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How will Azerbaijan Solve its Oil Fund Deficit?

You might not think that money from oil would be a problem for Azerbaijan, one of the former Soviet Union’s largest energy producers. But when oil production drops, and election-year demands for money increase, the picture changes.

Next year, for the first time in its history, the country’s State Oil Fund will post a multi-billion-dollar deficit. For economists, the question is what to do about it.

Azerbaijan’s 2013 budget, passed on November 30, is expected to increase by roughly 12 percent to 19.15 billion manats or $24.4 billion. As it has since 2009, the State Oil Fund (SOFAZ), which oversees investment of the country’s oil revenues, will provide the lion’s share (59.3 percent) of that sum, via a direct transfer of 11.4 billion manats, or $14.5 billion.

Given Azerbaijan’s petroleum prowess, that role may come as no surprise. Except that, with its oil production tapering off (down by 7.8 percent, compared with 2011, according to the State Oil Company of the Azerbaijani Republic), Azerbaijan had been expected to draw less on SOFAZ and more on the non-energy sector of its $93.05-billion economy.

But Azerbaijan’s October 2013 presidential election (in which President Ilham Aliyev will run) means the government wants to spend big on infrastructure projects and increases in state salaries and pensions, critics note, and must look to SOFAZ for the cash.

The 2013 budget transfer from the Fund represents a 15-percent increase over this year’s transfer, and a tenfold increase from 2008, when oil production was still rising.

No legislative restrictions exist on the amount of transfers from the State Oil Fund to Azerbaijan’s government budget or on spending from the Fund.

The 1.7 billion-manat ($2.2-billion) deficit brought about by this year’s budget transfer, however, prompts some economic experts to argue that the Fund should be required to hold 25 percent of its revenues in reserve.

"Otherwise, with such a pace of transfers, future generations of Azerbaijanis will face an empty Oil Fund," said Zohrab Ismayil, director of the non-governmental organization Support for a Free Economy.

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SOFAZ Executive Director Shahmar Movsumov, though, has shied away from pushing for such restrictions, telling local media on November 6 that responsibility for such a decision lies with the government and parliament.

But, in an election year, the incentive for the government or parliament, dominated by Aliyev’s Yeni Azerbaijan Party, to impose restrictions on SOFAZ transfers is slim, critics say.

"There are big hopes for economic growth and the government has to increase spending on infrastructure, which means jobs, and to raise salaries, especially in the law-enforcement sector to keep their loyalty," commented Ingilab Ahmadov, director of the non-governmental Public Finance Monitoring Center.*

For 2013, the government plans to continue heavy investments into infrastructure projects (6.9 billion manats or $8.8 billion) and to increase both pensions and the salaries of about 700,000 state employees by, on average, 15 percent. The salaries of law-enforcement agency employees will increase by 30 percent, on average.

Parliament’s Economic Policy Committee Deputy Chairperson Vahid Ahmadov, an independent parliamentarian, calls the proposed 2013 budget "normal,” when compared with the indebtedness of European governments. “The budget will preserve economic stability in Azerbaijan,” Ahmadov commented to EurasiaNet.org.

Economic expert Natik Jafarly, head of the non-governmental Society of Economic Bloggers, is not buying it. He counters that the proposed 2013 budget disproves President Aliyev’s repeated declarations that Azerbaijan has successfully developed its non-oil-related economic sectors.

"The dependence on oil monies is just growing. Despite the billions invested into development of the regions … since 2004, Baku [the energy industry’s center – ed] still provides 98 percent of all budget revenues," Jafarly said.

The oil-and-gas sector is expected to account for over 41 percent of Azerbaijan’s 2013 tax revenue, according to official data.

The government insists that that situation will change dramatically next year.

Economic Development Minister Shahin Mustafayev asserted in parliament that more than 500 industrial facilities would open by the end of 2013 and expand the economy’s non-oil-related sectors by more than 18-percent, plus bring in an additional 500-million manats ($637.2 million) in tax revenue, Azerbaijani news outlets reported.

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Yet out of this roster, two of the biggest likely moneymakers, a cement plant and a methanol production plant, are located near Baku, and the other two, a pair of reopened chemical plants owned by a subsidiary of the State Oil Company of the Azerbaijani Republic, are in Sumgayit, about 28 kilometers from Baku.

Finance Minister Samir Sharifov admitted to parliament that the regions are lagging far behind in budgetary contributions – only 2.69 percent of the total – but added that a 100-million-manat ($127.44-million) increase in their contributions compared with 2012 means that “the regions are developing.”

Baku has argued that infrastructure development is the key to regional economic growth, but analysts complain about an absence of public information about related expenditures.

Finance Minister Sharifov has acknowledged the problem, and said that the ministry and a parliamentary budget-monitoring body will monitor infrastructure spending.

But even if the regional boom in non-oil sectors actually takes off, Public Finance Monitoring Center Director Ahmadov worries that the tax revenue will not reflect it.

"We cannot collect taxes,” he charged. “[T]he construction sector is booming, both officially and visibly, but tax revenues did not increase there.” The government has not addressed the complaint.
Taking aim at the corruption and monopolies that distort Azerbaijan’s economy is the next step, economists argue.

"Several large multi-functional holdings are now major players in the Azerbaijani economy. They all are controlled by government officials and, thus, enjoy monopolistic positions and do not pay enough taxes," Ismayil alleged. The government did not respond.

With an estimated $40 billion in foreign-currency reserves and an expectation that 2013 oil prices will stand at $100 per barrel, the Azerbaijani government, for now, is not concerned. But the clock, noted Public Finance Monitoring Center’s Ahmadov, is ticking, and “there is no money outside the oil sector.”

By. Shahin Abbasov

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