What to expect from Azerbaijan's 2023 state budget? Caliber.Az optimistic forecast

The Ministry of Finance of Azerbaijan presented to the government the draft state budget and consolidated budget for 2023, as well as relevant indicators for 2024-2026, and published a number of forecasts for the next year.

Despite geopolitical instability, crisis processes in the world economic system, and volatility in commodity prices, Azerbaijan expects the oil economy to grow next year by increasing gas production and exports. Overall, positive trends in the non-oil sector will continue and budget expenditures will increase in a number of social areas.

The ongoing war in Ukraine, the breakdown of established transport and logistics links and supply chains in the Eurasian region, the energy and food crises, the imported inflation factor, the industrial downturn in the EU, and the mortgage collapse in China are just some of the serious issues affecting the global economic outlook in 2023. Today, many international financial institutions (IFIs) and rating agencies are predicting a high probability of the global economic system plunging into recession. In particular, back in late July the International Monetary Fund (IMF) cut the growth expectations of the world economy in the current year from 3,6 per cent to 3,2 per cent, and with an expected recession, revised the global growth figures in 2023, reducing them to 2,9 per cent. For its part, in a press release for the September Global Economic Outlook report, the international rating agency Fitch lowered global GDP growth expectations for 2022 from 2.9 per cent to 2.4 per cent and also significantly cut the outlook for the US and EU economies for the coming year.

The global economy could face a recession in 2023, triggered by an aggressive wave of monetary tightening by regulators in various countries, according to a new World Bank (WB) report published the previous day. "The experience of previous recessions since the 1970s shows that such changes in monetary policy have had more serious consequences than expected in terms of worsening financial conditions and a deepening slowdown in global growth," the WB report said.

The negative processes around the world also create certain risks for Azerbaijan. However, our country's resistance to the crisis is based on the low level of public debt, growing foreign exchange reserves, and a trade surplus. Judging by the draft state budget 2023 presented by the Ministry of Finance of Azerbaijan and published economic, social, and other data, next year our country will not only maintain its remarkable crisis resistance but also ensure the growth of indicators in several important positions.

First of all, it should be noted that the positive dynamics on basic indicators were outlined already this year: according to the updated estimates of the Government, the forecast figures for real GDP growth in Azerbaijan in 2022 increased from 3.4 per cent to 3.5 per cent and by the end of the year the volume of gross product will reach AZN 117.3 billion. These expectations are justified: for the second year in a row Azerbaijan has increased its foreign trade turnover, the driver here is a global shortage of energy resources, the gas crisis in Europe, and in general the rise in prices for petrochemical raw materials, fertilizers, and fuel. Thus, the average oil price in January-June 2022 was $101.2 per barrel, almost half as much as in the corresponding period last year. Accordingly, in the first half of this year, the volume of foreign trade turnover of the country amounted to $24.8 billion, and according to the CBA, it has provided Azerbaijan with a foreign trade surplus of $13 billion with a 3.7-fold increase. Not surprisingly, against this background, in the first half of the year, the country achieved a current account surplus of about $10.331 billion, or 27.6 per cent of GDP. Thus, the surplus on the balance of payments increased 5.5-fold compared to last year's figures.

The country's economic capitalisation is performing reasonably well, with the highest figures in the non-oil sector. In turn, foreign direct investment (FDI) in the economy exceeded $3.220 billion in the first half of the year, a 22.2 per cent increase over the same period last year. According to the balance of payments data, 65.9 per cent of FDI was in the oil and gas sector. However, while non-oil sector investments accounted for just over a third (about $1.098 billion) of the total, non-oil sectors attracted 2.4 times more investments than a year earlier. This is an extremely important point, which demonstrates the attractiveness of the domestic industry, agricultural sector, tourism, and other sectors of the economy for foreign investors. And, apparently, the dynamics of financing of the non-oil sector will continue increasing - in the medium term the growth rate of non-oil GDP in the country will be in the range of 4.5-5.1 per cent, rising from AZN 73.1 bn in 2023 to AZN 92.3 bn in 2026

According to the Ministry of Finance, under the budget package for the next and the next four years our country can count on steady positive dynamics of the economy. In particular, Azerbaijan's GDP growth is estimated at 2.7 per cent in 2023, rising markedly in 2024 - 4.1 per cent, and keeping a moderate growth in 2025-2026 - 3.7 per cent and 3.4 per cent respectively. If we compare these figures with the forecasts of leading IFIs, the average growth figures for the domestic economy will be comparable with the global average and noticeably exceed expectations for the EU and US markets. By comparison, Fitch recently cut the US GDP growth figures for 2023 to an unacceptably low 0.5 per cent.

According to the calculations of the Azerbaijani government, export growth supported by favorable external conditions, large-scale contracting work in the Karabakh region, and the rise of industry and agriculture contribute to the growth of state revenues in 2023 at more than $30.720bn with an increase of 5.2 per cent against the current year. In particular, tax revenues are projected to grow by 14.2 per cent and the State Customs Committee will increase its budget plan by 3.1 per cent. The increased possibility of budget financing will allow raising expenses for a number of important directions: expenses for the housing and utilities sector will be increased by 30.2 per cent, budgetary investments into agriculture by 20.5 per cent, social welfare expenses will grow by 18.3 per cent, education by 13.3 per cent, healthcare by 11.5 per cent, defence and national security by 4.6 per cent, etc. However, despite the increase in social and defence spending, next year the state budget deficit will not increase but, on the contrary, shrink. For comparison, the state budget deficiency in 2022 is projected at AZN 3.106 bn or 2.7 per cent of GDP, and in 2023 this parameter is estimated at AZN 2.579 bn or 2.4 per cent of GDP.

Monetary stability achieved in Azerbaijan, the steady growth of gold and foreign currency reserves, and trade and payment balance surplus contribute to the strengthening of macroeconomic stability. Among the most positive developments is a long-awaited reduction of inflationary pressures due to the abovementioned domestic factors as well as mitigation of imported inflationary pressures. In particular, whilst the inflation rate is forecast to be in the range of 12.5 per cent this year, in 2023 it will be reduced by almost half to 6.9 per cent.