20 weak points in the state budget of 2020

Although the budget “discussions” has not yet been started in the Milli Mejlis, the Ministry of Finance has already submitted the draft state budget for 2020. According to the submission, the state budget revenues will be 24 billion 134.5 million manat and expenditures will be 26 billion 913.7 million manat next year. It is expected that the average annual inflation will be 4.6%, the manat exchange rate will be 1.70 manat against one US dollar and the average selling price of crude oil in world markets will be US $ 55 next year .

As a result of the analysis of budget risks and macrofiscal forecasting, the evaluation of the sustainability of budget revenues, as well as the transparency and efficiency of expenditures, it is clear that the 2020 budget contains at least 20 weak points. The presence of weak points reduces the quality of budget management, in other words, the efficiency of expenditures and its contribution to economic growth for the next year. These weak points can be classified as follows.

1. There are no budget discussions in Azerbaijan. At a socioeconomic meeting with the president on October 15, discussions about next year's budget have confirmed that the budget allocation in Azerbaijan depends on the opinion of a group. The state budget allocation is still under the control of the Ministry of Finance, the Ministry of Economy and the Presidential Administration. The participation of various sectoral and line ministries in this process, as well as other budget-funded government bodies, is formal. Other public bodies, except the Ministry of Finance and the Ministry of Economy, are almost certainly not involved in budget discussions.

2. The role of parliament in the budget process is nominal. According to Article 13 of the Law of the Republic of Azerbaijan “On the Budget System”, the draft law on the state budget for the next budget year, together with other documents, in compliance with Article 109 § 2 of the Constitution of the Republic of Azerbaijan, is submitted to the Milli Mejlis for discussion and approval no later than October 15 of the current year. Despite the fact that today is October 25, the budget of the Republic of Azerbaijan for 2020 has not yet been discussed in parliament. However, in the neighboring countries, Georgia and Russia, budget discussions have begun last month and continue. In Azerbaijan, violation of the Law of the Republic of Azerbaijan "On the Budget System" has become a tradition.

 3. “The result-based budget” is still not being developed. The budget of 2020, as in previous years, was prepared without coding and classification by programs. The budget work for calculation of results and their measurements with programs has not yet been established in Azerbaijan. Therefore, the effectiveness of budget expenditures is decreasing from year to year, and since indicators are not being developed to measure its impacts and outcomes, and the activities of independent civil society institutions are hindered, budget monitoring and social audits are not conducted. This directly disallows the evaluation of the role and performance of the executive agencies in budget expenditures.

 4. The newly adopted financial regulations do not restrict the use of oil revenues. Thus, on July 29, 2018, in the Article 11-1.2 of the Law of the Republic of Azerbaijan respecting the amendments to the Law of the Republic of Azerbaijan “On Budget System”, first of all, the upper limit of consolidated budget expenditures is determined. This threshold was determined based on the total of the forecasts of non-oil and other revenues with oil revenues that can be used for no more than 103% of the approved consolidated budget expenditures for the current year. According to fiscal rules, expendable annual oil revenues are calculated each year by the sum of the 20% of the difference between the 30% of net financial assets at the beginning of the forecasted year and oil revenues and the minimum index of these variables. Initial presentation of the 2020 budget project shows that while the growth of expenditure from the non-resource sector can be achieved, the government of Azerbaijan maintains a high level of oil revenues transfer to the state budget even if fiscal rules exist. Thus, next year transfers from SOFAZ to the state budget will amount to 11.35 billion manat, or 47% of the budget revenues.

 5. The price of every barrel of oil in the budget is based on optimistic scenario, not realistic. Discussion of the budget project of 2020 shows that oil prices are falling in the world markets. Therefore, assuming that the average world market price of oil will be $ 55 per barrel for 2020 is an optimistic approach. In fact, the price of one barrel of crude oil must be forecasted in several price scenarios while the budget draft is prepared in order to be insured against external shocks and manage risks.

 6. The budget is not adequate to the financial potential of the economy. Thus, 43% of budget revenues fall on non-oil sector and 56.1% on oil sector.[1] Although in the medium term (2020-2023), prepared by the Ministry of Economy, the non-oil sector is projected to be 65.8% in the GDP and 34.2% in the oil sector.[2] Poor use of the financial potential of the economy can be seen in comparison with the oil and gas-rich countries of the former USSR. Thus, while Russia's budget revenues in 2020 will amount to $ 293.2 billion and $ 2027 per person and Kazakhstan's budget revenues will amount to $ 30.3 billion and $ 1666 per person, Azerbaijan's budget revenues is expected to be $ 14.2 billion and $ 1377 per person.

 7. The budget's dependence on oil revenues is increasing. Transfers of the State Oil Fund (SOFAZ) are still the main source of budget revenue. Thus, 47% of projected revenues of the state budget for the next year are from the State Oil Fund, 32.6% are from the Ministry of Taxes, 16.6% are from the State Customs Committee of the Republic of Azerbaijan and 3.8% are from other sources. The share of the Ministry of Taxes in the formation of budget revenues will decrease from 40.7% in 2015 to 32.6% next year.

 8. Budget smells like oil. Of the 100 manat of Azerbaijan's projected budget for 2020, 56.10 manat will be formed by oil revenues and 43.90 manat by non-oil revenues. Of each 100 manat of the budget, 47 manat will be collected by SOFAZ, 32.60 manat by the Ministry of Taxes, 16.60 manat by the State Customs Committee, and 3.50 manat by fines and sanctions. As for budget expenditure, of the 100 manat of the budget, 64.20 manat will be directed to current expenditures, i.e. consumption directly, 29 manat to capital expenditures, and 6.80 manat to state debt service expenditures.

 9. Budget revenue collection expenditures are increasing year by year. According to the Chamber of Accounts, the expenditures of the Ministry of Taxes (including extra-budgetary expenditures) for the collection of budget revenues in the amount of 100,000 manat amounted to 1.8 thousand manat for 2017 and 2.1 thousand manat for 2018, and this figure is forecasted to be 3.1 thousand manat for 2019. Also, the expenditures of the Customs Committee for the collection of budget revenues in the amount of 100,000 manat (including extra-budgetary expenditures) amounted to 3.0 thousand manat for 2017 and 3.6 thousand manat for 2018, and it is expected to increase to 3.8 thousand manat. Currently, the abolition of the Ministry of Taxes and the transfer of this function to the Ministry of Economy make such calculations for next year impossible currently.

10. There is no consistent policy for budget transfers from the SOFAZ. The growth of declining transfers from 2014 to 2019 in the current year will continue in the next year. In the 2018 state budget, SOFAZ's transfers were 10.995 million manat, and it is projected to be 11.364 million manat this year and 11.350 billion manat next year. This means that next year's budget will be 47 percent of SOFAZ's transfers; moreover, SOCAR's budget payments will be $ 1,450 million and AIOC's will be 730 million manat which result in share of oil revenues to be 56.1% of total revenues.

11. Revenues from penalties and sanctions will increase next year. The budget of 2020 is expected to include 839.5 million manat from paid services of budget organizations, which is 212.9 million manat or 34 percent more than the current year's forecast. The reason for the increase in these revenues is a forecast of the increase in financial sanctions, customs duties, state duties and administrative fines for violations of tax laws. So the next year, businessmen will face more fines and sanctions.

12. The contribution of the regions to the formation of budget revenues is still low. By 2020, since centralized revenues will be 96.7 percent of total revenues, the share of local revenues will be 3.3 percent.

13. Dotations to regions from budget are increasing. Local budget expenditures are projected to be 850.1 million manat in 2020, which is 7.3 million manat or 0.9 percent more than in 2019. However, in spite of this increase, 39 districts and cities will provide their expenditures with their own income in the next year, which shows that more than half of all districts and cities are still subsidized

14. The current growth rate of the current budget expenditures surpasses the nominal growth rate of non-oil GDP. The share of current expenditures in the state budget expenditures, which belongs to the structure of budget expenditure, will be 64.2% or 17275.9 million manat in 2020. The growth rate of current expenditures is expected to surpass the nominal growth rate of the non-oil sector. By 2020, non-oil revenues from all sources are projected to be 10604.5 million manat, which is 61.4 percent of current expenditures. This means that the budget formed without taking into account the oil revenues will be able to finance 2 manat out of every 3 manat of current expenses.

15. Distribution of budget expenditures is unfair. Of each 100 manat projected for the 2020 budget, 21.60 manat will be spent on the maintenance of defence, national security, law enforcement, judicial and prosecutor's office bodies, 18.20 manat on construction, 12.10 manat on social security, 11.70 manat on education, 7.40 manat on administration, 6.80 manat on state debt service, 5.10 manat on health, 4.40 manat on agriculture, housing and utilities, 1.60 manat on culture, arts, physical education and information, 1 manat on environmental protection, 0.70 manat on science.

16. Up to the half of budget expenditures are not disclosed. There is neither economic nor functional classification of the next year budget expenditures' areas including the maintenance of defense, national security, law enforcement, judicial and prosecutor's office bodies with 21.6%, industry, construction and mineral resources with 18.6%, services not included in the main units with 3.7%, economic activity with 2.6%.  This means that 46.5% of the budget expenditures is closed. Not only the public but even members of parliament are not aware of this.

17. Next year's budget will create inflation. The main increase in absolute expression of income sources in next year's budget will consist of value added tax (226 million manat), income tax of individuals (295 million manat), excises (147 million manat) and income from paid services of budget organizations (212.9 billion manat). Next year's budget envisages an increase of customs duties by 5.6%, value added tax on imports by 13.2% and road tax by 40.6%. As you can see, non-oil revenues, which are expected to increase next year's budget, have been largely driven by increased consumer spending. This is especially possible with the rise in prices for imported goods. Therefore, it is not realistic that inflation will be 4.6% next year.

18. A closed budget will increase the amount of corruption. The closeness of 46.5% of budget expenditures next year, the absence of any economic or functional classification for parliamentary debate, and the opaque and non-reportable use of budgetary funds increase the risk of corruption. The construction costs of 4.9 billion manat increase the risk of corruption even more.

19. The budget for next year is not insured against external shocks and not excluded from external risks. The expected decline in oil prices in the world market from next year could have a negative impact on the 2020 budget with regard to the SOCAR and AIOC's payments. Along low prices, expected decline in oil production could lead to a deficit in the SOFAZ's budget. The 2019 budget may be subject to these negative impacts.

20. Next year, the budget deficit will go beyond the crisis. The budget deficit is projected to be 3.3% of GDP next year. This means that 3 percent crisis threshold set by the Mastrix Agreement for the countries on European territory will have been exceeded. The budget deficit for next year will be 12.5 times more than last year. The growth trend started this year. Thus, the expected deficit of the 2019 budget will be 9 times more than the actual deficit of the previous year. Apparently, this year and next year, the budget deficit will grow exponentially.

[1]
            Disclosure of the primary indicators of the state and consolidated budgets of the Republic of Azerbaijan for 2020, http://maliyye.gov.az/scripts/pdfjs/web/viewer.html?file=/uploads/news_files/5d7b8f2899635.pdf

[2]   ibid