(Economist Intelligence Unit) -- Parliament has approved the government budget for 2016, which targets expenditure of Manat14.6bn (US$14bn at current exchange rates). If implemented, this would represent a cut in government spending of 10% compared with The Economist Intelligence Unit's estimate for 2015 expenditure. This would be likely to lead to a further sharp slowdown in the economy.
However, we continue to forecast that the authorities will devalue the manat in early 2016 in order to relieve pressure on the balance of payments and the public finances. We expect the government to revise up its spending plans following the devaluation, although higher inflation will mean that spending will still decline significantly in real terms.
According to the Ministry of Finance's budget plans, in 2016 the government expects revenue to total Manat14.4bn, down by over 12% compared with our 2015 revenue estimate. The transfer from the State Oil Fund of the Republic of Azerbaijan (SOFAZ, the sovereign wealth fund), which over the past five years has accounted for over half of government revenue, is due to fall to Manat6bn, from around Manat9bn this year, equivalent to just 37% of projected revenue.
This underlines the commitment of the government, which was recently restated by Ilham Aliyev, the president, to conserve SOFAZ assets, even at the cost of sharp reductions in spending. On the basis of an annual average oil price of US$60/barrel, we project that SOFAZ revenue will total US$9.5bn in 2016. Therefore, if the manat-US dollar exchange rate is held constant, we project that the size of the sovereign wealth fund will increase by around US$4bn next year.
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