74.0 % of SOFAZ’s 2019 revenue will be transferred to the state budget in Azerbaijan

74.0 % of SOFAZ’s 2019 revenue will be transferred to the state budget in Azerbaijan

Transfer to the state budget will reach 98.0 % of total fund’s expenditure

The 2019 budget of the State Oil Fund of the Republic of Azerbaijan (SOFAZ) has been approved. According to the budget, SOFAZ’s revenues for 2019 will be at 15 billion 450 million manat ($ 9.08 billion US), expenditures will be 11 billion 595 millon manat ($ 6,820 billion US).

SOFAZ’s revenues from the sale of profitable oil and gas are forecast at 13 billion 218 million manat ($ 7.775 billion US), acreage fees at 4.692 million manat ($ 2.76 million US), income from oil and gas transit through Azerbaijan at 19.04 million manat ($11.2 miliion US).
Meanwhile, SOFAZ’s revenues from placement and management of assets are forecast at 1 billion 442 million manat ($ 848.23 million US), bonuses paid by investors within oil and gas agreements or in connection with their implementation at 765,170 manat ($ 450,100 US).
SOFAZ’s transfers to the state budget in 2019 will be 11 billion 364 million manat ($6,684 billion US).

Expenditures for improvement of living conditions of refugees will be 200,0 million manat ($ 117,64 million US). The management expenses have been approved at 30,938 million manat ($ 18.198 million US).

According to the approved budget, 9,440 million manat ($ 5.552 million US) of expenditures will account for salaries, expenditures for the purchase of goods and services –will be 4,819 million manat ($ 2.834 million US), for grants and other payments – 765,480 manat ($ 450,282 US), for rental and paid services – 20,000 manat ($11,764 US), for banking costs – 2,935 million manat ($ 1,726 million US).
Expenditures for pensions and social payments will be 65,000 manat ($ 38,235 US), for purchase of non-financial assets at 4,180 million manat ($ 2.458 million US), while 20,378 million manat ($ 11.987 million US) will be paid for other expenses.

According to the budget file, 74 % of SOFAZ’s total budget will be transferred to the state budget. Meanwhile, share of SOFAZ’s state budget transfer in the fund’s total expenditure will be 98.0 %. The largest source of revenue for the state budget is yet again the SOFAZ. With that, the share of direct oil revenues in the state budget comes to 50.4 %. In 2019, 59.8% of total state revenue will be generated in oil sector,. In other words, oil revenue’s share of the state budget will increase with 2.7% year-on-year in 2019. It shows that the state budget of Azerbaijan is highly reliant on transfers from the oil sector, which intrinsically, makes it vulnerable to price fluctuations in the global oil market.

There are a number of vital issues upon the new requirements for changes to the “Law on the Budget System”, such as the limitation of the upper limit of the consolidated budget and the limitation of non-oil base deficit, the definition of the specific boundaries of the spendable part of oil revenues and the changes to the approved budget. Thus, according to the new law, the upper limit of the reviewed budget should not exceed 103% of the current year’s indicator. The total of transfers from SOFAZ to the state budget, in accordance with the rules on oil revenues that can be spent, should not exceed the sum of the 20% of the difference between the 30% of net financial assets at the beginning of the forecasted year and oil revenues and the minimum index of these variables, and should be less than the figure of the current year’s nonoil GDP deficit of the non-oil base deficit of the consolidated budget. However, only a part of the changes will be reflected to the 2019 state budget.

There are a few worrying changes to the fiscal rules which is that the new framework for spending of oil revenues depend on quite variable and complicated factors (remaining balance of SOFAZ, remaining balance of state treasury in the banking and financial accounts, unified treasury account’s fund allocated to management, obligations within the contracts signed on behalf of the Republic of Azerbaijan, debt to be paid by foreign governments and total amount of current year’s sum of public enterprises obligations by services towards the state budget, domestic and foreign public debt). In the coming years, this can weaken the durability of the fiscal policy towards external fluctuations and the financial stability policy implemented by the government.

Reminded that he average price of BRENT crude oil has been calculated as 60 USD per barrel while estimating the state budget revenues of 2019.

© CESD, 2019

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