AZERBAIJAN: DRAFT 2007 BUDGET PROJECTS 42 PERCENT

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 001476

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E.O. 12958: DECL: 10/11/2016
TAGS: ECON EFIN PREL AJ
SUBJECT: AZERBAIJAN: DRAFT 2007 BUDGET PROJECTS 42 PERCENT
INCREASE IN GOVERNMENT EXPENDITURES


Classified By: AMBASSADOR ANNE E. DERSE, PER REASONS 1.4 (B, D)


1. (SBU) After months of debate and anticipation, the
Government of Azerbaijan is poised to submit its largest ever
Consolidated State Budget to Parliament for final approval.
After the huge increases in expenditures in the 2006 state
budget (an 80 percent increase over the 2005 budget),all
economic observers have been anxiously waiting to see the
level of planned government expenditures in the 2007 budget.
On September 15, the Finance Minister submitted to the
Cabinet of Ministers the draft state budget which was then
subsequently passed to President Aliyev on September 25 for
approval. The president will pass the budget to the
Parliament for final approval on October 15.


2. (SBU) The 2007 Consolidated State Budget, reportedly 1500
pages long, is not yet public, but according to initial press
reports contains the following information.

--Projected revenues are estimated at USD 6.16 billion.

--Government expenditures will be USD 6.59 billion.

--Budget deficit is projected to be USD 435 million.

--Based on a projected 2007 GDP of USD 25 billion, revenues
are 24 percent of GDP and expenditures are 42 percent of GDP.

--Compared to the final state budget for 2006, the draft 2007
budget foresees a total budget increase of 41.2 percent, with
revenues increasing 39.7 percent and expenditures increasing
42.6 percent.

--In 2007, government salaries are expected to increase in
increments, as they did in 2006.


3. (C) While the budget has made it through the Cabinet of
Ministers, the total expenditure amounts will probably
increase in the coming weeks as different government
ministries and agencies jockey for more money. In a recent
meeting with the Ambassador, the Executive Director of the
State Oil Fund said that the Finance Minister was still
receiving many requests for additional funds from different
ministries. We believe that the Minister of Finance is
interested in maintaining a short leash on budget
expenditures and is looking for additional revenue sources to
finance the budget.


4. (C) In addition there have recently been many long
meetings at the Finance Ministry with different ministerial
budget officials, possibly to hammer out final budget
details. Some economic observers have noted that the Finance
Minister himself may have been behind the press reports
detailing the size of the budget, putting a marker down in
case the budget increases once it leaves his ministry. The
Minister of Finance has told the international community that
he withstood heavy lobbying and criticism in keeping the
total budget increase to 40 percent. It is still unclear the
total amount of money the GOAJ will transfer from the State
Oil Fund for budgetary support. In 2006, the Oil Fund
transferred more than USD 600 million to the budget. Once
the budget is public, Post will provide a detailed analytical
report on its contents and macroeconomic effects.


5. (C) In a recent meeting with the Ambassador, Economic
Development Minister Babayev confirmed that government
ministries and agencies are lobbying for additional
infrastructure project funding in the 2007 budget. Babayev
stated that line ministries wanted to spend more than USD 4
billion in capital expenditures on public investment projects
in 2007. Both he and Minister of Finance Sharifov believed
that this large amount could threaten overall macroeconomic
stability and agreed to limit public investment project
spending to USD 1.5 billion, adding that USD 1 billion of
this total would come from foreign investment.


6. (C) COMMENT: In 2006, the government increased spending by
more than 80 percent; in 2007, the government apparently

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plans to spend an additional 42 percent on top of last year's
large increase. This rapid fiscal expansion, while necessary
to modernize and grow the economy, could lead to some
macroeconomic destabilization effects, such as higher
inflation, later in 2007. In addition, it is unclear if
Azerbaijan's relatively small economy is able to absorb the
large amount of money or if the GOAJ is able to manage the
expenditures without massive waste and corruption. We will
report full details on the budget as soon as they are
available.
DERSE