How much have our oil revenues decreased?

The Central Bank has announced the balance of payments for the first quarter of 2020. A more detailed assessment will be in our next article. This article is to acquaint you with the figures on the narrowing of the export range of oil and oil products, which covers foreign trade relations in the balance of payments. The Current Account Balance (CAB) surplus in the oil and gas sector decreased by 19.2% ($ 0.6 billion) compared to the same period last year and amounted to $ 2.4 billion.

On the foreign trade balance, the foreign trade turnover in the first quarter of this year amounted to $ 7.1 billion, met the surplus of $ 3.6 billion in the oil and gas sector and the deficit of $ 1.7 billion in the non-oil sector, resulting in a surplus of $ 1.9 billion (a decrease of 24.7%) in the foreign trade balance.

Declines in commodity exports were recorded. During the reporting period, exports of goods amounted to $ 4.5 billion (a decrease of 6%). During the period, exports in the oil and gas sector decreased by 6.9% to $ 4.1 billion (mainly due to a 7% decline in crude oil prices on world markets). Of the exported oil products ($ 1 billion), $ 3.2 billion was crude oil and $ 95 million was oil refining products.

The balance of payments data shows that the deficit was due to a decrease in exports and an increase in imports. If we compare the first and second quarters of this year, then we can easily predict that in the second quarter, there will be a serious decline in exports. Because in the first quarter, the effects of the pandemic were not seen in oil prices. Starting from March 3, there has been a basis for serious fluctuations in oil prices. If there is a balance of payments deficit in the first quarter with an average oil price of $ 58, then what will be the consequences in the second quarter, which fluctuates between $ 30-40.

The analysis of the balance of payments shows that the deficit was not due to a sharp decline in revenues from oil exports but due to the outflow of investment from the country. The average oil price for the last five months was $ 41. If we make such a calculation, then it will be clear how much we have lost from oil exports.

As is known, a decrease in the price of oil by $ 1 per month means that our country will lose about $ 640,000 per day. If the average price of oil falls by $ 2 a year, that means losing $ 500 million in revenue. According to the Central Bank, the average annual oil price last year was $ 64.4. This means a decrease of 9.6% compared to 2018. If we calculate according to this scenario, then our loss for about half a year will exceed $ 2.6 billion. That's an annual loss of about $ 5 billion. However, there were years when Azerbaijan earned about $ 20 billion from oil revenues.

Oil revenues and the dynamics of some macroeconomic indicators

Source: https://www.stat.gov.az/

While our state budget revenues for 2020 are 24.1 billion AZN; of this, 11.35 billion AZN will be transferred to the budget from the Oil Fund. This is 47% of budget revenues. Then our losses will not be only the losses of the Oil Fund, which accumulates oil revenues. At the same time, the reduction of state budget revenue sources will be observed. In this case, the budget sequestration will be on the agenda. Against the background of declining revenues, some "cuts" in expenditure items will be inevitable.

In fact, budget policy is an important leg of economic policy. Moreover, we need to pay attention to the activities of budget policy, the public benefit of expenditures and taxes for the needs of society. It is not the right way to tighten fiscal expansion when oil revenues increase, and budget "pipelines" when oil revenues decrease. As a state, you must have a constantly expanding expenditure corridor!

Cited official sources:

1. The Central Bank

2. State Statistical Committee

3. Ministry of Finance