break-even" oil price for Azerbaijan in 2022 is $46.7 per barrel, and in 2023 - $35.7 per barrel.