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19 weak points of 2019 budget

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“Debates” over the national budget of Azerbaijan for 2019 were over at Milli Majlis. Budgetary revenues were approved in the volume of 23bln 168mln manats, and expenditures - 25bln 190mln manats. Next year’s average annual inflation is forecast to make up 3,8%; manat rate in respect of USD at 1,7 manats; average sale price of crude oil at world markets at $60,0 per 1barrel.

It transpired, following an analysis of budget risks and macro-fiscal forecasting, including economy’ assessment from dependence on natural resources standpoint, that there are, at least, 19 weak points in the budget-2019. It should be remembered that rise in the number of weak points degrades the quality of budget for the next year; or in other words, it reduces expenditures effectiveness and their contribution to the economic growth. These points may be classified as follows:

1)No budget negotiation are held in Azerbaijan. This year’s budget discussions confirmed once again that organization and discussions of the budget in Azerbaijan is not a matter of the parliament but monopolized by a certain group in the executive power. Suffice it to recall that t

he budgeting process is still under absolute control of the Ministry of Finance and presidential administration while the participation of certain sectoral and linear ministries and other budget-financed government bodies is restricted. In other words, they are practically in no position to take part in budgetary discussions.

2)The role of parliament in the budgetary process is nominal. It must be remembered that this year’s budget discussions at the parliament were not different from similar hearings of the previous years. Instead, the budget was submitted to the parliament later but adopted quicker than the last year. As has been expected, some superficial changes were made in the budget after the parliamentary discussions. National budget revenues for 2019 were approved in the volume that exceeded by 251 mln from preliminary prognosis, or by 1,1% from approved revenues, and expenditures by 410 mln manats from preliminary prognosis, or 1,6% from approved expenditures. As a matter of fact, these indices are enough to make an appraisal of parliamentary’ role in the budgetary process.

3) "No result-oriented budget" has so far been drawn up. Like previous years, the budget-2019 was brought up for discussions without coding by programs, without budget classification. The essential point to remember in Azerbaijan is that no budgetary work based on specific results and their appraisal has so far been organized. For this reason, effectiveness of budgetary expenditures is blunted from year to year, and no monitoring is held for lack of indicators to measure it. This, in turn, makes it no possible to evaluate role and activity of related organizations in direct budgetary spending.

4) A newly adopted financial rule imposes no restrictions on oil revenues spending. Thus, Article 11-1.2 of the Law of the Azerbaijani Republic”Оn introduction of amendments in the Law of the Azerbaijani Republic "On budgetary system" dated July 29, 2018, s

ets an upper limit on consolidated budget expenditures. The limit has been set up in line with summarized forecast on oil, non-oil and other receipts that may be expended in the volume not more than 103% of expenditures of consolidated budget if the current year. For this reason, a balance between non-oil basic deficit of consolidated budget and non-oil GDP remains to be high. Thus, percentage ratio between non-oil budget deficit in 2019 and non-oil GDP is forecast to make up 30,8%. Note that higher deficit is a result of longstanding procyclical policy.

5)A price for oil per barrel included in the budget is too optimistic and unrealistic. Draft budget for 2019 debates were accompanied by drop in oil prices at world markets. According to December 1 reports, 1 barrel of Azerbaijani Brent crude oil at world markets cost $59.46. So, it’d be too optimistic to include a figure of $60Тin the budget. In the meantime, when drawing the national budget it is essential to forecast prices per barrel of crude oil on the basis of several scenarios to thus secure against external shocks and manage risks.

6) The budget is inadequate with financial potential of economy. Thus, despite the growth of a share of non-oil sector in GDP recently (a figure stood at 62, 8% in 2017), it is on the bottom in budgetary revenues which is clearly discernible in comparing this index with similar figures of post-Soviet countries. Thus, next year’s non-oil budget is forecast to make up $5,4 bln which means that non-oil budget of Azerbaijan in 2019 will constitute $551 per capita. In the meanwhile, non-oil budget of Georgia in 2019 is forecast to make up $1000 per capita. Differences between indices of Azerbaijan and former Soviet, rich in oil and gas republics’ are noticeable. Thus, if budgetary revenues of Russia are expected to make up $296 bln, or $2050 per capita in 2019 and revenues of Kazakhstan - - $31,5 bln, or $1711 per capita, budgetary revenues of Azerbaijan will constitute $13,5 bln, or $1377 per capita.

7)Budget dependence upon oil revenues is growing. Main sources of budgetary revenues formation are transfers from the SOFAR. Thus, a share of SOFAR receipts in the structure of predictable national budget revenues in 2019 is 49,1%; a share of the Ministry of Taxes is 31,9%; a share of the State Customs Committee is15,1%; a quota of other sources is 3,9%. In so doing, a share of the Ministry of Taxes in the formation of the budget revenues will drop from 40,7% in 2015 to 31,7% in 2019.

8)Budget revenue collection expenditures are growing from year to year. According to the Court of Auditors, expenditures of the Ministry of Taxes for collection of each 100,000 manats of budgetary revenues (including non-budgetary expenditures) made up 1,800 manats in 2017; 2,100 in 2018; and forecasted 3,100 manats in 2019. Also, expenditures for collection of 100,000 manats of budgetary revenues (including non-budgetary expenditures) in 2017 made up 3,000 manats; in

 2018 - 3,600 manats; and forecasted 3,800 manats in 2019.

9)No coherent policy of transfers from the SOFAR to the budget is pursued. It should be added that this year’s growth of transfers that fell from 2014 to 2018 will continue this tear as well. Thus, this year’s transfers from the SOFAR amount to 10.995 mln manats; next year’s figure will stand at 11.364 mln manats. In other words, in the next year’s budget a share of transfers from the SOFAR will make up about 50%. Besides, at the expense of SOFAR and AMOC payments, the volume of oil revenues in the budget-2019 will make up 13.700 mln manats which constitutes 59,1% of total revenue volume.

10)Regions’ contribution to the formation of budgetary revenues remains to be low. When adjusted for the fact that centralized revenues form 96,8% of total revenues in the national budget for 2019, a share of local revenues will make up 3,2%. As compared with anticipated budget-2018 implementation, the growth is forecast to take place (except for occupied regions) in towns as follows: Sumgait, Gyandja and Shirvan; in regions: Absheron, Neftchala, Salyan, Astara, Agdjabedi, Geychay, Barda and Qazakh. The recession in Baku, as well as regions: Sabirabad Udjar, Geranboy and Geygel.

11)Budget subsidies are growing. Next year’s budget provides for rise in the upper limit of financial aid (subsidies) from centralized expenditures of the national budget to regulate local expenditures. A figure for 2019 is forecast in the volume of 104,046,000 manats which is up 33471,000, or 47,4 % from this year. A specific weight of the amount in the structure of local expenditures is 12,4% which up 2,6 interest points from this year.

12)Non-oil budgetary revenues are reducing. Thus, if in 2015 non-oil receipts made up 5028,5 mln manats, in 2016 - 5405,6 mln manats, in 2017 - 5189,5 mln manats, and expected to make up 5 bln manats in 2018, next year’s receipts are expected to make up 5 bln manats, next year’s receipts to the national budget are forecast to make up 4980 mln manats. In the meantime, a period from 2015 – present was noted for non-oil GDP growth.

13)Growth rates of current budgetary expenditures exceed nominal growth rates of non-oil GDP. According to the budget-2019, growth rates of current expenditures are expected to exceed a nominal rates of growth of non0oil revenues by 4,6 in

terest points. Non-oil revenues from all sources are forecast to make up 9217,2 mln manats in 2019 which constitutes 93,2% of current expenditures. This implies that the budget having been drawn up with no regard for oil revenues is not enough for financing the current expenditures.

14)Debt service budgetary commitments are growing. A predictable amount to be paid by domestic national debt for 2019 is up 67,3% and expenditures to serve an external debt is up 0,2% from 2018. Approx. 10% of next year’s budgetary expenditures will be spent for payment of domestic and external national debts. FYI, 90% of predictable payments on domestic national debt fall on interest charges;72,2% of external national debt fall on principal debt payments.

15)Unfair distribution of budgetary expenditures. Of each 100 budgetary manats for 2019, 6 qapiks will be spent for ecology; 50 qapiks for science, 70 qapiks for subsidized housing and social mortgage, 1 manat 40 qapiks for culture and art; 4 manats 20 qapiks for public health; 5 manats 72 qapiks for management; 6 manats 41 qapiks for judicial power and law-enforcement and procurator’s bodies; 9 manats 20 qapiks for education; 9 manats 40 qapiks for national debt service; 10 manats 30 qapiks for social security; 12 manats 30 qapiks for defense; 39 manats 90 qapiks for construction.

16)Details of nearly half of budgetary expenditures are closed. Thus, in compliance with the next year’s budget, expenditures for industry, construction, mineral resources (a specific weight in the budget-2019 - 27,6%), defense (a share - 12,6%), services unrelated to basic items (a specific weight- 6,3%), economic activity expenditures (a share - 1,2%) are classified neither economically, nor functionally. This means that 47,7% of budgetary expenditures are closed. Neither public, nor MPs are aware of it.

17)Next year’s budget will accelerate inflation. The budget-2019 is described as follows: main sources of income increments in absolute terms will be typical (after SOFAR) for excises (201 mln manats), profit tax (income tax) of legal entities (137,4 mln manats) and receipts from paid services of budgetary organizations. In percentage terms the next year’s budget provides for growth in government fees– by 33,8%; excises – by 27,7%; receipts from paid services of budgetary organizations – by 25,6%. In all likelihood, the budget-2019 envisages that non-oil revenues have been forecasted with due consideration for increase in consumers’ expenses which is attainable due to rise in prices for import commodities. So, next year’s 3,8% inflation is impractical.

18)Closed budget will raise a level of corruption. Corruption risks are repeatedly increased owing to privacy of 47,7% of budget expenditures for 2019, refusal from discussion of their economic and functional classification, lack of transparency and accountability on budgetary spending. Note that the investment budget in the volume of 6,8 bln manats is subject to increased corruption risks because of closed expenditures.

19)Next year’s budget is uninsured against extraneous shocks and secondary risks. Next year’s anticipated fall in oil prices is expected to negatively affect payments into the budget-2019 from SOCAR and АМОC. Along with this, anticipated fall in oil prices may lead to SOFAR budget deficit. As a whole, the budget-2019 may be subjected to negative effects of this sort.

 

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