Azerbaijan’s 2025 Budget: A Shift Towards Military Power and Social Spending

In his recent speech at the opening session of the National Assembly, Azerbaijan’s President Ilham Aliyev emphasized the importance of strengthening the country’s military potential and restoring the regions of Karabakh and Eastern Zangezur. This marks a notable focus in the state’s 2025 budget, which reflects a delicate balance between defense investments, social spending, and managing the declining revenues from the oil and gas sector, notes Dr. Gubad Ibadoghlu, an economist.

According to preliminary data from the Ministry of Finance, state revenues for 2025 are expected to reach 36.6 billion manats, which represents a mere 0.6% increase over the approved figure for 2024. Meanwhile, expenditures are forecasted at 39.6 billion manats, down by 0.2% compared to the revised 2024 budget forecast but up by 8.8% from 2023. The state budget deficit, projected at 3.05 billion manats, is expected to be financed primarily through borrowing.

Despite efforts at diversification, Azerbaijan’s economy remains heavily dependent on oil and gas revenues, which are forecasted to make up 46.6% of state revenues in 2025, compared to 48.8% in 2024. This decline is driven by a forecasted average annual crude oil price of $70 per barrel, with lower expectations for subsequent years. The non-oil sector, expected to contribute 53.4% of revenues in 2025, reflects a promising but gradual shift toward economic diversification.

Transfers from the State Oil Fund of Azerbaijan (SOFAZ) remain a critical component of the budget, accounting for 34.9% of total revenues. However, the country’s continued reliance on SOFAZ transfers underscores Azerbaijan’s vulnerability to fluctuations in global energy markets. This also highlights the unmet goal of reducing SOFAZ’s share to 15% by 2025, as outlined in the Strategic Roadmap for National Economic Development.

In line with President Aliyev’s comments, defense and national security spending is expected to rise, accounting for 16.8% of total budget expenditures. This reflects the government’s priority to safeguard the country’s territorial integrity amid ongoing geopolitical tensions in the region.

Social spending also takes center stage, with minimum wages and pensions set to increase in 2025. Healthcare and education are also due to receive significant allocations, with healthcare projected to take 5% and education 12.5% of the budget.

A notable shift in Azerbaijan’s fiscal policy is the focus on current expenditures, which are expected to make up 63% of total budget spending in 2025, compared to 58.1% in 2024. Meanwhile, capital expenditures are expected to drop from 38.7% to 31% of total expenditures. This move towards a consumption-driven budget, largely fueled by increased defense and social spending, may curb long-term economic growth, particularly due to reduced infrastructure and development projects.

The macroeconomic environment in Azerbaijan faces additional challenges, including inflationary pressures and the devaluation of the currencies of key trading partners. Although the manat exchange rate is forecasted to remain stable, the country’s dependence on external factors, such as oil prices and global demand, presents risks to fiscal stability.

Moreover, servicing state debt is expected to take up a larger portion of the budget in 2025, rising from 3.3% in 2024 to 6% next year. This increase in debt servicing costs, alongside reduced capital investments, paints a picture of a budget increasingly constrained by financial obligations.

While Azerbaijan’s 2025 budget sets ambitious goals for military and social spending, it also faces significant fiscal challenges. Declining oil revenues, combined with rising debt service obligations and inflationary pressures, suggest a more cautious outlook for the country’s economic future. The government’s ability to reduce corruption, enhance fiscal transparency, and diversify the economy will be critical to achieving sustainable growth in the coming years, Dr. Ibadoghlu concludes.