Fiscal Policy in Azerbaijan: A Tightrope Act

Strategic Insights -

Fiscal policy in Azerbaijan was marked by a tight budget in the first eight months of 2002, with the state recording a deficit of Manat74.2bn (US$15.2m; 0.4% of GDP), compared to a target deficit of 1.2% of GDP for the year. Revenue was lower than expected, with a 3% decrease from the target, primarily due to a narrow tax base. The budget relies heavily on oil exports, which provide over 30% of total budget revenue, and customs duties, which account for about one-fifth of fiscal revenue.

Key Takeaways:

  • The Azerbaijani government's failure to broaden the tax base has led to a heavily reliant budget on external trade, particularly oil exports.
  • Revenue from the oil sector provides over 30% of total budget revenue, with customs duties accounting for about one-fifth of fiscal revenue.
  • Budget expenditure was slashed to keep the budget within its parameters, but is likely to rise in the fourth quarter due to government arrears.
  • The government aims to increase the tax base and encourage tax compliance by easing the burden of taxation on the enterprise sector.
  • The corporate profit tax is being reduced from 27% to 25% in 2003.
  • Energy subsidies, explicitly included as a spending item, will cost Manat1.42trn (22.5% of total spending) in 2003.
  • The actual level of subsidies is likely higher due to consumers and businesses not paying for energy consumption.

Statistics:

  • Manat74.2bn (US$15.2m; 0.4% of GDP) - state budget deficit in the first eight months of 2002.
  • 3% - decrease in revenue relative to the target.
  • 16% of GDP - revenue accounting for total budget revenue in the first eight months of 2002.
  • 30% - percentage of total budget revenue provided by oil exports.
  • 12.3% - year-on-year increase in customs duties revenue to Manat552.9bn (3.2% of GDP).
  • Manat331bn (1% of GDP) - consolidated fiscal deficit target for 2003.
  • US$19.5/barrel - assumed oil price for 2003 by the government.
  • US$24.7/b - forecasted oil price for 2003 by the Economist Intelligence Unit.
  • 27% - current corporate profit tax rate.
  • 25% - reduced corporate profit tax rate in 2003.
  • Manat6.4trn - increase in government expenditure commitments by 23% year on year in nominal terms.
  • Manat1.42trn - energy subsidies cost in 2003 (22.5% of total spending).

Sources:

  • Country Report