AZERBAIJAN’S PUBLIC FINANCES UNDER CONTROL.

Thanks in part to high oil prices, the government in 2000 was able to meet its ambitious target for budget revenues and keep the budget deficit well below forecast levels. In addition to keeping inflation under control, this should help Baku keep relations with the IMF and World Bank on an even keel in 2001.

According to information released in February, the state budget deficit in 2000 was 239 billion manats (approximately US$53 million) or 1.1 percent of GDP. This was below the 2.6 percent targeted for the year, as well as below the 1999 deficit of 2.8 percent of GDP. The lower deficit in 2000 reflected the government’s ability to hit its ambitious revenue target: Budget revenues rose nearly 28 percent last year (to 3.6 trillion manats). Because inflation in Azerbaijan remains very low, budget revenues grew by some 16 percent in real terms. High international prices for oil in 2000 helped swell budget revenues: the government is estimated to have received US$200-300 million in budget revenues from the oil industry alone. Revenues in 2001 should also be boosted by oil wealth as state income from the State Oil Company of the Azerbaijani Republic (SOCAR) alone is expected to reach 1.3 trillion manats (US$282 million). Should the oil sector develop as planned, this figure could rise to US$1 billion by 2005. Plans to expand production this year at fields of the Azerbaijan International Operating Company (AIOC), the major international consortium producing in Azerbaijan, will further increase state revenues. Should oil prices stay high this year, the targeted deficit for 2001–420 billion manats or 2.0 percent of GDP–should be well within reach.

Although they came in below its targeted level, government expenditures also rose sharply last year, by 17 percent (to 3.8 trillion manats) in nominal terms and by some 6 percent in real terms. While the 3.8 trillion manats spent by the central budget in 2000 were some 6 percent below the targeted level (Russian agencies, February 25), the government’s moderation helped bring the deficit down and keep inflation under control. It also helped keep Baku’s relations with the IMF and World Bank on track, because these institutions have been disappointed by Azerbaijan’s slow progress on privatization and other structural reforms.

The 2001 budget calls for revenues to increase 17 percent, while expenditure growth is to be held to 15 percent. If realized, this budget will continue to allow government spending to rise in real terms while keeping Azerbaijan in the IMF’s good graces. Azerbaijan is now close to securing its next round of financing from the IMF and World Bank. A three-year development program is likely to be in place by April which will aim to maintain macroeconomic stability in Azerbaijan, improve the system of government administration and regulation, reform the fuel and energy sector, and restructure the tax and customs authorities. The funds will also finance projects in agriculture and other sectors not related to oil production and refining. Azerbaijan is slated to receive US$100-150 million from the IMF, and up to US$300 million from the World Bank (Russian agencies, February 11). This will raise Azerbaijan’s foreign debt levels noticeably but the overall level and servicing requirements of the debt should remain very much under control. Azerbaijan’s foreign debt at the start of this year was less than US$1.2 billion, or only 25 percent of GDP (Trend news agency, February 2).

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