Azerbaijan Navigates Economic Space: Budget, Inflation, and Banking Sector Dynamics

In the intricate dance of oil production, global price fluctuations, and the imperative of sustained funding for the State Oil Fund of Azerbaijan (SOFAZ), the Azerbaijani government approaches budget growth with caution. The 2024 state budget reflects a measured strategy, projecting revenues at 34,173 million manats and expenditures at 36,763 million manats—a marginal increase of 0.8% and 0.4%, respectively, compared to the 2023 forecasts. Despite modest growth, the anticipated budget deficit is set to be 5.3% lower than the preceding year.

A noteworthy aspect of the 2024 budget is the substantial contribution from SOFAZ transfers, reaching a record high of 12,781 million manats. However, it is crucial to recognize a projected decrease of 26.1% in SOFAZ revenues for 2024, amounting to 12,073.3 million manats, while expenditures are expected to rise by 8.9% to 12,900.2 million manats. Essentially, all SOFAZ revenues are earmarked for budgetary allocations in 2024.

To offset the budget, the State Tax Service and the State Customs Committee are expected to contribute 13,865 million manats (40.6% of income) and 5,900 million manats (17.3% of revenues), respectively. While broadening the tax base is commendable, concerns arise about potential disproportionate pressures on the populace and businesses, a trend that has become apparent.

In the context of the global economic landscape marked by inflation, Azerbaijan maintains an anti-inflationary policy, projecting annual rates within the target range of 4.3% in 2023, 5.5% in 2024, and 3.4% in 2025, attributing inflation to external and internal factors.

Azerbaijan displays robust financial indicators, with the central bank's foreign exchange reserves increasing by 33% to $10,615.9 million. The exchange rate remains stable, reflecting reduced demand for the dollar, and the country's total foreign exchange reserves stand at $66.4 billion, bolstering macroeconomic stability.

The banking sector exhibits steady growth in assets, loans, and key indicators. S&P Global Ratings underscores confidence in Azerbaijan's banking sector stability, emphasizing improved financing metrics and sound risk management practices. Concerns about the short-term nature of deposits have led to minor tax breaks for term deposits, targeting annual incomes up to 2.4 thousand manats. Economists question the rationale behind this decision, estimating its limited contribution to budget revenues.

A memorandum of understanding between the Central Bank of Azerbaijan and the Ministry of Digital Development and Transport signifies a significant step toward artificial intelligence development, influencing the digitalization of the banking system. Recent discussions emphasize the comprehensiveness of bank reports, assuring financial stability. Plans for the next three years and innovations in the financial sector signal a commitment to addressing challenges and integrating the banking system effectively into economic growth.