New MPs in Azerbaijan Will Face Budgetary Challenges
By Rovshan Ismayilov: 11/03/05

The winners of Azerbaijan's parliamentary elections on November 6 will immediately face a daunting challenge Ų managing the windfall generated by exports of the country's plentiful natural resources.

The 125 people who win parliamentary seats will be responsible for approving budget allocations for the next five years Ų a period when Azerbaijan's income from energy exports is expected to skyrocket. Indeed, state revenue is projected to increase as much as 70 percent in 2006 over the current fiscal year. Powering the revenue increase will be a substantial rise in oil production Ų from about 16 million tons this year to an estimated 29 million tons in 2006. In addition, foreign companies involved in the development of the Azeri-Chirag-Guneshli field will begin paying taxes after enjoying a tax holiday that was built into the so-called „Deal of the Centuryš pact signed in 1994.

The preliminary state budget for 2006 has been set at about $3.7 billion. Incumbent MPs timed the budget debate for September in an effort to give those seeking re-election a campaign boost. The governing Yeni Azerbaijan Party (YAP) has played up the budget windfall, promising all sorts of public works and other programs.

Roughly $600 million -- much of the money coming from the State Oil Fund -- is expected to be spent on a variety of infrastructure projects, including the reconstruction of highways and roads in and around the capital Baku, along with the building of schools, hospitals and community centers in Azerbaijan's provinces.

Among the most prominent social welfare programs is a $119-million project to improve living conditions for those displaced by the Nagorno-Karabakh conflict. In addition, the country will launch its first-ever mortgage program in 2006, setting aside about $21 million for mortgage loans to would-be property owners. The state is also allocating over $50 million to compensate citizens who lost their savings amid the collapse of the Soviet savings bank system in the early 1990s.

Incumbent YAP MPs have portrayed themselves as the candidates best able to deliver a large share of the budget windfall for their respective districts. For example, Aydin Mirzazade, a YAP member of parliament running for re-election in the #47 Mingachevir city constituency is working to divert more assistance to young families in his constituency.

Meanwhile, Asya Manafova, incumbent MP (YAP), running in the #51 Gusar constituency, suggested that even such a massive budget hike will still not be sufficient to meet all the developments needs. „The Gusar region suffers from poor infrastructure: the roads are terrible, and electricity cuts leave businesses vulnerable. The region needs more care from the government,š Manafova said.

Opponents of President Ilham Aliyev's administration have criticized some projects as being little more than pre-election gimmicks. Gubad Ibadoglu, a top economic advisor with the opposition Musavat Party, was especially critical of the plan the compensate those who suffered from the collapse of the Soviet savings bank. The roughly $50 million allocated for the program is just a sliver of the estimated $1.5 billion lost by Azerbaijani citizens. „Authorities used the budget to send a positive message to voters,š Ibadoglu said. „However, this step is not a solution for the problem. I wonder whether they are going to pay out deposits during next 30 years?š

State revenues could end up being far higher than projected given that government experts made budgetary calculations assuming that the price of oil would be in the $40 per barrel (bbl) range. The current cost is almost $60 bbl.

The abundance of revenue is prompting concern among some economic experts, many of whom fear that such a spike in state income can stoke inflation. Others worry that a significant portion of the windfall could be wasted, or disappeared.
„Construction, as well as the procurement of inventory, has traditionally been a source for corruption. While there are no strong public control tools, such big allocations make [the possibility of] corruption even bigger,š Ibadoglu said.

Some economic analysts say that insufficient thought was given to matching needs in 2006 to appropriations. Instead, the most influential government ministers secured the largest budget shares. „The budget is a result of intra-governmental intrigues. The ministers who are strongest get the most money,š a source familiar with the budgetary process said.

The source expressed concern that the lack of budgetary planning could fuel so-called „Dutch diseaseš in Azerbaijan, in which an over-reliance on the energy sector causes other sectors of a given country's economy to stagnate. „First the state system should be reformed in order to effectively manage the increased amounts of state incomes,š the source said.

The government's intended use of the State Oil Fund -- which was created in 1999 as a means for using energy revenues to ensure long-term prosperity Ų has become the focus of some experts' attention. Inglab Ahmadov the director of Public Finances Monitoring Center, local Baku-based non-governmental organization, suggested the Oil Fund's planned expenditures in 2006 were „shadily high.š In 2005, he pointed out, the fund contributed $163 million to the state budget. This year the contribution will be $635.8 million, nearly a four-fold increase. [Ahmadov's organization receives funding from the Open Society Institute-Assistance Foundation in Azerbaijan, which is part of the Soros foundations network. EurasiaNet operates under the auspices of the New York-based Open Society Institute].

Even with the substantial rise in income, Azerbaijan stands to run a budget deficit in 2006, mainly because of a massive increase in military spending. Parliament allocated roughly $638 million for the military in 2006, and 85 percent increase over 2005 expenditures. Of the 2006 total, approximately $224 million is slated to be spent on new weapons and equipment.

Azerbaijani officials, including President Aliyev, have hinted in recent months that if negotiations with Armenia on a Nagorno-Karabakh settlement do not make progress soon, Baku would consider a military option. However, experts believe that Azerbaijan's 2006 military budget is not necessarily driven by the Karabakh peace process. These experts point out that in May 2005 Azerbaijan signed an Individual Partnership Action Plan with NATO, under which the country pledged to upgrade its military to NATO standards.

Ibadoglu, the Musavat economist, said military expenditures in 2006 deserve scrutiny from international watchdog groups. „There are no guarantees that this money will not be misappropriated, taking into account the level of corruption in the Defense Ministry,š Ibadoglu said.

Editor's Note: Rovshan Ismayilov, free-lance journalist based in Baku

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Ingilab Ahmadov, director of the Public Finance Monitoring Center, talks to reporters in his Baku office. Like other economists, Ahmadov is concerned about the effects Azerbaijan's growing oil revenue will have on the rest of the economy and how that revenue will be spent. (Yigal Schleifer for Eurasianet)