Fiscal sustainability and the State Oil Fund in Azerbaijan

Abstract

Azerbaijan, like many resource-rich countries, decided to set up a sovereign wealth fund in order to avoid income volatility, to achieve intergenerational equity and to transform resource wealth into more productive assets. Azerbaijan established the State Oil Fund of the Azerbaijan Republic (SOFAZ) in late 1999 to accumulate income from hydrocarbon exports. SOFAZ has gradually become the leading part of the country's public finance system. Azerbaijan was the first country to fulfill all requirements of the Extractive Industries Transparency Initiative (EITI), an international agreement to implement global standards of transparency in the resource extracting sectors. However, SOFAZ's contribution to an effective resource revenue management and long-run economic development is still questionable: transparency applies only to the income side of Azerbaijan's oil fund while the expenditure side remains opaque. Unlimited and unconditional transfers from SOFAZ to the state budget have threatened fiscal sustainability and the overall macroeconomic equilibrium.

Management of Oil Revenues: Has That of Azerbaijan Been Prudent?

“…While the four aforementioned initiatives that Azerbaijan has taken to mitigate the volatility and other problems associated with oil have been impressive and compare favorably to most other oil exporters, its achievements in terms of industrial diversification have been much less impressive. Many analysts of the Azerbaijan economy, e.g., Ahmadov et al 2011;Pomfret 2012;Aslanli 2015, have already come to a similar conclusion. What they have not done, however, is to identify the specific sources of, or mechanisms leading to, incomplete diversification.…”

“…Oil and gas exports and revenues are likely to continue for some time, offering further potential for growth of Azerbaijan's economy if these revenues can be managed well. Indeed, the World Bank (2009) Nevertheless, as shown in Table 2 below and in more detail by Aslanli (2015) and Pomfret (2011), despite both SOFAZ and the fiscal rule, government consumption expenditures, much of them financed by transfers to the State Budget from SOFAZ, rose sharply. In real terms these expenditures increased seven-fold between 2004 and 2015.…”

Caspian region: a focus on Azerbaijan – oil, natural gas, environment and resource management

“…The socialist economic system that eliminated private enterprise transferred its monopolies to Azerbaijan along with its collapse. One of the decisions taken in the first years of independence was the legal regulations regarding the elimination of monopolies [4]. The relevant laws were enacted, which are the "Law on Anti-Monopoly Activity" and the "Law of Privatization."…”

“…There are 20 cities in the country, and the most important ones among them are Bishkek, Osh (Russians, Talysh, Lezgins, Jews, Armenians, etc.) [4].…”

The role of the oil transfers in the fiscal policy: the case of Azerbaijan

“…The key feature of the public expenditure management to take into consideration the lack of the sustainability of the public revenue, the abnormal increase of the spending in the years of the booming oil-gas sectors. That is why, this dependence from the one source: oil-gas export can create more challenges for the Azerbaijan economy (Aslanli, 2015). On the other hand, the Azerbaijan government could manage to prevent the negative effects of the world economic crisis in [2008][2009].…”