If tax revenues from oil and gas decrease, will other taxes be increased?

The Azerbaijani Milli Majlis discussed the draft law pertaining to the state budget for the year 2024. During this discussion, Finance Minister Samir Sharifov addressed various concerns surrounding the budget.

Minister Sharifov highlighted that the state budget for the upcoming year anticipates a significant decrease in tax revenues from the oil sector, resulting in a 7.5 percent drop in total tax revenues compared to the 2023 forecast. He emphasized that tax revenues from the oil sector have plummeted by over 2 billion Manats, a reduction of nearly half, and this development should raise serious concerns. He attributed this decline in part to a sharp increase in global gas prices at the beginning of the previous year, which had benefited Azerbaijan. Nevertheless, he noted that the current world energy market presents a positive price situation, leading to an adjustment of the state budget's oil price assumption to $60 per barrel.

Rufat Guliyev, a member of the Milli Majlis Committee on Economic Policy, Industry, and Entrepreneurship,  shared his point of view in an interview with Turan, indicating that the decrease in gas revenues is not expected to trigger economic turbulence in Azerbaijan. He emphasized the government's focus on the non-oil sector and the need for its growth. Guliyev pointed out that while progress has been made in the non-oil sector, there is still room for improvement in terms of growth rates and non-oil exports.

According to data from the State Statistics Committee, the country's gross domestic product (GDP) in 2023, during the first nine months, amounted to AZN 100.9 billion, showing a 0.5 percent increase compared to the same period in the previous year. Notably, the oil and gas sector witnessed a 2.3 percent decline in value added, while the non-oil and gas sector experienced a 3.1 percent increase.

Guliyev expressed confidence that there is no need for immediate emergency measures, pointing to the well-developed transport infrastructure that could bring additional foreign exchange income to Azerbaijan. He also highlighted the potential for increased income from the sale of gas and oil, especially if agreements with Turkmenistan materialize regarding the Trans-Caspian gas pipeline.

Guliyev underscored the country's transition toward small and medium-sized businesses, which are expected to form the backbone of the economy. He emphasized the importance of government oversight and the pursuit of optimal solutions to address the current economic challenges.

The deputy suggested that success in renewable energy production could enable Azerbaijan to export saved gas and oil. He also mentioned the potential benefits of the ALAT Free Economic Zone and the financial influx from Karabakh to the country's budget in the future, countering concerns about the impact of declining gas revenues.

Economist Natig Jafarli shared his thoughts in an interview with Radio Azadlig, emphasizing that Azerbaijan's economic problems stem not only from oil and gas prices but also from a decline in production, as the peak of production occurred a decade ago. Jafarli pointed out that gas prices, in particular, have witnessed a substantial decrease, citing instances of gas prices falling from $2500-3000 per 1000 cubic meters to an average of $400 per 1000 cubic meters at the beginning of the year. While Azerbaijan holds long-term gas contracts, market fluctuations still affect contract prices.

Jafarli noted the challenges arising from the heavy dependence of Azerbaijan's economy on the oil and gas sector. He mentioned that declining oil prices and production have led to reduced revenues for oil companies operating in Azerbaijan, resulting in lower tax obligations.

The Economist also weighed in, explaining that as revenues decrease, tax revenues are also affected. The publication highlighted the Azerbaijani government's longstanding focus on developing the non-oil sector, where some areas exhibit minimal tax obligations. However, the progress made in these sectors has not translated into significant increases in tax revenues. To enhance tax revenues, the government would need to pursue liberalization and increased competitiveness in the market.

Jafarli suggested that the government might attempt to compensate for the decline in tax revenues by increasing taxes, pointing to ongoing discussions about canceling benefits for micro and small entrepreneurs. However, he cautioned that such measures could create significant problems.

In his assessment, Jafarli indicated that it would be challenging to offset losses in the gas and oil sector with gains from the non-oil sector in the coming years.