Growing tax payments as reliable indicator of Azerbaijan's business activity Anaysis by Caliber.Az

In 2023, over half of all revenues of the state budget will be provided at the expense of the non-oil sector, and the lion's share of revenues to the treasury will be provided by the State Tax Service (STS), whose forecast for the current year was increased by 14.2 per cent. The day before Minister of Economy Mikail Jabbarov wrote on Twitter that tax revenues of the State Tax Service increased by almost 75 per cent in January-March. Judging by the high rates of tax collection in the first quarter of this year, the new challenges are quite feasible for the fiscal agency. Moreover, these positive trends indicate the growth of the tax base and stable development of domestic business despite the negative factors - imported inflation and the global recession.

Since late last year, international organisations and experts have been predicting a sharp slowdown of the global economy due to high inflation, imbalances in the energy market, and the ongoing Russian-Ukrainian war. All this does have a very negative impact on economic activity in Europe and the US, and a number of Asian countries, and therefore the UN has lowered its forecasts for global GDP growth this year to 1.9 per cent, down from 3 per cent a year earlier. Signs of the global recession are also visible to some extent in Azerbaijan, where a slight decline in foreign trade was recorded in early 2023, mainly due to lower oil and gas export figures and high volatility in global energy prices.

However, this April, the situation in the global energy market has fundamentally changed thanks to the revolutionary decision of OPEC+, which announced the reduction of oil production by almost 1.7 million barrels per day from May to December 2023. In this context, many experts expect oil prices to grow by the summer of this year. In particular, it is projected that the price of a barrel of Brent will reach $100 and more. This circumstance will benefit Azerbaijan, as it promises an increase in revenues from oil exports, and accordingly, tax payments to the budget and reserve funds will increase. The favorable situation in the external markets, the expected rise in energy prices, as well as steady growth in the production and export of non-oil products, contribute to boosting the revenues of our country's state budget. The last year was quite indicative in this regard: record GDP growth of 134 billion manats was achieved, and foreign trade increased appreciably exceeding $52.6 billion, with a trade surplus amounting to $25 billion.

Although trade in hydrocarbons is still a significant factor in the country's foreign exchange earnings, its role in the structure of the economy is far from dominant. Reforms in recent years, accelerated industrialisation of the country, and the formation of numerous local industrial clusters and agro-parks have significantly reduced the economy's dependence on raw materials, and the share of the non-oil sector in Azerbaijan's GDP structure has accounted for more than half of it in recent years. Steadily high dynamics of development of the non-oil sector has supported production in the domestic agricultural and industrial sectors for two years in a row: in the first half of 2022 alone the share of industrial zones in the production of non-oil products was 14.9 per cent, and their share in non-oil exports reached 33.1 per cent. Overall, non-oil GDP growth in Azerbaijan reached 9.1 per cent last year.

Today it is difficult to speculate whether it will be possible this year to maintain a comparably high rate of development of the non-oil economy and even more so to forecast the possibility of approaching last year's record indicators. Nevertheless, there are a number of direct and indirect indicators which show that business activity in the country is relatively good. "In January-March 2023, tax revenues to the state budget through the State Tax Service under the Ministry of Economy increased by 74.8 per cent over the same period last year and exceeded 4.899 billion manats," Economy Minister Mikail Jabbarov wrote on his Twitter account the previous day, noting that significant growth of fiscal revenues enhances the sustainability of the economy. The minister emphasized that 2.618 billion manats out of total tax revenues (16.4 per cent growth) were provided by the non-oil sector.

Thus, in the first quarter, the non-oil sector accounted for over 53.4 per cent of total fiscal revenues, a very consistent indicator over the past few years and indicative of the crucial role of the country's private sector in generating tax revenues. Moreover, according to the Tax Department, about 97 per cent of all business entities registered in the STS database belong to the small, medium, and micro-businesses segment, which means that the SME sector has great potential in the national economy and is largely the driver of business activity growth this year as well. Importantly, the growth in fiscal revenues from the non-oil sector also confirms the effectiveness of all the reforms implemented in recent years on voluntary tax payments and the development of public-private partnership mechanisms. Since 2018, activities aimed at reducing the shadow economy and ensuring revenue transparency have contributed to a dynamic increase in non-oil tax revenues and a broadening of the tax base. In 2022, for example, the number of active taxpayers increased by 7 per cent, active VAT payers by 15.1 per cent and active facilities by 3.2 per cent. As of January 2023, the number of active taxpayers was close to 712,000.

The most important component of the implemented policy for suppressing grey schemes has been increased income transparency and increased income tax payment rates, to which the country owes its efforts to optimise the labour contracting processes and digitalisation of the database. Thus, according to data from the Ministry of Labour and Social Protection, as of January 1, 2023 the number of concluded labour contracts in Azerbaijan exceeded 1.746 million, and more than half of them (831,400) were in the private non-oil sector.

The above data suggest that the positive trends of recent years will continue in the current and future years, and the increase in tax revenues from the non-oil sector observed in the first quarter serves as a reliable marker of business activity in the country. It should also be taken into account that investment in fixed assets grew by 61.2% at the beginning of 2023, including a 2.5-fold increase in the non-oil sector. The capitalisation of industry, processing sector, agribusiness, construction, and building materials production will only increase in the future, including the implementation of large-scale infrastructure and construction projects in the Karabakh region of Azerbaijan, and this will support economic and fiscal activity in the country over the coming months of the year.

The Central Bank (CBA) of Azerbaijan holds the same view in general. "Under the conditions of stimulating fiscal policy and growth of currency revenues in the country, there is an expansion of aggregate demand and high growth rates of the non-oil sector remain. Demand growth in particular is influenced by the implementation of the 4th social package since the beginning of 2023 (increase in wages for state employees, pensions, and benefits) and continued lending activity: the annual growth of the loan portfolio of banks and non-bank credit institutions has slowed slightly, but still remains high - 15.7 per cent in February 2023," the CBA said in a recent statement.