The sharp drop in world oil prices in March and April 2020 have prompted discussions on the state of the Azerbaijani economy.
About the Author: Gubad Ibadoghlu, Senior Policy Analyst for social and economic studies at Azerbaijan’s Economic Research Center, a Baku-based NGO that promotes economic development and good governance.
As discussed in earlier blog posts and in Crude Accountability’s new report, ‘The Empty Bucket of the State Oil Fund of Azerbaijan: Profit and Profiteering’, Azerbaijan’s state budget relies heavily on oil revenues.
According to previous forecasts, 56.1% of 2020 state budget revenues will come from the oil and gas sector, of which $6.8 billion dollars will come from SOFAZ transfers. Therefore, nearly 47% of the 2020 state budget is comprised of SOFAZ transfers.
Other sources of the state budget include payments from the State Oil Company (10.7%) and income tax from production sharing agreements operating in the oil and gas sector (5.4%).
The 2020 Azerbaijani state budget was calculated assuming that the price of oil was $55 per barrel. According to May 5 data, the price of one barrel of Azeri light crude fell by $ 29,54 per barrel.
The average price of oil exported by Azerbaijan from January 1 to March 1, 2020, was $60 per barrel. Calculations showed that if the average price of 1 barrel of oil fell to $35 this year, the surplus in Azerbaijan’s balance of payments will be reduced to zero, and if the price dropped to $40, there would be a deficit in the balance of payments. Brent dropped below $33/barrel in early April, meaning that the value is only half what it was in the first quarter of the year.
In the current situation where oil production and export prices decrease and operating costs increase, how much is it possible to secure the projected revenues from the oil sector in the state budget?
SOFAZ – the main contributor to the Azerbaijan state budget will be most affected by the decline of oil prices.
According to SOFAZ’s budget indicators for 2020, total revenues are expected to be $8.25 billion, which is 30.9% less than the expected 2019 performance.
If the current oil price remains stable, SOFAZ could lose up to half of its projected revenues.
In the first quarter of 2020, SOFAZ’s assets fell to $2 billion. The Fund’s assets amounted to $41,349.5 million, which is a decrease of $1,973.8 million compared to the value of assets on January 1 this year ($43,323.3 million).
The decrease in SOFAZ’s assets was due to two reasons. About a quarter ($544 million) was related to the sale of assets and the transfer of proceeds to the budget. The remaining $1.4 billion decline is due to the depreciation of assets. However, SOFAZ stands to lose much more. This will present serious difficulties in transferring the necessary funds from SOFAZ to the state budget. The current drop in oil prices may require taking funds from SOFAZ’s savings to supplement budget projections.
There will also be a reduction in the State Oil Company’s payments to the budget and income tax revenues from the production sharing agreements operating in the oil and gas sector, as lower oil prices will also reduce the amount of taxable profits and income tax. This will lead to an increase in the projected budget deficit of 3.3% of GDP in 2020.
The fall of oil prices in the world market will have a negative impact on the role of the non-oil sector contributions to the budget as well. Reductions in foreign trade will result in lower customs payments to the budget. In particular, the reduction in trades with such major import partners as Russia, Turkey, Iran, and China due to the coronavirus will create problems for the fulfillment of the State Customs Committee’s budgetary obligations.
The dominant role of the oil sector in budgeting in Azerbaijan creates significant risks in terms of fiscal sustainability, creating a serious budget crisis.
It is likely that the government will be forced to revise the budgets of SOFAZ and the state to correct for reductions in both revenues and expenditures. The investment budget will most likely also be slashed. All of the measures will result in a slow down of the GDP growth rate and decreased business activity in the country.
The average annual export price of one barrel of oil which is the base indicator of the Fund’s budget for 2020 was determined as $55. The average annual rate of the Azerbaijani manat against the US dollar was determined as 1.7 manats.