Our foreign exchange reserves in the context of fiscal sustainability

As soon as the nightmare of devaluation hits our economy, officials come out and express the excess of our foreign exchange reserves to create reassurance in the community. Recently, one of the officials said that our fiscal sustainability stands in balance, our financial resources are more than 50 billion, or 106 percent of GDP.  It can be said that there is almost no such country in the world today.

First of all, I would like to note that conceptually, the concept of fiscal sustainability is not limited to the amount of assets accumulated in strategic foreign exchange reserves. Strategic foreign exchange reserves are the sum of assets accumulated in two sources that provide fiscal balance. In other words, it is understood as the cumulative sum of the assets of the Oil Fund and the Central Bank. Based on this formula, it can be said that fiscal sustainability should be understood as a set of factors, not as an "airbag".

IMF experts see this concept more as a mechanism to protect the current situation from crisis situations, ensuring macroeconomic stability of the countries. Fiscal sustainability helps to ensure that there is no long-term imbalance between government revenues and expenditures. In other words, when using assets accumulated for difficult days for the benefit of the present generation, it is perceived as not endangering the fate of the next generation. It eliminates the negative effects of the intergenerational distribution of "pie". So, based on the meaning of this concept, we can say that if our government reaches out to the share of the next generation when using foreign exchange reserves to solve current problems, it means a violation of fiscal stability. Therefore, the stability of foreign exchange reserves is determined by the limits of the use of reserves.

The fiscal sustainability of a state is conceptually based on several indicators. This sustainability is mainly determined by the following indicators: (i) debt sustainability, (ii) sustainability of the pension system, (iii) sustainability of the health system, (iv) sustainability of the budget system, (v) sustainability of the tax system. Our assessment of these indicators separately will help to fully clarify the situation.

Debt sustainability: In the reports of the official bodies of Azerbaijan, public debts are taken separately from the debts of state companies (AZAL, SOCAR, AzerSu, etc.). However, the debts guaranteed by the state to the state company must be called state debts. The total amount of these debts is over $ 20 billion. This is not a dangerous limit in terms of international norms, but it should not be considered a small burden for the state, which exceeds the peak of reserves. In this sense, the growing amount of debt determines the risks of increasing debt obligations in the near future against the background of declining oil revenues and shrinking GDP.

Sustainability of the pension system: If the average pension of 1.3 million retirees in the country is over 200 AZN, and if it is lucky in terms of "demographic burden" international norms, then it is incorrect to say that the pension system is heartwarming.

Sustainability of the health system: It is necessary to approach the amount of funds allocated from the state budget to finance health expenditures in terms of international norms. According to the norms of the World Health Organization, expenditures on health from the state budget in developed countries should not be less than 3% of GDP. The current situation in Azerbaijan is below these norms.

Sustainability of the budget system: This indicator envisages long-term optimization of state budget revenues and expenditures in such a way that any force majeure situations in the economy do not affect the budget. If there is a dominant burden of one sector at the source of budget revenue, the weakening of that chain ring should not have a negative impact on the other budget chain. The weight of the oil sector (the sum of transfers of the Oil Fund and the tax burden of transnational oil companies) in the state budget in Azerbaijan remains a leading area. Against the background of falling oil prices on world markets, it is a harsh reality that there are serious difficulties in financing budget expenditures.

Sustainability of the tax system: One of the important contributions to the formation of taxes is again related to the tax burden of transnational oil companies operating in the oil sector. The tax burden is paid to the fiscal body according to the price sold before this burden. After this burden, the remaining profit after earning the prime cost of oil sold by the Azerbaijan International Operating Companies provides for the distribution of oil under a contractual obligation. If 63% of budget revenues are formed from tax and non-tax revenues in the oil sector, this allows us to say that the balance of the tax system no longer depends on domestic factors.

A small assessment in these areas shows that the sustainability of these indicators is due to the oil factor, which has a direct and indirect impact. Therefore, if the oil factor, which is the key point of fiscal stability, depends on global conjuncture, then fiscal stability will also be sensitive to external shocks. This will consist of fiscal instability rather than fiscal sustainability.

The second direction we quoted in the introductory part of the article was related to the amount of reserves. Pointing out that "there is no such reserve in the world", it made us look at the world countries.

Norway has a population of only 5 million. Their foreign exchange reserves in the Pension Fund are more than $ 1 trillion. It costs $ 200,000 per capita. I do not even add the reserves of the Central Bank of Norway.

Azerbaijan has a population of 10 million. It has $ 52 billion in foreign exchange reserves. It costs $ 5,200 per capita. Given the 40-fold difference between the per capita foreign exchange reserves of these two countries, how can it be said that "there is no such country in the world"? Look, here it becomes impossible to understand this...