The Ministry of Finance's response to tightening their weak points in next year's state budget

The press service of the Ministry of Finance commented on the article "20 Weak Points in the State Budget of 2020" published on the Internet resources of Turan Information Agency. In addition to pointing out the weaknesses of the authors of the non-ethical expressions used in this statement, their nonprofessional approach has provided additional references to increase the number of weak points in the 2020 budget. Therefore, we first look at the "arguments" of the ministry.

Ministry officials, who deliberately mix budget access with selected budget parameters, deny the budget document is closed. Although only one of the documents posted on the Ministry's website on behalf of the budget project presentation and parameters contains index of the functional, economic and administrative parameters of the state budget expenditures for 2018-2020, it is also incomplete. Thus, it is not possible to get acquainted with the income project at the level of paragraphs of functional, economic and administrative classifications provided by Article 12 of the Law of the Republic of Azerbaijan “On the Budget System” on the Ministry of Finance website, the expenditure classification has not been fully implemented, and the administrative classification has not been presented at all. Although this article of the Law requires publication of the state budget and consolidated budget for the next year, as well as a draft public investment program in line with the draft budget for the next three years, it is not possible to look at this document either from the Ministry of Finance website or the budget envelope distributed to members of Parliament. In addition, the consolidated financial balance on the territory of the Republic of Azerbaijan, which is required by law, was not disclosed, as well as clarifications on draft laws on budgets of extra-budgetary state funds was not provided. It is also impossible to get acquainted with the information on the expected execution of the consolidated budget of the current year, summary report on extra-budgetary operations, the report on the actual sources of funding of the state budget deficit in past budget year and expected sources of it in the current budget year in the list of documents submitted by the Ministry of Finance.

Finally, I would like to note that economic, functional or administrative classification of expenditures not included in the main section, which includes 20.8% of the budget for construction and urban planning, 14.3% for defense and national security, 6.8% for public debt, 6.7% for state budget at the level of functional, economic and administrative classifications. Apparently, at least 48.6 percent of expenditures in the state budget 2020 budget, there are no economic, functional or administrative classification.

However, the response we receive indicates that a comprehensive and detailed data collection on all budget parameters is available on the website of the Ministry of Finance to ensure public access. But not only the public, but even members of parliament do not know where, how much and by whom about half of the 2020 budget they voted for is spent.

The response reveals that the Ministry of Finance still does not know what the budget negotiations are, and it is mixed with the surface discussions in the Cabinet of Ministers and the President's Office. In such situations, it is said that “what to expect from the tail, if this head carries it”. Budget negotiations are a budget process that combines the budget project with both top-down and bottom-up. According to these negotiations, the Ministry of Finance should negotiate with municipalities and determine the amount of subsidies in accordance with their needs. Although there are no such negotiations, for example, for the municipality, regardless of their number and other parameters, municipalities have been provided with 5 million subsidies a year for the same amount, regardless of their number and other parameters for ten years. As the budget is not negotiable, this amount remains stable and does not increase or decrease.

The Ministry of Finance claims that the parliament is satisfied with the budget process. However, under the Law “On the Budget System”, the budget process in parliament is envisaged for a period of 2 months and 5 days between October 15 and December 20, and in recent years, these discussions have not been more than 10 working days.

The Ministry of Finance states that the establishment of a cost-effective budgeting mechanism is a fairly complex reform process, and that it will take 8-11 years for other countries to transition, adding that such a classification is possible after full-scale implementation of the Medium-Term Framework in Azerbaijan. Here comes a question. Why is the Ministry of Finance not preparing such a classification for 27 years, even though the establishment of a result-based budgeting mechanism takes 11 years? According to the information we have, the best result-based budget is expected in Azerbaijan in 2023. Isn’t really 30 years enough to ensure a transition to this reform-oriented, result-based budget planning? In fact, it is not the interest of the Ministry of Finance that the organization of a result-based budgeting mechanism enables the public sector and the media to track budget spending.

The Ministry of Finance notes that according to the Decree of the President of the Republic of Azerbaijan dated December 22, 2018, target values ​​for the share of the consolidated budget's non-oil base deficit in the non-oil GDP in 2020, 2021 and 2022, respectively, are 30.1, 29.1 and 28.1 percent respectively. The level of these indicators shows that the budget balance is at serious risk and it is impossible to agree with its 1% reduction annually. This turtle speed raises questions. Is really 25 years are needed after today to reduce the specific weight of the non-oil base deficit in the non-oil GDP to the normal level?

At the same time, we consider that revenues in the state budget should not be classified in the oil and non-oil sectors. In fact, in normal world practice, these revenues are classified as resources and non-resource revenues. Given the increase in gas revenues and other mining industry products (gold, silver, etc.) in Azerbaijan, the share of non-resource base deficit in the non-resource GDP will be up to 35%.

While calculating the state budget revenues, as for the price of 1 barrel of crude oil at $ 55 per barrel, this price does not insure Azerbaijan's budget from the significant shocks that may arise on the world market, as acknowledged by the Ministry of Finance.

The Ministry of Finance, which objects to the idea that the budget is not adequate to the financial potential of the economy, believes that tax and investment privileges do not allow this, and the response says that even though these areas are part of the GDP, they do not increase budget revenues as a result of the exemption. It would be more logical to compare the budget revenues per capita with those of other countries in view of these factors. Let's draw from this logic and compare the per capita budget revenues in Azerbaijan with the other two post-Soviet countries which are rich in natural resources. Thus, Azerbaijan expects budget revenues of $ 1,400 per person by 2020, $ 1,666 in Kazakhstan and over $ 2,000 in Russia.

Explaining the high share of oil in budget revenues with the oil and gas sector being the most traditional sector of Azerbaijan's economy, the Ministry of Finance forgets that, in 2015, President Ilham Aliyev spoke about the importance of developing the non-oil sector and offered "to ignore oil, gas, and generally forget about them". In contrast, the Ministry of Finance notes that the Azeri-Chirag-Guneshli oil field agreement has been revised and extended until 2050, while the Shah Deniz project has been in full force and other fields are underway. Undoubtedly, some of the revenues from these projects will be included in the consolidated budget in the coming years and will form an important part of the state budget.

Referring to fines in the budget structure, ministry officials say it will account for 1.1 percent of total revenues (270.0 million manat). Yet they forget that fines and sanctions are not a predictable indicator in the economy. You can talk about only their actual addling in the past. However, for several years the Ministry of Finance has been predicting fines and sanctions for the next year, which is contrary to economic science.

The Ministry of Finance, which recognizes the annual increase in budget revenues, notes that tax spending will be increased by 83.7 million manat, customs authorities spending by 22 million manat in 2020 compared to the current year. It is expected that next year, the state tax and customs authorities will spend 105.7 million manat more compared to this year.

The Ministry, which comments on the share of oil revenues in the budget, not on the lack of a consistent policy on budget transfers from SOFAZ, for some reason, does not comment on the need for changes in the amount of transfers in 2015-2020.

The Ministry, which refrains from explaining the low contribution of the regions in the formation of budget revenues, especially the increase in subsidies to Nakhchivan from the budget, does not deliberately comment on problems in this area.

The Ministry, which exlpains objective reasons for current expenditures growth rate’s, which is the weakest part in the budget (36 percent), being three times higher than the non-oil revenue growth rate (12 percent) with significant increases in social expenditure in 2019, takes a unilateral approach to the issue, avoiding commenting on the risks arising from the expected changes in favor of the first of the two indicators (growth in current expenditures and growth in non-oil revenues).

The Ministry of Finance agrees that next year's budget will create inflation, and that the increase in social spending in the next year will in theory increase the risk of inflation. The Ministry acknowledges that inflation is forecast at 4.6% for the next year.

The budget for next year is not insured against external shocks and is not excluded from external shocks, the Ministry acknowledges that the Government of Azerbaijan recognizes budget revenue and expenditure risks, including risks of external origin, and opinions are also clearly stated in  the "Presentation of projects on state and consolidated budgets for 2020" report.

Finally, the state budget deficit in 2020 will be $ 2779.2 million. It is projected that its ratio to GDP will be 3.3% and budget expenditures will be 10.3%. In this regard, the Ministry of Finance confesses that increasing the budget deficit and using more debt instruments to finance it could pose a threat to medium and long-term budget sustainability as well as macroeconomic stability. In short, the Ministry of Finance does not rule out that there will be a budget crisis next year.

Previous related materials:

The Ministry of Finance has responded to those seeking "weak points" in next year's state budget

20 weak points in the state budget of 2020