CESD; Changes in the SOFAZ Strategy will not decrease price dependency

CESD; Changes in the SOFAZ Strategy will not decrease price dependency

The revenues from managing Oil Fund assets is only 1,7 % of total revenues which confirm that Oil Fund revenues highly depends on oil price in the world market

SOFAZ does not intend to increase purchase of shares of different companies in foreign markets- State Oil Fund announced on August 26, 2011: “Currently, the situation in world financial markets is unstable and State Oil Fund of Azerbaijan – SOFAZ will not spend any money until the stability is resumed.  Note that, at present, there is debt crisis Europe, and it negatively impacts on global financial markets. “It is unknown how long the stability will continue. In the future, the fund is expecting the purchase of shares”

Center for Economic and Social Development experts point out 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 recommends 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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