Lower Oil Revenues, Higher Public Debt: The Fiscal Policy Implications of Low Oil Prices in Azerbaijan

Abstract

This article examines fiscal policy and the main parameters of Azerbaijan's fiscal position in the context of the severe constraints (namely, reduced budget revenues and cuts in government spending) posed by the decline in crude oil prices. Azerbaijan's fiscal balances have deteriorated considerably as crude oil prices have tumbled. A worsening of Azerbaijan's fiscal balance could gradually contribute to an increase in the public debt burden and threaten fiscal sustainability in the long term. The sovereign wealth fund of Azerbaijan, SOFAZ, now has very limited profits from the sale of oil, and will contribute less to the fiscal revenues of the state as a consequence. The national state-owned oil-gas company, SOCAR, temporarily cancelled its plans for a new oil-gas refining and petrochemical complex because of the rapid fall in crude oil prices. However, at the same time, the new low oil price environment also offers an opportunity to boost a new wave of fiscal and public administration reforms in Azerbaijan.