Azerbaijan"s balance of payments continued to decline

The payment balance is positive now, but it keeps on declining. By 2018 it is forecasted to reach a negative point. The level of state debt is rather acceptable. But the fact that the showing of the international investment position of the country disappeared from the Central Bank of Azerbaijan’s report is disturbing. This index describes common debt of the country, including foreign borrowings of economic structures, which keep growing. The transfers from the State Oil Fund (SOFAZ) and compression of budgetary costs - the non-oil deficit rate exceeds 40% for a long time- lead to low budgetary deficit. The technological improvement of the financial system is evident, but development of the financial institutions is very slow.

The banking system is a key chain in development of the financial system and the entire economy. Its showings kept improving in April 2013. In the first half of 2013 net withdrawal of credit resources increased by 50.3%, though last year net growth of crediting of economy doubled (603,010,000 AZN in 2012 against 267,433,000 AZN in 2011). This means that this is actually the matter of allotting of new credits since early year. According to the Central Bank of Azerbaijan (CBA), in the first half of the year allotting of credits by the banks to physical and juridical persons totaled 854,827,000 AZN, up 42.76% against a year earlier (598,793,000 AZN). During the same period repayment of the earlier allotted credits totaled 1,070,365 AZN, up 44.22% against the first half of 2012 (742,191,000 AZN). In the first half of the year net withdrawal of credit resources from physical and juridical persons totaled 215,538,000 AZN against 143,398,000 AZN a year earlier.

By the same time total credit portfolio of the banks totaled 13,522,100 AZN against 10,463,300 AZN a year earlier. By January 1, 2013 total credit portfolio of the banks reached 12,720,500 AZN against 9,950,300 AZN by January 1, 2012.

By May 1, 2013 total volume of deposits reached 11,405,300,000 AZN. Of this volume deposits of physical persons in the Azerbaijani banks totaled 5,768,300,000 AZN (growth by 4.2% against April 2013). From January to April 2013 this index increased by 12.8% against the same period in 2012 – by 33%. In 2012 this index increased by 24.1%, while in 2011 – by 36%.

The reason of growth of bank deposits of population is the same: insurance of deposits, stable rate of national currency (60% deposits in national currency) and poor business environment in the country. In theory population could have spent free money for certain type of business activity. However, people prefer not to do that, because risk is very high in any new and unprotected business. The deposits bring a good and stable profit, the same 10-15% that small-size business can count on. As long as there are risks in business, the volume of deposits, especially in the national currency will keep growing. This is a strange relationship between the business environment and the bank deposits.

On the other hand, we see crediting of the real sector by the banks is expensive. The circle is narrowing here. Credits cannot be reduced, because deposits are expensive. As a result, CBA is looking for the ways to reduce the deposit rate, for instance, through reduction of the upper limit of the deposit interest rate of the protected deposit. But one needs the whole system of steps. The credit rates go down slowly, though economy’s demand in cheap credits will only grow, because stake is made on the industrial sector.

The banks are busy increasing authorized capital by early 2015. Meanwhile, CBA has worked out the updated version of rules of management of risks in the banks. They must regulate activities of the banks after consolidation of the system. The new “rules of management of banks’ risks” are aimed at more efficient management of risks in the banks, including defining a detailed risk strategy and ensuring rational involvement of risk management in the decision-making. In addition, the new version of the rules defines the position “Chief Risk Administrator” as well as his or her duties and powers.

Banks still do not want to fully service real sector of economy. It is easier to get cheap resources and then sell them in retail, than be involved in difficult and sometimes risky relationships with the enterprise-borrower. Re-financing of the banking system also favors that. In second quarter it started to grow again and during 6 months the volume of re-financing decreased by 11.8% against its increased by 61.8% during last year.

CBA reported that by May 1, 2013 the re-financing volume totaled 2900.2 million AZN against the peak growth up to 3,293.2 million AZN by February 1, 2013 (absolute record) and 3,2879 million AZN by January 1, 2013. By six months 2013 re-financing of CBA ensured 22.02% of the bank crediting of economy against 26.5% by early year. On the other hand, the CBA re-financing policy is easy to understand. In 2012 profit from placement of CBA funds constituted only 0.31%, while interest rate of re-financing constitutes 4.75% at present. There are certain risks here, repayment of these funds takes a long time, but the gain is obvious.

Non-governmental coalition “National Budget Group” (NBG) has criticized execution of the state budget in fiscal year 2012. The report reads that according to the international estimates, Azerbaijan occupies 58^th place among 100 world countries on the budget transparency.

In 2012 the state budget incomes totaled 17,281,521.8 (+1.4% of forecast), while expenses – 17,416,453 AZN (-1.4%). One of the sources to cover the budget deficit was EU pilot grant. NBG report mentioned that the state budget is still dependent on the oil and gas industry. In 2012 73.13% of budgetary costs fell to this sector. This is up 7.4% against 2011. Transfers from the State Oil Fund (57.3% of budget proceeds in 2012) doubled against 2010 and increased by 100 times during nine years. Reduction of oil production makes this tendency very dangerous. NBG experts believe that if in the future the government does not reduce costs against the background of reduction of oil incomes, it will lead to narrowing of economy. There is only one way here is to improve the budget discipline. The government needs to adopt the Budget Code and make the process of budget investment transparent. NBG stated that share of the non-oil sector (4,637 million AZN) in the budget proceeds does not reflect the level of development of a real sector.

The tax debts to the Azerbaijani budget also grow. NBG reported that in 2012 tax debts of state companies to the budget reached 1,234.5 million AZN or 44.6% of the entire debt, while debts of the private sector totaled only 1162 million AZN (41.6%). In 2011 these showings constituted 39.7% and 55.9%, respectively. As we can see, the volume of debts of state enterprises grows faster.

In 2012 the dominating role of investment costs from the state budget (33.1% of expenses) increased the risk of corruption. 27.2% of budget costs falls to the social needs, though in 2003 this index reached 41%. Azerbaijan occupies the last place among the neighbors on the level of social expenses. In Georgia the state budget expenses for education, health and social program constitutes 38.8%, in Kazakhstan – 34.1%. NBG has worked out the proposals and recommendations to the government to correct the budget policy for the coming years. It is clear now that despite slight correction, the main tendencies in the budget process do not change.