What does the state budget for 2021 promise?

On December 29, 2020, the Draft Law on the State Budget of the Republic of Azerbaijan for 2021 was voted and approved by the Milli Majlis of the Republic of Azerbaijan[1]. According to the adopted law, the main indicators of the state and consolidated budgets are as follows: Revenues of the state budget for 2021 are projected at 25,427.0 million AZN, expenditures of the state budget at 28,543.0 million AZN, and the deficit of the state budget at 3,116.0 million AZN. Revenues of the consolidated budget for 2021 are projected at 23,828.1 million AZN, expenditures of the consolidated budget at 31,163.4 million AZN, and the deficit of the consolidated budget, at 7,335.3 million AZN. This article will mainly focus on the state budget. But before that, let’s look at a number of procedural issues.

According to Article 13 of the Law of the Republic of Azerbaijan on Budget System[2], the draft law on the state budget for the next budget year, together with other attached documents, shall be submitted to the Milli Majlis of the Republic of Azerbaijan for discussion no later than October 15 of the current year and shall be adopted by December 20. According to Article 14 of the Law, the draft law on the state budget for the next budget year, together with these other documents, shall be published in the press within 10 days from the date of its submission to the Milli Majlis of the Republic of Azerbaijan. However, the consolidated budget and state budget of 2021 were submitted to the Milli Majlis on December 21, 2020, this year[3]. On the same day, the official website of the Ministry of Finance published links to the draft law[4] and the explanation of the draft[5]. Unfortunately, the documents[6] specified in Articles 12.1.1-12.1.10 of the Law on Budget System - the concept and forecast indicators of economic and social development of the Republic of Azerbaijan for the next budget year and the next three years; the main directions of fiscal policy; targeted programs to be financed from the state budget; draft revenues and expenditures at the level of paragraphs of budget revenue classification, functional, economic, and administrative classifications; information on public debt and other obligations guaranteed by the state; draft consolidated budget for the next year at the level of paragraphs in accordance with the functional and economic classifications; draft state investment program, which includes important investment projects in accordance with the draft state budget and consolidated budget for the next year, as well as the consolidated budget for the next three years; the total financial balance on the territory of the Republic of Azerbaijan - have not yet been published until December 30.

This year's parliamentary discussion of next year's state budget was held in violation of the regulations (providing the period from October 15 to December 20) provided for in Article 13 of the Law on Budget System. Even the parliamentary discussion of the budget was not held on force majeure situations provided for in Article 15.4 of the Law. The 2021 budget submitted to the Milli Majlis on December 21 was superficially discussed in the Milli Majlis and adopted on December 29. However, according to the force majeure situations provided for in the Law[7], if the draft state budget for the next budget year is not approved within the specified period, until the approval of the state budget, the relevant executive authority shall determine temporary rules for financing up to one-twelfth of the previous year's expenditures (full on protected expenditure items) on a monthly basis. The same rule applies to the management and operating expenditures of extra-budgetary state funds.

As can be seen, although the parliamentary discussion of next year's budget for this year was organized in violation of Article 13 of the Law on Budget System, it was not held on force majeure situations provided for in Article 15.4 of the Law. Hence, the budget for 2021 was adopted by the Milli Majlis in violation of the requirements of the Law on Budget System adopted by the parliament itself. In fact, this calls into question the legitimacy of the budget adopted for the next fiscal.

As a result of a week-long discussion of the draft state budget for 2021 in parliament, no changes were made in the revenues and expenditures of the budget. Such that revenues and expenditures on the draft budget were accepted as they are. For every 100 manats of the projected state budget revenues for next year, 54 manats 20 gapiks will fall to the oil sector, 45 manats 80 gapiks to the non-oil sector. For every 100 manats of revenues in the oil sector, 88 manats 60 gapiks will be transfers from the State Oil Fund of the Republic of Azerbaijan, 11 manats 40 gapiks will be payments from the oil sector through the tax authorities. For every 100 manats of revenues in the non-oil sector, 48 manats 70 gapiks will be taxes, 33 manats 50 gapiks will be payments through the customs authorities.

For every 100 manats of budget expenditures in 2021, 23 manats 40 gapiks are intended for expenditures on defense and national security, judiciary, maintenance of law enforcement agencies and the prosecutor's office, 17 manats 64 gapiks for construction and urban planning, as well as 7 manats 70 gapiks for reconstruction and restoration of the liberated territories, 14 manats 57 gapiks for general public service expenditures, as well as 7 manats 70 gapiks for public debt, 12 manats 90 gapiks for social protection and social security, 11 manats 50 gapiks for education, 4 manats 90 gapiks for health, 3 manats 30 gapiks for agriculture, 1 manat 50 gapiks for culture, art, information, physical education, youth policy, and other similar activities, 96 gapiks for environmental protection, 60 gapiks for science.

Thus, for every 100 manats of budget expenditures in 2021, 61 manats 10 gapiks will be spent on current expenditures, 29 manats 20 gapiks on capital expenditures, and 7 manats 70 gapiks on public debt service.

A comparison of budget revenues with Azerbaijan's land border neighbors (excluding Iran) shows that our country is the country with the weakest financial security in the region in terms of per capita non-oil budget revenues. This can be seen comparatively from the data in Table 1. See Table 1.

Table 1. Comparison of South Caucasus countries in terms of per capita budget revenues and expenditures

Source: Ministry of Finance of the countries

Compared to 2020, although it is planned to expand the scope of compulsory health insurance next year and allocate additional funds from the health budget for vaccination against the COVID-19 pandemic next year, next year's state budget projected health expenditures at 18 percent or 308 million AZN less than this year. It seems that the government also predicts an increase in funds to be collected from insurance premiums in health financing.

As for social protection expenditures, the expenditures on this budget are projected at 3,692.7 million AZN, an increase of 14.1 percent or 455.7 million AZN compared to the current year. This can be explained mainly by the increase in pensions from next year. Such that by 2021, transfers from the state budget to the Social Protection Fund will be increased by 40 percent or 466 million AZN. At the same time, from next year, a 19 percent increase is projected in the cost of benefits for the children of martyrs and an 18 percent increase in the cost of benefits for children of conscripts. I would like to note that up to now, children growing up in the families of martyrs were paid 21 manats per month until the age of 16, and children growing up in the families of conscripts were paid 15 manats per month.

The 2021 budget does not envisage an increase in salary expenditures. Such that the salary fund for next year is projected at 6,592.3 million AZN at this year's level, and its share in social expenditures will be 23.1 percent. At the same time, 13.1 percent or 3,752.2 million AZN of social expenditures will be spent on pensions and social benefits, 1.7 percent or 477 million AZN on the purchase of food products, 1 percent or 290.4 million AZN on the purchase of medicines, bandages, and materials. In 2021, the expenditures on the purchase of goods and services from the budget will be reduced by 31 percent compared to the previous year.

As for the education budget, next year's expenditures on education will amount to 3,277.7 million AZN, which is 242.9 million AZN or 8.0 percent more than in 2020. It is planned to allocate 80.0 million AZN for student loans from next year's education budget. One of the features of the next year's education budget is the allocation of funds provided for in the Education section of the functional classification of budget expenditures to finance 24 sub-programs and 18 programs that include 111 measures. However, the classification of budget expenditures for the programs is not disclosed.

Expenditures on defense and national security, judiciary, maintenance of law enforcement agencies and the prosecutor's office will increase by 16.3 percent or 937.7 million AZN compared to 2020 and will amount to 6,678.6 million AZN. Defense and national security will account for the largest share of growth in this section. Such that in 2021, 4,585.8 million AZN will be allocated to finance defense and national security expenditures. It is still unknown where, how, and how much the fund will be spent.

The state budget for 2021 envisages 8,330.3 million AZN or 29.2 percent of expenditures to finance capital expenditures, which is 607.8 million AZN or 7.9 percent more than in 2020. The increase in expenditures on this section is due to the allocation of 2.2 billion AZN for the restoration and reconstruction of cities and villages to ensure the return to the liberated territories from next year, the creation of a modern infrastructure in those territories.

In 2021, the upper limit of the state budget deficit is projected at 3,116.0 million AZN, of which ratio to GDP will be 4.1 percent. The deficit prevention is planned to be carried out at the expense of the following sources:

• Loans attracted on the basis of project financing in the amount of 610.0 million manats in accordance with the signed loan agreements,
• New domestic and foreign borrowing in the amount of 1,895.0 million manats,
• Probable balance of the single treasury account of the state budget as of January 1, 2021, in the amount of 500.0 million manats,
• Revenues from privatization in the amount of 111.0 million manats.

As can be seen, for the first time, the Azerbaijani government will borrow 1 billion 895 million AZN in domestic and foreign debt, which will ultimately lead to a deterioration in business activity. One of the highlights of next year's deficit financing is the large amount of funds expected from privatization. This means that large-scale privatization is planned in Azerbaijan next year.Top of Form

[1] http://maliyye.gov.az/news/5501/milli-meclis-azerbaycan-respublikasinin-2021-ci-il-dovlet-budcesi-haqqinda-qanunu-qebul-edib

[2] http://www.e-qanun.az/framework/1126

[3] http://maliyye.gov.az/news/5499/azerbaycan-respublikasinin-2021-ci-il-dovlet-budceinin-layihesi-milli-meclise-teqdim-olunub

[4] http://maliyye.gov.az/scripts/pdfjs/web/viewer.html?file=/uploads/news_files/5fe055aaa50f5.pdf

[5] http://maliyye.gov.az/scripts/pdfjs/web/viewer.html?file=/uploads/news_files/5fe0996cc4b44.pdf

[6] http://www.e-qanun.az/framework/1126

[7] http://www.e-qanun.az/framework/1126