Government spending in
Azerbaijan stood at 36% of GDP in 2016, mostly in line with other Commonwealth
of Independent States (CIS) countries. After a 6% of GDP deficit in 2015, a
small consolidated fiscal balance surplus of 0.3% of GDP was recorded, but
further changes in fiscal policy are necessary in order to make public finances
sustainable. This fiscal result stems from higher ravenues, due to customs
reorganization and higher oil prices, but also due to the fall in capital
expenditures. The economy experienced contraction of 3.8% in 2016, not just due
to energy prices, but more importantly, due to the fall in non-oil industries.
Inflation remains high, mostly due to pass through effects of the national
currency devaluation, peaking at 12.4%. The government approved a
Road Map in December 2016, a broad development plan, covering areas from
macroeconomic stability and exchange rate policy to investment plans in chosen
industries deemed as competitive, which may have a strong influence on future
economic freedoms depending on its implementation. Non-tax revenues stemming
from oil and gas allowed for a high degree of public investment and large-scale
welfare programs, leading to high social transfers, but these revenues are
dwindling. Unreformed state pension system is a drain on public finances.
Public debt has been tripled since 2014, to almost 40% of GDP. Numerous state
owned enterprises (SOE) are present in the economy, not just in the oil or
utility sector and many of them have a near-monopoly status, with unclear
separation between regulatory bodies and SOE corporate interests. An ambitious
plan of privatization of public companies that was drafted in 2016 is lagging
in implementation. Azerbaijan’s Sovereign Wealth Fund, that was set up with
exceeding oil revenues, has been linked to corruption of high state officials
and bad investment policy. Corporate tax is set at 20%, while VAT is at 18%.
Personal income tax is progressive, being 14% up to a high threshold and 25%
above it, while social contributions stand at 25% of the gross wage (22% paid
by the employer and 3% by the employee).