Azerbaijan’s 2025 budget has been approved with a deficit of 3.1 billion manats. At first glance, this gap between revenues and expenditures might raise concerns. However, a closer look reveals that the situation is far from critical. In fact, budget deficits have become the norm rather than the exception for many countries, including advanced economies. What matters more than the mere existence of a deficit is its size relative to the economy and how it is managed.
From the perspective of scale, Azerbaijan’s deficit is far from alarming. According to international standards, a budget deficit within 10% of GDP is considered acceptable, and Azerbaijan’s current budget comfortably falls within this range. Nevertheless, even a safe level of deficit demands careful management. How these 3.1 billion manats are covered will impact not only the country’s immediate financial stability but also its long-term development prospects.
Why Does the Deficit Arise?
Despite notable progress in recent years, Azerbaijan’s economy remains heavily reliant on the oil and gas sector. Revenues from energy exports form the backbone of the state budget, making it vulnerable to global price fluctuations and production volume changes. Simultaneously, government expenditures are rising, with increased spending on social needs, infrastructure projects, and other key programs. This creates an inevitable gap between income and spending.
However, a budget deficit is not inherently bad. If the funds are directed toward economic development, such as building roads, schools, or supporting businesses, they can return in the form of GDP growth, increased tax revenues, and improved living standards. That said, effective management of these resources is essential.
Traditionally, Azerbaijan covers its deficit through the issuance of government bonds. The state raises funds domestically by selling these securities to banks and other investors. While this approach ensures swift access to resources, it has its drawbacks. Firstly, such borrowing withdraws money from the private sector, potentially limiting business opportunities. Secondly, funds reintroduced into the economy through government expenditures are not always used efficiently and may sometimes be lost due to bureaucratic inefficiencies.
An alternative approach could involve targeted monetary issuance by the Central Bank, meaning the creation of new money specifically to cover the deficit. This method has certain advantages, especially given Azerbaijan’s under-monetized economy. Increasing the money supply could stimulate investments, create jobs, and accelerate the development of non-oil sectors. However, this strategy carries risks, particularly inflation. If the newly issued money is channeled into recurring expenditures rather than productive investment projects, it could weaken the economy rather than strengthen it.
What Solutions Are Possible?
An optimal solution may lie in a combination of approaches. Utilizing the reserves of the State Oil Fund of Azerbaijan (SOFAZ) can help cover the deficit without placing additional pressure on the domestic market. Borrowing from international markets might also be effective if done on reasonable terms. However, in the long term, it is crucial to address the root causes of the deficit rather than just its symptoms.
Accelerating economic diversification is the key to reducing dependency on oil and gas revenues. Developing sectors such as agriculture, tourism, IT, and manufacturing would create a more stable foundation for budget revenues. Combating the shadow economy and enhancing the transparency of the tax system could also significantly boost fiscal income. At the same time, improving the efficiency of public spending is essential to ensure every manat is utilized to its fullest potential.
A budget deficit is not inherently a threat to the economy, provided it remains within reasonable limits and is managed effectively. Azerbaijan is in a favorable position: the scale of its deficit is far from critical, and the government has tools at its disposal to address it. The key is to use these tools wisely while laying the groundwork for sustainable economic growth. With the right approach, managing the budget deficit can become not a challenge, but an opportunity to propel Azerbaijan’s economy to a new level of development.
