2007 STATE BUDGET FORESEES 60 PERCENT INCREASE IN

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 001800

SIPDIS

SIPDIS

E.O. 12958: DECL: 12/15/2016
TAGS: ECON EFIN ETRD AJ EINV
SUBJECT: 2007 STATE BUDGET FORESEES 60 PERCENT INCREASE IN
GOVERNMENT SPENDING

REF: BAKU 1476

Classified By: DCM JASON HYLAND, PER REASONS 1.4 (B, D)


1. (C) SUMMARY. Azerbaijan's Parliament approved the 2007
State Budget on November 28. Compared to the 2006 budget,
the 2007 budget plans for a 57 percent increase in revenues,
a 60 percent increase in expenditures, and a small budget
deficit. Government revenues are expected to total USD 6.1
billion, while government expenditures will total USD 6.6
billion, leading to a budget deficit of USD 435 million. The
State Oil Fund will contribute more than USD 650 million to
the budget for 2007, nearly 40 percent of its total current
assets of USD 1.5 billion. As part of overall government
revenues, however, the reliance on SOFAZ budgetary support
has decreased by more than seven percent compared to its 2006
budget contributions. The GOAJ expects that a growing
portion of the 2007 State Budget revenue will come from the
energy sector, including increased oil tax revenues. Despite
many international observers' fears of massive,
out-of-control government spending, the 2007 state budget
reflects a slightly more disciplined approach to maintaining
Azerbaijan's growing economic machine. Finance Minister
Samir Sharifov told the Ambassador that he negotiated hard to
keep spending under control, fighting many line ministries
pushing for more money and a larger part of the budget pie.
The 2007 budget earmarks sizable increases of more than 50
percent in the education and health areas, reflecting the
GOAJ's interest in improving the daily lives of Azerbaijanis.
END SUMMARY.


2. (SBU) We have reviewed Azerbaijan's 2007 State Budget
document (presented to Parliament on November 8) and offer
our initial analysis below. The Government of Azerbaijan,
however, will not publish the budget breakdown by ministry
and agency until early 2007 by Presidential Decree. Once
this information is available, we will provide additional
budgetary analysis. Azerbaijan's Gross Domestic Product in
2007 is forecasted to total USD 25 billion. All figures are
in millions of U.S. Dollars. (NOTE: For 2007 budget
calculations, we used the new Azerbaijani manat 0.87 equals
USD 1 exchange rate.) All percentage changes are at the
nominal rate unless otherwise noted.

2007 2006 %Change %GDP
Revenues: 6,136 3,586 57 24.5
Expenditures: 6,571 3,783 60 26.3
Budget Deficit: 435 198 91 1.7

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BUDGET REVENUES
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3. (SBU) In 2007, the GOAJ predicts budget revenues to
increase by 57 percent compared with 2006, including a 121
percent increase in "profit taxes" and a 22 percent increase
in Customs revenues. Budget revenues are projected to be
24.54 percent of 2007 GDP, an increase of nearly one percent
compared to 2006. As in 2006, the State Oil Fund (SOFAZ) is
contributing more than USD 600 million to the budget for
2007; nearly one-third of its total current assets.
According to the 2007 Budget Decree, major increases in
revenues are indicated below:

2007 2006 %Change
Personal Income 632 418 38
Tax:
Profit Taxes: 2,409 915 141
SOFAZ Transfers: 672 616 9

Main Items in Budget Revenues:

% of Total Revenue % of GDP
Profit Taxes: 39.26 9.64
VAT: 18.55 4.55
Transfers from SOFAZ: 10.96 2.69
Personal Income Taxes: 10.31 2.53


4. (SBU) The GOAJ expects that a growing portion of the 2007
State Budget revenues will come from the energy sector,
including increased oil tax revenues. The economy continues
to expand at a rapid pace (2006 GDP growth is estimated to be
more than 30 percent) contributing to higher government
revenues. In addition, the Ministry of Finance has increased
contributions from the State Customs Committee and the
Ministry of Taxation, capturing more revenues. Since early
2006, the GOAJ has also made extensive efforts to improve tax
collection procedures and increase the number of tax payers.

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The 41 percent increase of Personal Income Tax represents
Azerbaijani citizens' growing personal wealth and rising
salaries, as well as growing GOAJ collection efforts.

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BUDGET EXPENDITURES
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5. (SBU) Azerbaijan's 2007 State Budget expenditures are
predicted to be 60 percent higher than 2006 budget
expenditures, totaling 26.29 percent of GDP. As in previous
budgets, the government proposes major increases in the areas
of defense, education, social protection/social security, and
industry, construction and mineral resources.

2007 2006 %Change
General Government 569 511 8
Services:
Defense: 916 618 45
Education: 843 501 54
Social Protection
And Social Security: 607 426 30
Industry, Construction
And Mineral Resources: 1,749 647 148
Courts, Law Enforcement: 504 270 62
Health: 310 150 79

Percentage of % of GDP
Total Expenditures
General Government 8.66 2.28
Services:
Defense: 13.94 3.67
Education: 12.83 3.37
Social Protection
and Social Security: 9.23 2.43
Industry, Construction
and Mineral Resources: 26.63 7.00
Courts, Law Enforcement: 7.67 2.02
Health: 4.72 1.24


6. (SBU) While defense expenditures increased again in the
2007 budget reaching more than USD 900 million, the largest
government expenditure remains the "Industry, Construction
and Mineral Resources" area. Based on the current budget
document, however, it is not possible to determine how much
of the USD 1.75 billion budget (an increase of 148 percent)
for this area will be actually used for government ministry
expenses and large capital expenditures. In 2006, the
Industry, Construction and Mineral Resources received USD 647
million, an increase of 267 percent compared to the 2005
state budget. The increase in this area of the budget also
indicates the GOAJ's continuing efforts to modernize rapidly.

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SOFAZ TRANSFERS
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7. (SBU) As in 2006, the State Oil Fund is contributing more
than USD 650 million to the budget for 2007, nearly 40
percent of its total current assets of USD 1.5 billion. As
part of overall government revenues, however, the reliance on
SOFAZ budgetary support has decreased by more than seven
percent compared to its 2006 budget contributions. In 2007,
SOFAZ should receive approximately USD 5 billion in oil
revenue with the completion of the BTC pipeline and increased
oil exports from the Azeri-Chirag-Guneshli field.

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BUDGET DEFICIT
--------------


8. (SBU) The budget deficit predicted in the 2007 State
Budget increases to USD 436 million, up from USD 175 million
in 2006. The budget deficit, however, is relatively small at
only 1.74 percent of GDP. In addition, the GOAJ maintains
little external debt.

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PARLIAMENT DEBATES BUDGET
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9. (SBU) After weeks of discussion in Parliament, the 2007
budget passed on November 28 with a vote of 94 to 3. (NOTE:
28 Members of Parliament (MPs) did not vote, a not unusual
occurrence, according to several opposition MPs.) Opposition
MP Panah Huseyn, who was in a group of five Musavat party MPs
who walked out during a session in which the draft budget was
being discussed, told the press that the budget was "not

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transparent and was corrupt, designed to plunder the national
riches." In a November 30 meeting with visiting FAS
Counselor, MP and Economic Policy Commission Chair Ziyad
Samadzade said that the main goal of the 2007 budget was to
diversify Azerbaijan's economy, to "lessen the country's
dependence on the oil sector." In addition, Samadzade said
he hoped that aiming to develop a variety of sectors would
bring Azerbaijan's economy "closer to international
standards." Samadzade said that the GOAJ needed tighter
budget control, and now that the budget has passed, he said
that he anticipates Parliament discussing the budget system
during several December sessions.

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COMMENT
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9. (C) Despite many international observers' fears of
massive, out-of-control government spending, the 2007 state
budget reflects a slightly more disciplined approach to
maintaining Azerbaijan's growing economic machine. Finance
Minister Samir Sharifov told the Ambassador that he
negotiated hard to keep spending under control, fighting many
line ministries pushing for more money and a larger part of
the budget pie. Minister Sharifov, a relative budget hawk in
Azerbaijan, is concerned that large government spending could
lead to higher inflation and macroeconomic distortion.
Azerbaijan, with its vast energy resources now more readily
exportable to international markets amid higher prices, would
have the cash flow to increase dramatically budgetary
spending.


10. (C) While not outlined in the budget document, the GOAJ
will continue to raise government salaries incrementally,
adding to inflationary pressures. On a positive note, the
2007 budget earmarks sizable increases in the education and
health areas. Both areas will receive increases of more than
50 percent compared to 2006, reflecting the GOAJ's interest
in improving the daily lives of Azerbaijanis. In addition,
the GOAJ's decreasing reliance on the State Oil Fund for
budgetary support is a good sign and represents a growing
economy that could translate into more funds being available
at the Oil Fund for "future generations," a key Oil Fund
objective.
HYLAND