BAKU, Azerbaijan, November 4. Deviations in
Azerbaijan’s inflation from the forecast level are expected to have
a limited impact on fiscal indicators in the medium term. At the
same time, rising inflation could lead to a deterioration in the
consolidated budget-to-GDP ratio, while lower-than-projected price
increases could lead to an improvement in this indicator.
This was reported in the fiscal risk analysis included in the
draft state and consolidated budgets for 2027.
The document notes that persistent high uncertainty in the
global economic environment, price trends among major trading
partners, and volatility in international commodity markets are the
main external risk factors for inflation.
“In particular, continued geopolitical tensions in the Middle
East could create additional volatility in energy and other
commodity prices. At the same time, a weakening of the nominal
effective exchange rate could accelerate the pass-through of
imported inflation to domestic prices.
As for domestic factors, under current fiscal and monetary
policies, the likelihood of aggregate demand rising to a level that
would significantly increase inflationary pressure is assessed as
low,” the report notes.
In assessing the potential impact of inflation on fiscal
indicators, the effects of price-level changes on nominal GDP,
government budget revenues, and the ratio of fiscal indicators to
GDP were taken into account.
To this end, various scenarios were developed for 2027–2030
based on inflation deviating from the baseline forecast by 0.5, 1,
and 1.5 percentage points above and below.
According to the calculations, changes in inflation will have a
limited impact on the ratio of the non-oil primary deficit to
non-oil GDP under the existing scenarios. However, according to
projections, this ratio, which stands at approximately 18% in 2026,
is expected to approach 12% by 2030 under the baseline
scenario.
The document emphasizes that, under the most pessimistic
scenario, the 12% interim target for the ratio of the non-oil
primary deficit to non-oil GDP could be exceeded by 0.5 percentage
points in 2030. Thus, under this scenario, the ratio is projected
to reach 12.5%.
As for the consolidated budget balance-to-GDP ratio, the data
show a surplus of 6.6% in 2022, 8.7% in 2023, 4.7% in 2024, and
3.4% in 2025. In 2026, this figure is projected to approach zero
and amount to approximately 0.2%.
According to forecasts, the consolidated budget balance-to-GDP
ratio is expected to shift to a deficit of approximately 2.2% in
2027, followed by a gradual improvement in subsequent years,
reaching a deficit of 1.1% in 2030.
Inflation exceeding the baseline scenario is assessed as a
factor that worsens the consolidated budget balance-to-GDP ratio,
while inflation below the baseline scenario is assessed as a factor
that improves it. The scenario ranges also show that, by 2030, this
indicator could settle at different levels depending on changes in
inflation.
Measures to Mitigate Inflationary Risks
The document notes the importance of implementing flexible
fiscal policy and targeted social protection programs to manage
fiscal risks in an inflationary environment.
It is reported that the use of preventive financial mechanisms
to minimize the negative consequences of unexpected price increases
can both protect government revenue and ensure sustainable economic
growth.
