The Curse of Oil Wealth

The Curse of Oil Wealth

CESD: “Assessment rather than calculation is needed to explore how huge oil money used”

The State Oil Fund of Azerbaijan, SOFAZ, has received $60bn from the oil and gas industry since its creation in 2000, the fund’s Director said: “Part of the funds transferred to SOFAZ has been spent on the resolution of the problems of refugees and displaced persons, particularly, on eliminating the tent camps. In addition, thanks to the funds from the implementation of oil and gas contracts, the country has been able to finance such strategically important projects as the international Baku-Tbilisi-Kars transport highway and the Oguz-Gabala-Baku water pipeline”.

SOFAZ now has assets of $32bn. This is an increase of more than $1.5bn on the fund’s assets of $30.358bn reported on 1 July this year due to increasing oil price in the world market.

Center for Economic and Social Development (CESD) experts point out that assessment should be done on how oil money has been used in the country rather than how much we gained. Lack of transparency and accountability remain a problem in usage of oil revenues which reducing impacts of usage of oil money. Transparency is considered an important prerequisite for establishing proper institutional  and regulatory structures, and for creating the conditions  in which abuses can be challenged.

CESD addressed the fact that budget revenues of the SOFAZ for the period of January-June, 2011 reached 7,8 billion  mantas ($ 9,9 billion), while budget expenditures constituted 2,5 billion mantas ($ 3,2 billion). Revenue of 7,69 billion manats ($ 9,74 billion) for the period of January-June, 2011 was received from implementation of oil and gas agreements, including 7,51 billion manats  ($ 9,50 billion) from the sale of profit oil and gas. The revenues from managing assets of the Fund for the reporting period amounted only to 135.0 mln. mantas ($ 170,8 million) which is about 1,7 % of total revenue. It means even before changes oil revenues were not well-managed. It shows that SOFAZ revenues very highly depends on oil price in the world market.

The CESD mentioned that the efficiency gap in the management of oil money in Azerbaijan is enormous. Improvements need to be made in the oil money accumulation, saving and spending processes so that this short-term national resource can better serve the long-term development needs of the nation. The necessary changes include redefining and streamlining the Oil Fund in parallel with improvements in budgetary and public investment work.

The CESD experts recommend that sustainable long-term development needs to be a major focus and the only criterion for the use of oil money, as with any public resource. The short-term availability of this resource, however, makes the issue more subtle and brings additional concerns. The need for sustainable long-term development makes the macroeconomic concerns a priority. This is to say that the nation’s strategy for the use of oil money needs to focus on the long-term growth of GDP, fiscal stability and independence, and monetary concerns in order to avoid inflation, account for the capacity of the public sector and prevent the creation of an environment conducive to corruption.

The strategy must clearly delineate the share and dynamics of national consumption, public investments, government expenditures and trade with other countries with the hydrocarbon resources deducted and oil money added to the national assets. A good strategy will measure and use the oil money not for separate consumption expenditures or investment projects, but in line with all public spending, while accumulating and saving that oil money separately. The diversification principle need to be prepared to illustrate the ceilings expressed in percentages of the Fund’s resources can be allocated in each country, in each currency, each type of the business, and each company, as well as ceilings expressed in percentages of the invested company’s assets.

Principles need to be developed for the future possibilities in investing in the domestic business sector, in the form of the separate bank that would expect the return for the Fund form the investing in the local business higher than from the investment abroad. With a longer-term spending policy in place, SOFAZ can then shift its investments to a longer-term horizon and be able to diversify from the highly liquid but low-yield investments it made in 2001. The allocation report needs to be prepared for the every portfolio investment by the Fund.  The report will replace the feasibility study, as a justification of selection based on transparent criteria and methodology, as well as the appraisal document that would explain why the selection is made vis-à-vis with other possible allocations.


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