Trend in Azerbaijan's external debt increase is dangerous

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-Natik bey, President of Azerbaijan Ilham Aliyev told a last year’s meeting of the Cabinet of Ministers that the foreign public debt of the country is at low level within 17% of GDP, and a figure will go down this year. At present, our foreign public debt is 17,2% of GDP. Is this index really low for Azerbaijan?

- In Azerbaijan, there are serious problems in methods of calculation of of foreign debt. The government includes official debts and expended credits in its balance. Thus, there are current credit contracts that take previous ones into no account. Besides, a major issue is that our government does not include into its balance the credits incurred by public companies under state guarantees. According to the Ministry of Finance calculations, a respective figure is small, just 17%. However, state guaranteed credits incurred by companies SOCAR, «Azerenerji», Caspian Shipping Company, «Azersu», AZAL, etc. are also to be included in the public debt. In this case the foreign debt of Azerbaijan is expected to make up approx. 40% of GDP. In spite of the fact that the said figure is not dangerous, it is nevertheless up 2 times from government-declared 17%. 

-President added that the country has financial reserves enough to reduce the foreign debt within as a short time. On what does his arguments bottom? Does it reflect reality?

-It is natural that Azerbaijan has financial reserves enough to reduce debts. Thus, joint resources of the Central Bank and SOFAR are approx. $51 billion. However, it’s erroneous opinion, for it’d be wrong to close external debt or use all resources at once. Note that from mathematical and formal point of view Azerbaijan has opportunity to repay its debt overnight. However, no approach of this sort is practiced in the international relations. True, in reality Azerbaijan has financial resources enough to repay the foreign debt.

-The government forecasts the foreign public debt this year may be reduced by 1%.  What’s the real situation? Is it possible to implement the plan?

- The question is about drop by 1% of the foreign public debt ratio to GDP. It ought to be noted that the government of Azerbaijan is eager to attain its purpose, especially as a relatively small amount is required to come to the top. However, until public debt calculation methods are changed, the true picture will be inconsistent with reality.

Account has to be taken of debts of public companies to thus estimate a real percentage ratio of the foreign debt and GDP. For example, a public-guaranteed credit debt of SOCAR is equal to the official public debt of Azerbaijan. Hence, I believe that changes in calculation methods will make it possible to calculate rise/drop in public debt/GDP ratio.

- Is the country equipped enough to reduce the foreign public debt this year?

- It has to be kept in mind that financial resources of the country make it possible to attain this goal; however, we’re in another bag now. The point is that the next tranche for TAP project completion is expected to be allocated in 2020. Note that a credit agreement has been concluded following which minimum 400 million euro is allocated to drive up the foreign public debt.

It should be remembered that the budget-2020 provides for allocation of 1,7 billion manats, or $1 billion for foreign public debt repayment. If amount of public borrowings is down $1 billion, it’d be possible to reduce the foreign public debt.

- How does the foreign public debt affect living conditions of Azerbaijan’s population?  

- In different ways. First, some 10%, and when adjusted for 2018, 2019 and 2020, 10-12% of the public budget is spent for the debt retirement. Were it not for, these funds could have been spent for improvement of social and economic conditions of Azerbaijani citizens. Granting this, the foreign public debt has a direct impact on country’s life.

-How is the foreign public debt formed? And why is the Azerbaijan’s debt so vast?  

-The main reason of the debt growth is due to «Shahdeniz-2» and «South gas corridor» (SGC) projects implementation. Thus, in 2014 the foreign public debt of Azertbaijan made up 8% of GDP, and since 2015 Azerbaijan has rapidly been overgrown with debts. To implement the project, Azerbaijan is spending approx. $24 billion half of which are credits of foreign financial institutions. It was a rapid credit growth under gas projects that led Azerbaijan to the immense public debt.   

- Is it possible to pay the foreign public debt? What should the state do to avoid the foreign public debts?  

-It must be borne in mind that there is no definition of foreign public debt payment in full discharge in the world economy. It is worth remembering that all countries worldwide are in foreign public debt, and it is quite natural and not very dangerous. That’s quite another story where foreign public debt and GDP ratio is driven to red lines. All things considered, the central aim is to avoid the situation falling to an irreversible stage. Note that there are countries whose foreign public debt is nearly equal to GDP or even above it. In this case the situation is disastrous. As a consequence, difficulties facing these countries are increasingly growing.

It is worth pointing out that the foreign public debt of Azerbaijan has not yet reached red lines even despite all its borrowings which do not make up even half of GDP.

It should be noted that the most hazardous thing is the very tendency towards country’s impetuous public debt accumulation, so it is crucial to eliminate this threat.  As a matter of fact, the point is not that Azerbaijan is in debt but that there is a need in normal and transparent credit disbursement. It must be acknowledged in many cases credits obtained by the country, especially those allocated to state-owned companies, fall victim to corruption.