Why Has the Domestic Public Debt Increased?

Azerbaijan's external public debt has decreased, while its domestic public debt has increased. As of July 1, 2024, the external public debt stood at USD 5.3613 billion, down by USD 1.0999 billion or 17% compared to the beginning of the year. In contrast, the domestic public debt amounted to 16.5719 billion manats, an increase of 705.5 million manats from the start of the year.

The rise in domestic public debt was also observed last year. According to the Ministry of Finance, the main reason for the increase in domestic debt is the support for the development of the securities market within the country, a gradual reduction in the share of external debt in the total public debt, and the issuance of government bonds on the domestic market. "Of the 7.2807 billion manats of domestic debt, 7 billion 280.7 million manats correspond to circulating government securities, while 9.2912 billion manats correspond to government-guaranteed obligations assumed by the government."

Economist Elchin Rashidov discussed this on the program "Complex Issue." He explained that, according to Azerbaijan's strategy, external debt is gradually being replaced by domestic debt. A limit has been set for external debt, as both state enterprises and the government itself tend to borrow. Therefore, the government essentially sets a limit for itself, which poses the risk that it may raise this limit at any time, essentially nullifying the government's own guarantees.

Rashidov believes that replacing external debt with domestic debt can be a positive development to some extent. This is due to significant mismanagement in Azerbaijan's financial system, both at the micro and macroeconomic levels. For example, the returns on the State Oil Fund of Azerbaijan Republic (SOFAZ) are extremely low, around 1% of nominal value, which is even lower than the annual inflation rate, indicating a decrease in SOFAZ's funds. At the same time, the operations of state enterprises in Azerbaijan lack transparency and their borrowings are risky.

Rashidov noted that the State Oil Company of Azerbaijan Republic (SOCAR) takes loans at 7% annual interest, while SOFAZ provides loans at 1% annual interest. "This means our economy loses 7% annually. Replacing external debt with domestic debt compensates for this loss," the economist explained, adding that domestic borrowings also carry risks.

According to Rashidov, "SOCAR has invested significant amounts in various countries. However, these investments are opaque and therefore prone to risks," the economist asserts.