The World Bank Country Manager in Azerbaijan spoke at "The Role of the State Budget in the Economic Development" Conference

Ahmed Jehani, WB Country Manager for Azerbaijan

8 June, 2004

Ministry of Finance, Baku, Azerbaijan

 

1.      Azerbaijan is entering a new phase in its economic development, during a period in which the country’s foreign exchange inflows will greatly exceed its import requirements. Prudent budget management policies and strong institutions for effective and efficient public expenditure execution are key to avoid the disappointing experience of many other oil rich countries and to ensure Azerbaijan’s growth and poverty reduction objectives are met.

 

2.      To address poverty, the Government of Azerbaijan has established to a comprehensive program through a balanced approach to economic reform as outlined in the State Program for Poverty Reduction and Economic Development (SPPRED), which was approved by the President of Azerbaijan in February 2003. The SPPRED was prepared with significant input and participation by a broad range of civil society and key stakeholders to identify priorities for poverty reduction. The Country Assistance Strategy of the World Bank is based on, and also links its objectives with the Government’s strategy in SPPRED.

 

3.      As part of the SPPRED, Azerbaijan fiscal reforms, including the institutional and public expenditure management reforms have so far been aimed at (i) achieving transparency and accountability of public expenditures; (ii) structural strengthening of the budgetary  system to maintain monetary and macroeconomic stability and ensure a proper management of the oil wealth; (iii)  ensuring probity and integrity of public expenditures, and of internal and external audit procedures; and (iv) streamlining institutional arrangements and administrative structures to be consistent with requirements of market-based economy and cost-effectiveness in the delivery of public services.

 

4.      Public expenditure management takes a central place among the core institutional capacities that needs to be strengthened so that the Government’s programs of poverty reduction, as elaborated in the SPPRED, can be effectively implemented. In Azerbaijan, reforms in public expenditure management have so far contributed to achieving macroeconomic stability and to strengthening the budgetary system. However, the Government needs to complement these reforms by addressing a number of overarching issues to ensure sustainability and efficient use of resources in the future.

 

5.      Aggregate fiscal discipline would help the Government to cope with the challenge of the oil wealth management to avoid undesirable macro-imbalances. Any decision on the use of oil revenues should be made consistent with the overall macroeconomic framework.  To ensure prudent management of oil revenues, the Government would need to maintain the prudent governance framework of the Oil Fund by establishing a proper mechanism for management of the oil resources. The Government should continue to ensure all Oil Fund expenditure decisions are included in the annual budgets, Medium-Term Expenditure Framework, and the Public Investment Program. It is important to continue with the best practice of publishing the annual audited accounts of Oil Fund. It is also critically important to introduce a sustainable, rule-based long-term strategy for the use of oil revenues that is consistent with SPPRED objectives. The strategy would focus, among other things, on: principles for the long-term use of oil and gas revenues; the policy on management of oil and gas expenditures in the medium term; and, the management of the unspent part of oil and gas revenues. The goal would be to insulate the budget from short-term swings in oil prices by targeting the size of the non-oil deficit, and in doing so, to provide for a stable medium-term financing envelopes to fund Azerbaijan’s multiple priorities. Given the pressing needs for infrastructure and social spending in Azerbaijan, significant investments will be necessary to support sustainable non-oil growth.

 

6.      Allocative efficiency is needed to ensure that the country’s resources are best used to meet the multiple SPPRED priorities. For the most of the 1990s, line ministries received little guidance on spending priorities and on calculation of expenditure requests. One of the most important reform efforts to improve allocative efficiency has been the approval of the new Budget Systems Law in 2002 and its amendments in 2003.  The new Law is intended to address many of the deficiencies of the past, including the incorporation of off-budget expenditures, as well as monitoring and reporting requirements.   It is anticipated that the Budget Systems Law will help reduce the large variations between the planned and actual variations in the past.

 

7.      The Medium-Term Expenditure Framework is an instrument to improve public expenditure management process and strategic priority setting for the budget formulation process. The Government realizes that the Medium-Term Expenditure Framework and the Public Investment Program mechanisms will help to secure financing for the priority needs while strengthening the linkage between policy objectives set in SPPRED and the annual public expenditure programs. By establishing these mechanisms, the Government would establish discipline for all ministries to operate within a strategically prioritized expenditure framework, and a predictable resource envelope. The budget calendar, as stipulated in the Law, entails a much stronger participatory process involving line ministries and other budgetary organizations. The budget formulation would thus need to move from norms-based to program-based focusing on achieving measurable outcomes with performance indicators, starting with health and education. The recently adopted regulations related to the Budget Systems Law and the Budget Process Manual, which Government intends to develop by the end of 2004 will surely represent a good stepping stone in this direction.  Considerable training also needs to be undertaken in the Ministry of Finance and in other line ministries.  The Government will also adopt a new budget classification system within the framework of Government Financial Statistics Manual.

 

8.      To increase operational efficiency the Government realizes the need to make stronger links between budgetary allocation decisions and operational outcomes by moving away from allocating resources based on pre-defined norms to a more performance-based budget model.  With the implementation of the new Budget Systems Law and introduction of the Medium-Term Expenditure Framework, spending units will have to be involved much more closely in developing, costing and prioritizing their sector development programs based on their respective medium term sector resource envelopes, while identifying key performance indicators.  Such performance indicators of the previous year could then serve as a basis for the next year’s program.

 

9.      This new framework will improve clarity in the delineation of responsibilities for budget execution between the Ministry of Finance and the line ministries. There is also a need to strengthen project appraisal capacity in line ministries and to integrate fully investment spending with the overall public expenditure planning process.  This is necessary not only to improve the efficiency of public expenditures but also to increase accountability of those public officials in charge of these expenditures.

 

Main Conclusions

Azerbaijan has strong potential to grow rapidly in the years ahead because of the oil and gas resources which it is currently developing.  These resources are considerable, but finite, peaking in about a decade and then declining steadily.  The most difficult challenge Azerbaijan faces, which is well understood by the Government, is to avoid the path followed by many natural resource rich countries, wherein their citizens derive little benefit from the influx of oil revenues.  This requires designing and implementing a policy agenda that leads to poverty reduction and improves incomes as well as equity for current and future generations, while maintaining macroeconomic and financial stability.  Strong institutions are essential to tackle this challenge, yet Azerbaijan has had little more than a decade in which to build the government institutions and the civil society networks to support them.  For this reason, the World Bank Group's assistance is providing cross-country experience, helping to build the institutional capacity and sustain the policy reforms necessary for Azerbaijan to succeed to achieve the ambitious goals of poverty reduction envisaged under the SPPRED.