Azerbaijani State Budget in 2016: Perspectives and Challenges

1 Theoretical section . 2 Introduction . 5 2. Public revenues in Azerbaijan . 6 3. Public spending in Azerbaijan . 13 3.1 Total public spending . 13 3.2 Social security . 15 3.3 Education . 19 3.4 Health . 19 3.5 Judiciary, law enforcement and prosecution . 21 3.6 Defense and security . 22 3.7 Housing and communal services . 23 3.8 Agriculture, Forestry, Fishery, Hunting and Environment . 23 3.9 Transport and communication . 25 3.10 Economic activities assistance . 25 3.11 Functional distribution of local expenditures for 2016 . 26 Conclusion . 29 References . 31 Azerbaijani State Budget in 2016 Perspectives and Challenges Nijat Hajizada, Tahmasib Alizada, Rovshan Jamalov Page1 / 32 CESD Center for Economic and Social Development Better research, better policy, better reform ABSTRACT The principal plan emerged from the next 2016 budget is to increase to achieve a substantial tightening of the budget in order to allocate recent budget deficit. State Oil Fund’s contribution to public revenues is projected to decline by unprecedented scale in 2015-2016. The recent revenue volatility further reinforces the urgent need for economic diversification and nonoil sector investments. While public spending on all departments has grown steadily prior to the recent sharp decline in oil prices, the latest 2016 budget projection suggests that the next public spending will be squeezed for the half of the main departments. The expenditure structure of the state budget for 2016 reveals more socially oriented targets of the government. The main spending growth areas of the 2016 budget are education, defense and security, agriculture and related fields and housing. This paper aims to describe the current trends in the projected state budget for 2016 and provide the summary of analysis of revenues and spending changes over the last five years. Azerbaijani State Budget in 2016 Perspectives and Challenges Nijat Hajizada, Tahmasib Alizada, Rovshan Jamalov Page2 / 32 CESD Center for Economic and Social Development Better research, better policy, better reform THEORETICAL SECTION State budget ensures the financing of expenditures related to state function. State budget is the main instrument in the context of development of economic and social life of the country. Government budget is consist of revenue and spending parts. State budget of the Republic of Azerbaijan determines with the Constitution of the Republic of Azerbaijan, legislation of the Azerbaijan Republic on the state budget and other legislative acts. According to the literature analyze there are some ideas about the fiscal policy on managing oil revenues, making the budget in the oil exporting countries. Matthias L. (2010) demonstrate that, when the government revenue fluctuates with the world crude oil price market, then medium-term expenditure plans should base on cautions assumption about the future price. By origin, when the oil price high, government should spend less than current revenues and accumulative savings, which may be keep the expenditures stable when the price is low. The stabilization and savings fund is effective in collectingassets for the medium and long run. Paulo M. and Daria Z. (2009) indicates that, reduce the macro-fiscal costs associated with revenue volatility, the evolution of government expenditure should be de-linked from the short-term developments in oil revenue. Maintaining a non-oil revenue base can create greater budgetary flexibility to manage shocks, while expanding the coverage of fiscal indicators. Teresa Ter.M. (2007) indicates that, oil funds can play advantageousrole in asset management, provided they are decently integrated with other government financing operations. The resources in the oil funds should be controlled in order to support the government’s overall asset and liability management strategy. Azerbaijan is an oil exporter country, which has traditional energy resources. Most of the oil exporter countries’ economy related to the oil. Therefore, the oil exporter countries use the same model in order to manage the oil revenue and transfers to the state budget. The objective of stabilization funds is to minimize the transmission of oil price volatility to fiscal policy by smoothing budgetary oil revenue. The paper analyzes and compares the major oil-exporting countries Russian Federation, Norway and Saudi Arabia. As mentioned before, most oil-exporting countries have set up oil stabilization and or savings funds, which manage part of the country’s foreign assets. Usually the stabilization funds invest to foreign assets more aggressively than central banks invest traditional foreign exchange reserves. The stabilization function of oil funds appeal the short-term challenges of fiscal policy and aims to make the manner of policy less volatile. When oil prices are high, the funds may also help contain inflation and escape over-heating in the economy. When oil prices are low, they can increase the intervention costs in terms of the help to the national currency or national economy. The savings function of oil funds apply the long-term challenges of equity and fiscal sustainability that accompany nonrenewable resources. The funds can also be drawn upon for capital spending where there is a high return (for economic diversification). However, oil funds have a number of challenges of their own, including with regard to governance, transparency and accountability. Azerbaijani State Budget in 2016 Perspectives and Challenges Nijat Hajizada, Tahmasib Alizada, Rovshan Jamalov Page3 / 32 CESD Center for Economic and Social Development Better research, better policy, better reform Table 1. The stabilization funds of selected oil-exporting countries Oil-exporting Countries Stabilization Fund Year of establishment Azerbaijan State Oil Fund of Azerbaijan Republic (SOFAZ) 1999 Russian Federation Reserve Fund 2004 Norway Government Pension Fund – Global 1990 Source: Naotaka Sugawara 2014: viewed at 28 th of September; From Volatility to Stability in Expenditure: Stabilization Funds in Resource-Rich Countries; IMF working paper Saudi Arabia does not have oil stabilization or savings fund, unlike other GCC oilexporting countries.58 foreign assets are mainly collected by the Saudi Arabian Monetary Agency (SAMA), Saudi Arabia’s central bank. The volume of these assets are not formally classified as foreign exchange reserves. Norway is one of the most developed oil countries in the world. As other oil countries’ budget, revenues from oil sector have a share in the state budget of Norway too. Since the 2000 th year the high level of demand at oil sector has supported Norwegian economy. Norway successfully manages oil revenues and the impact of oil revenues in the formation of state budget. This is a Norwegian model, which contains a long term planning. Economic policy of the Norway Government is based on spending oil revenues to the development of education and infrastructure in country. Government regulates the use of revenues gained from oil sector within their fiscal policy. Revenues gained from oil and gas industries are saved as a reserve, which is approximately more than $ 870 billion. In the state budget of Norway, State Pension Fund has a transfer from oil sector revenues. The State Pension Fund aims to contribute to the government to increase the public pension, to support the government in spending of oil revenues and to implement the benefit from oil sector for the next generations. The Norwegian government planned to spend $ 19.15 billion gained from oil sector, in the 2015 state budget. This is 3% of State Pension Fund. Oil activities have a large share in the whole Norwegian economy but every year they aim to decrease the share of petroleum activities in the total revenues of the Fiscal Budget. Decreasing oil prices in the world market influenced to the oil revenues exactly. But the negative effect of low oil prices to Norway was less than other oil countries. 1 Government counted the losses from low oil prices and the effect of decreasing oil prices in the state b