Lessons in sustainable economic management Azerbaijan's debt success story

Attracting funds from international donors for the implementation of various capital-intensive projects, the payback of which requires a long period of time, is a common global practice. External borrowings are also important for Azerbaijan, but in recent years the government has been adhering to conservative scenarios in this issue.

Thanks to this, Azerbaijan is one of the most favorable in the world in terms of external debt to GDP ratio. In his opening remarks at the Caspian Oil & Gas 2024 exhibition, Azerbaijani President Ilham Aliyev mentioned the success of the country's policy on state debt management. And the day before the annual meeting of the working group of the International Organizations of Supreme Audit Institutions (INTOSAI) was held in Baku, which reviewed the issues of global challenges on public debt.

According to the calculations of the International Monetary Fund (IMF), by the end of 2023, the size of global government debt has grown to 93.2 per cent of world GDP, which is two percentage points higher than in 2022 and 9 points higher than in the prosperous 2019. Thus, already in 2022 the global debt in dollar terms amounted to 235 trillion, which is 200 billion higher than in 2021. The largest contribution to the growth of total world debt in recent years is made by the US and China. At the same time, there has been a renewed tendency for developing countries to increase external borrowing in recent years as a result of the adverse economic impact of the coronavirus pandemic, imported inflation and the global recession and other crisis processes.

Thus, over the past 12 years, the level of government debt in developing countries has increased by more than half. According to IMF estimates, the window of fiscal space for most of the world's nations will narrow in the coming years, while the need for additional spending (e.g., on energy transition) will only grow, interest rates will remain at relatively high levels, and growth prospects for economies are modest at this stage. These trends reflect the weakness of monetary and fiscal policies in emerging markets, as well as the attempts of governments to fill budget deficits by increasing external debt.

One of the countries in the world that pursues such a risky and shortsighted policy is Armenia. Thus, only during the reign of Prime Minister Nikol Pashinyan, the external borrowings of the republic increased by more than 1.7 times, in particular, at the end of 2023, the volume of the total state debt of the “country of stones” exceeded $11.8 billion, increasing year-on-year by 11.3 per cent. Thus, according to Armenian Finance Minister Vahe Hovhannisyan, the ratio of Armenia's public debt at the end of 2023 is estimated at 48.4 per cent of GDP. Moreover, the government's foreign debts grew at the highest rate: they increased by 12 per cent last year, eventually amounting to $11.295 billion.

According to Fitch Ratings analysts' assessments announced at the beginning of the year, Armenia's sustainable and consistent development is hampered by persistent risks due to the high share of foreign currency-denominated public debt and the high dollarization of the financial sector. Armenia is living beyond its means, and these factors are putting its country's creditworthiness indicators at risk, downgrading the banking system, not to mention the heavy burden on future generations who will have to repay external liabilities.

It is noteworthy that Armenia's neighbor in the South Caucasus - Georgia - pursues a much more cautious policy on external borrowing: thus, at the end of March 2024, Georgia's external public debt amounted to $8.722 billion, having decreased by 2.1 per cent compared to the end of last year. Moreover, according to the IMF, by the end of 2023, Georgia's public debt (external and domestic) amounted to 39.2 per cent of GDP: according to this indicator, the country ranks 141st in the world among 188 countries - the closer to the end of the list, the lower the burden of public debt.

However, the absolute record in the South Caucasus in terms of minimizing the level of risks on the debt track belongs to Azerbaijan. Back during the financial crisis of 2008, the government began to pursue a very conservative policy with regard to external borrowing, and this trend only intensified during the energy crisis of 2014-2017. In particular, the rules for attracting donor funds by state organizations were tightened, and clearer obligations of private banks and companies on the amount of funds attracted from external sources and the terms of their repayment were formulated. These and a number of other measures contributed to the fact that in terms of total external debt to GDP, Azerbaijan has taken one of the leading positions not only in the post-Soviet space, but remained one of the best in the Central and Eastern European region over the last decade.

“Last year Azerbaijan's foreign currency reserves increased by 17 per cent or $10 billion and reached $68.5 billion, in turn during the reporting period the volume of external public debt, having decreased by 3.5 per cent, amounted to $6.46 billion, or 8.9 per cent of the country's GDP,” Azerbaijani Prime Minister Ali Asadov said, addressing the Milli Majlis’ mid-March meeting with a report on last year's government activity.

In the past months of the current year the situation with total external debt has improved even more: according to the data of the Ministry of Economy of Azerbaijan, the level of public debt is very low - less than 8 per cent of GDP. These indicators show the presence of a healthy financial system in the country, which allows the government to pursue an independent economic policy; also, the low debt factor guarantees minimal default risks, especially given the high level of gold and foreign exchange reserves, which act as a reliable buffer in case of a sharp decline in the balance of payments and other global force majeure.

“We are not to blame for having oil and gas. We must be judged not for having these resources, but for how we manage them, how we transform this wealth through the channels into the society, how we build an inclusive society, and how we manage to reduce poverty from 50 to 5 per cent and reduce foreign debt from almost 100 to 7.7 per cent,” President Ilham Aliyev said, speaking at the opening of Caspian Oil & Gas 2024 exhibition.

This year the Azerbaijani President also cited developed countries of the world as an example, in some of them debt to gross product indicators often amount to 100 per cent, maybe 140 per cent, and in this regard Azerbaijan's efforts to manage the state debt should be recognized as the most effective and risk-free.

And this is indeed true: today the country's foreign currency reserves are more than ten times the size of its external debt, and this allows Azerbaijan to sustainably manage its debt, maintain a high creditor status, and most importantly, to attract new funds from international donors without special risks.

“Azerbaijan's external public debt is at a rather low level, in connection with which the government is considering the possibility of increasing borrowings up to $10 billion,” Minister of Finance Samir Sharifov said in late May during parliamentary hearings on the execution of the state budget in 2023. The Finance Minister also noted that important infrastructure projects are being implemented in the country, and due to low risks in the debt sphere it is considered expedient to attract new loans, slightly expanding cooperation with international financial institutions (IFIs).

The world's leading IFIs, rating agencies and other specialized structures recognize the reforms in the field of public debt management carried out in Azerbaijan as very successful. The achievements of the country in this sphere were once again confirmed during the annual meeting of the working group on public debt of the International Organizations of Supreme Audit Institutions (INTOSAI). The event “Response to global challenges on public debt”, organized with the participation of the Azerbaijan Chamber of Accounts, was attended by 60 experts from 27 countries, including Supreme Audit Institutions (SAIs), as well as profile specialists from the World Bank, IMF, International Budget Partnership and UNCTAD. During the forum, presentations were made on such relevant topics as “Public debt and climate change: selected legal issues”, “Coordination and control over debt management reforms”, “Understanding debt sustainability and different methodologies for its assessment”, “Public debt sustainability and risk management”, “The role of the SAI in public debt audit and challenges”.

“The Azerbaijan Chamber of Accounts is working closely with Türkiye, Russia, the United States and the Philippines within the INTOSAI working group on public debt,” Vugar Ibrahimov, auditor of the Chamber of Accounts, told the media.

The Working Group prepares guidelines and other informational materials for Supreme Audit Institutions to promote proper management of public debt and strengthen its accountability, as well as provides support in the field of improving knowledge and skills through exchange of experience and information".