The trend of state borrowing has been increasing significantly in recent years. The primary catalyst for this surge was the global coronavirus pandemic in 2020. Across the world, state borrowing has gained even more momentum. The UN document [1] states: “Globally, government debt has nearly doubled since 2010, reaching a historic record level of $97 trillion in 2023. Rising interest rates are putting even more pressure on government budgets, especially in developing countries. Today, more than 3.3 billion people live in countries that spend more on debt interest payments than on education or healthcare.”
Azerbaijan is no exception to this global borrowing trend. Despite a decline in oil production, our country continues to benefit maximally from high global oil prices. Although this cycle remains unbroken, our state borrowings continue to rise. According to the Ministry of Finance of Azerbaijan [2], as of the first half of 2024, the country’s state debt amounted to 25 billion manats, which corresponds to 21% of the GDP. Another government document [3] forecasts that by the end of 2025, the total state debt of the Republic of Azerbaijan (both external and internal) will reach 30 billion manats or 23% of the GDP.
During this period, the external public debt is expected to amount to 9 billion manats, or 7% of the GDP, while internal debt is projected to be 21 billion manats, or 16% of the GDP.
It should be noted that borrowing is not only about necessity but also a desire to spend more. Resources are never enough. The more you want to spend, the more reasons you’ll find to spend. The Azerbaijani government is inclined to spend more, utilizing both the assets accumulated in the State Oil Fund (SOFAZ), its transfers to the state budget, and borrowings
If borrowing fosters reforms or economic restructuring, then there is reason to believe in positive outcomes. If a country increases consumption solely through borrowing, it will contribute to GDP expansion but increase its hard currency obligations. In fact, it is more rational to implement reforms for the sake of borrowing rather than borrowing to implement reforms. If you have a problem managing the money in your pocket, it doesn’t matter how much money goes in. What matters is knowing where and why you spend it. The 12 billion manat loss of the International Bank can be considered a lesson derived from this situation. It means that the criteria for spending borrowed funds are more important than the borrowing itself.
If these loans are spent transparently, purposefully, efficiently, and accountably, then there’s no reason for concern. If not, then there’s not only a reason to worry but a reason to be even more concerned. Another reason for the increase in state borrowing is the decline in resource revenues compared to previous years. It is difficult for a government accustomed to large investment expenditures to demonstrate more restrained behavior with lower revenues and make optimal decisions in terms of fiscal stability. Therefore, the Azerbaijani government also resorts to borrowing to carry out construction and reconstruction work in the liberated territories and build new infrastructure. For reference, over the last four years, 19 billion manats have been spent for this purpose in the liberated territories. An additional 4 billion manats are planned to be spent in the coming year [4].
However, we must ensure that the country’s economic policy does not rely on fragile sources (post-oil realities) such as resource revenues and state borrowings to maintain macroeconomic stability. In reality, the path to ensuring macroeconomic stability and economic development lies in having stable financial resources. The structure of our country’s economy is such that we can only generate resource revenues. The weak development of the non-oil sector, the declining potential of the real economy, and the significant decrease in the flow of foreign investments indicate the fragile economic realities of our country.
According to the semi-annual indicators (01.06.2024), the currency reserves of the State Oil Fund [5] amounted to $58 billion. As noted in the Central Bank’s “Financial Stability Report” [6] for the same period, the reserves increased by 1.1% (or $125 million), reaching $11.7 billion. Overall, the country’s currency reserves increased by 3.1%, reaching $69.7 billion. This creates a paradoxical situation. On one hand, the country’s strategic currency reserves amount to approximately $70 billion, while on the other hand, we are borrowing large sums from international creditors.
African economist and author Dambisa Moyo writes in her book [7]: “Between 1960 and 2010, over $2 trillion in foreign aid was provided from wealthy countries to poor countries. Increased borrowing will not pull a country out of poverty. On the contrary, a development model based on foreign borrowing cannot ensure sustainable growth.” Therefore, borrowing is not only a key source of economic growth but also a significant financial obligation for the future. The state borrows it, but society pays it back. As an aphorism related to capitalism states: “If there is money, the rich share it; if there is debt, the people pay it.”
Sources:
[1] https://unctad.org/news/explore-world-debt-dashboard-key-insights-across-188-countries?fbclid=IwY2xjawFkjTFleHRuA2FlbQIxMAABHZ1a64T5O-GxktVZ0ALLY_f4vsvKr9kTypeBUq5z9eI1B5ZPWf83jc-WGw_aem_TutDXF0BtqTb6jmaxdmhmg
[2]https://maliyye.gov.az/scripts/pdfjs/web/viewer.html?file=/uploads/static-pages/files/66c72fab52a89.pdf
[3]file:///C:/Users/HP/Downloads/66e9a2703cc55.pdf
[4]file:///C:/Users/HP/Downloads/66e9a2703cc55.pdf
[5] https://oilfund.az/report-and-statistics/recent-figures
[6]https://uploads.cbar.az/assets/58696c0de75462383dba38398.pdf
[7] Dambisa Moyo, “Dead Aid: Why Aid is Not Working and How There is a Better Way for Africa”, 2013, p.49
