In December, President Ilham Aliyev approved the state budget for 2019. Although revenues increased by 3.5% compared to 2018, the state budget deficit is expected to widen. In accordance with the new state budget, the country’s tax code experienced changes in order to stimulate economic activity, reduce “shadow economy”, and increase transparency. Foreign policy agenda of the country was dominated by the meeting between Azerbaijan and Armenia during the OSCE Ministerial Council Meeting in Milan. The joint and unilateral statements gave a positive signal about the future talks.
What has changed in taxes?
Following the country’s state budget for 2019, Azerbaijan’s tax code has been changed. The new tax code changes the payments for state social insurance between an employer and an employee. Employers are not obliged to pay tax on salaries for seven years, which may motivate them to sign contracts with employees. On the other hand, private sector employees , who are not working in the oil and gas industry and earn less than 8000 manats (about $4700) will be exempt from paying taxes.
Good news for the individual entrepreneurs who have small businesses operating in the non-oil sector is that the tax rate for them has decreased from 4 to 2%.
In order to encourage non-cash payments and increase the rate of credit/ debit card usage, discounts have been introduced to merchants who use point-of-sale (POS) terminal. Moreover, when making non-cash payments, some part of the value-added tax will be returned to the customers.
Previously agricultural producers operating in Baku paid 4% tax, while the ones in the regions paid 2%. According to the new tax code, this taxation system will be unified to single 2% tax payment regardless of the geographical region.
Why do Exxon and Chevron seek to leave Azerbaijan?
The US giants Exxon Mobil and Chevron seek to sell their shares in the Azeri-Chirag-Gunashli field in the Caspian Sea. They have 6.8% and 9.57% stakes in the field, respectively. Exxon expects to secure $2 billion from the sale of its shares. Chevron has also decided to launch the sale of its 8.9% interest in the Baku-Tbilisi-Ceyhan (BTC) pipeline.
The question is why these companies, who have been in Azerbaijan over a quarter of a century since “the Contract of the Century”, want to stop their support to Azerbaijan.
These companies were among five US companies that supported Azerbaijan to launch its oil and gas industry after the collapse of the Soviet Union. While Exxon Mobil has not commented on the sale, Chevron officials relate this decision to the company’s regular review to make sure that its portfolio is in alignment with the company’s long-term goals. “As part of this review, we have decided to initiate the process of marketing, with a view to a potential sale, of our Chevron affiliate interests in the Azeri Chirag and deepwater Gunashli project and the Baku-Tbilisi-Ceyhan pipeline,” officials said. The reason behind Exxon’s exit may be the fact that in recent years company has increasingly focused on working within the US to develop shale fields and it also plans to invest in newly discovered oil fields in Guyana.
The budget deficit is projected to widen
Azerbaijani parliament passed the state budget for 2019 and on December 22 President Ilham Aliyev approved the budget. Next year’s budget is based on the oil price estimate of $60/barrel. Gross domestic product (GDP) is expected to grow by 3.6%, 45% of which comes from the oil and gas sector. This sector accounts for the 75% of the state revenue which is forecasted to total 23.168 billion Azerbaijani manats ($13.61 billion). Expenditures, on the other hand, are expected to amount to 25.190 billion manats ($14.80 billion). Revenues have an increase of 3.5% compared to 2018, while expenditures experience 7.3% increase. The economy of the country is expected to grow by 2% in comparison with 2018. Annual inflation is projected to decrease to 3-4% from 6.1% in 2018.
According to the state budget for 2019, the budget deficit will widen to 2.022 billion manats, which is approximately equal to $1.2 billion and comprises 2.5% of GDP from 951 million manats or 1.3% of GDP in 2018. If the oil export prices are higher than expected, this deficit can be covered.
What was agreed upon in Milan between Armenia and Azerbaijan?
On December 5 during the OSCE Ministerial Council Meeting in Milan, top diplomats of Azerbaijan and Armenia, the Foreign Minister of Azerbaijan Elmar Mammadyarov and Acting Foreign Minister of Armenia Zohrab Mnatsakanyan held a meeting together with Minsk Group co-chair countries. The Russian Federation, the US, and France praised the significant reduction in ceasefire violations and ministers of the two countries agreed upon working intensively to find a long-term and peaceful solution.
After the meeting, the statement of Mammadyarov has been a wide-discussion topic. “I think that at the last meeting with my Armenian counterpart in Milan, we reached an understanding for the first time in a long while,” he said. The minister mentioned the importance of achieving tangible results. On the other hand, Armenian Foreign Ministry spokeswoman Anna Naghdalyan noted that “It has been a long time since such an agreement was reached”. These statements gave a positive signal about the settlement of the Nagorno-Karabakh conflict.
A joint statement was made by the ministers of the two countries and the heads of the delegations of the OSCE Minsk Group co-chair countries. According to the joint statement, all parties agreed to continue working towards long-term peace, the co-chairs called on parties to take concrete steps to prepare the nations for peace and the next meeting is scheduled to January 2019.
Russian Foreign Ministry spokeswoman Maria Zakharova expressed Russia’s willingness for the next round of talks. When commenting on the joint statement, she added that “for it to turn into agreements it needs to be worked out”.