Vusal Gasimli: Decline in oil prices has little impact on state budget - EXCLUSIVE

A decline in oil prices has a little direct impact on the state budget because the upper limit of the transfers from the State Oil Fund of Azerbaijan (SOFAZ) is forecasted at AZN 11.35 billion. There could not be any problem in the transfer of these funds to the state budget, Vusal Gasimli, Executive Director of the Center for Analyses of Economic Reform and Communication, told Report while commenting on the possible impact of the decline in oil prices on Azerbaijan.

According to him, this year's transfer from the SOFAZ to the state budget makes up 15% of Fund's reserves: "Even if we don't take into account the further incomes of the SOFAZ, we can transfer this amount for seven years. Along with the Fund, the sustainability of the State Social Protection Fund and the Unemployment Insurance Fund were provided.

In the first two months of 2020, tax authorities transferred more AZN 180 million, customs authorities – more AZN 70 million. This fact shows that reforms, narrowing of the shadow economy, improvement of tax-customs administrations, and development of the non-oil sector made their contributions. According to forecasts, 56.1% of state budget incomes will come from the non-oil industry. Apart from SOFAZ's transfers, AZN 2.180 billion comes from tax authorities. SOCAR's budget transfers are expected at AZN 1.450 billion."

Gasimli noted that as SOCAR sells most of its products in the domestic market, the volatility of the oil prices in the foreign markets will have less impact on this forecast:

"Profit tax from PSA is forecasted at AZN 730 million, which can be worst affected by the decline in oil price. The Azerbaijani government has calculated these risks. In case the oil price falls to $40 a barrel, the state budget incomes may drop 1.6%, including 1.3% may arise from direct oil and gas sector, 0.3% from a decline in the oil price.

The decline may have a more significant impact on the consolidated budget. In the current account, we manage to keep the balance at the level of oil price at $40-45 a barrel. Total foreign assets of the commercial banks make up AZN 7.1 billion, foreign liabilities – AZN 1.6 billion, net foreign assets – AZN 5.2 billion."

The Executive Director believes that the balance of the commercial banks is in a positive zone, and it makes the banking sector more sustainable against external shocks: "In such situations, probability of dollarization causes anxiety. However, currently, the dollarization level in Azerbaijan is at a high level. The level of dollarization in deposits is 55%, while this figure was 37% in early 2015. Full insurance of deposits and higher interest on manat deposits is a stabilizing case for the market. The proportion of foreign currency in the loan portfolio is 1/3. In this situation, population and business are calm, currency sales in banks are normal, the exchange rate of manat is stable. No panic is observed."

According to him, the demand at a deposit auction held by Central Bank of Azerbaijan (CBA) today was AZN 268 million, the average weighted interest rate on deposit deals closed as a result of the sale made up 5.51%:

"If the demand for manat deposit is 5.51%, there is no panic in the banking sector. At the same time, $323.2 million of need was met at a currency auction held by CBA, in which SOFAZ also participated.

"All this happened in the background of the decline of oil prices to $30. So we have the necessary immunity against low oil prices. In other words, the government, business, and population in Azerbaijan are more prepared for lower oil prices than they were in 2015 and than in other countries. Moreover, the leading players of the market – Saudi Arabia, the United States, and Russia are not interested in low oil prices for a long period. It's just because of the decline in demand for oil due to coronavirus, at the same time, an increase in supply. In all situations, the Azerbaijani government will take into consideration all risks and take the necessary steps."