By a Decree of the President of the Republic of Azerbaijan, Mr. Ilham Aliyev, 2020 was designated as a pilot period for the introduction of results based budgeting and the medium term expenditure framework. Within this framework, the functional classification sections of budget expenditures related to “Education,” “Agriculture,” and “Environmental Protection” were identified as pilot sectors. An interview by the Executive Director of CAERC, Vusal Gasimli, on fiscal reforms was published in the Azerbaijan newspaper.

What is the medium term expenditure framework and how would you explain its importance?

The Strategic Road Map for the National Economy Perspective, approved by President Ilham Aliyev, emphasizes that the medium term expenditure framework is essential for strengthening budget management, aligning it with results based budgeting, ensuring the efficiency of public spending, and reducing the impact of oil revenue volatility. Results based budgeting will be implemented under the following conditions: ensuring the execution of state financial resources according to programs and strategic objectives, establishing control mechanisms over the use of budget funds, and preparing the budget draft based on a system of indicators that allows the evaluation of efficiency, outcomes, and cost effectiveness of budget organizations. As a result, results based budgeting will ensure more targeted, optimal, and efficient use of public expenditures.

The preparation of the 2021 state and consolidated budget drafts, as well as consolidated budget indicators for the subsequent three years, will be carried out in line with the medium term expenditure framework. For this purpose, a 39 item Action Plan has been approved.

The level of total factor productivity in Azerbaijan indicates that economic growth can be accelerated primarily through institutional reforms and human capital development. At the same time, the development of fiscal institutions, including budget rules, the medium term expenditure framework, and results based budgeting, is designed to accelerate economic growth. In this regard, the development of fiscal institutions under the leadership of the President is of great importance. Furthermore, the expanded application of corporate standards in state owned enterprises will contribute to increased fiscal sustainability, economic efficiency, and an improved competitive environment.

The medium term expenditure framework will also ensure alignment between the medium term resource envelope and national spending priorities.

How is the mechanism of results based budgeting structured?

Results based budgeting is a budget preparation process that establishes a link between the level of budget allocations for a program and the expected outcomes of that program. This approach ensures more efficient and effective use of budget funds.

Under this new methodology, known as program based budgeting, the budget process and documents present explanatory information on strategic goals, measures, instruments, and their associated costs. The main performance indicators in such budgets include the quantity, quality, and costs of services and activities carried out by public institutions to achieve specific objectives, as well as the outcome indicators expected from their implementation.

This requires an integrated approach to budget planning and execution, enabling proper prioritization and more effective use of the budget process. The technical principles for designing and implementing a sound results based budgeting system are reflected in the Theory of Results. Under this framework, results based budgets present the mission, targets, objectives, and justification for the use of funds, with a primary focus on outcomes. As a result, the entire planning and budgeting framework becomes results oriented and evaluation based. This process consists of three elements: outcomes, strategy, and activities or outputs. Key Performance Indicators must be defined for the final element. In short, results based budgeting represents the intersection of strategy and planning with implementation and measurement.

What can be said about international experience and the application of best practices in Azerbaijan?

For example, in the United States, results based budgeting in higher education initially aimed to encourage student enrollment. Institutions enrolling more students received higher budget allocations. Over time, the financing formula evolved and is now applied in 30 US states, incorporating criteria such as graduation rates, degree attainment, the number of degrees awarded, and the number of graduates from low income families.

The advantages of applying results based budgeting in education include incentives to increase enrollment and access to higher education, a stronger focus on outcomes and achievements, and fair resource allocation to institutions meeting performance criteria. Its main weakness lies in the difficulty of defining outcome indicators and measuring long term results.

Results based budgeting is a participatory and team based budget management approach aimed at improving program implementation, management efficiency, effectiveness, and accountability.

One important improvement in Azerbaijan regarding policy based budgeting was the Presidential Decree No. 239 of March 2010, which required the preparation, implementation, and monitoring of the State Investment Program. Its integration into the budget process improved discipline in budget preparation and execution.

The application of results based budgeting will enable both the public sector and the media to monitor budget expenditures. For example, in Norway, where results based budgeting is applied, the Parliamentary Finance and Economic Affairs Committee actively discusses budget drafts, supported by a dedicated research department established in 1999.

How will national spending priorities be determined?

National spending priorities will be defined in limited numbers by aligning strategic road maps, sector strategies, and new policy initiatives proposed by budget organizations. Typically, up to five national priorities may be identified, with up to seven in exceptional cases.

Sector analysis of the Azerbaijani economy shows that focusing on six priority sectors is more effective. Successful examples from Chile, the Czech Republic, Korea, and others demonstrate the benefits of specialization in six to seven sectors. The goal is to identify areas with the greatest potential and proactively promote investment in those sectors. Fiscal policy supports the transition from diversification to specialization.

Priorities are ranked from highest to lowest. When resources are limited, high priority initiatives are financed first, while others are scheduled for the medium term.

How will new policy initiatives avoid creating budgetary pressure and inflation?

New policy initiatives are proposed by budget organizations and must be economically justified and aligned with national priorities and sector strategies. Their total annual volume cannot exceed 10 percent of allocations for the next budget year. The medium term resource envelope is developed based on baseline forecasts and new initiatives, while coordination with monetary policy indicators ensures fiscal and monetary alignment. Budget rules establish an upper limit on consolidated budget expenditures, ensuring fiscal sustainability through the golden rules of budgeting.

What is the fiscal multiplier in Azerbaijan?

Econometric calculations conducted at CAERC show that over the past three years, the fiscal multiplier was 0.5 for the non oil sector and 1.2 for imports. After peaking in 2013, the multiplier declined, indicating that reliance solely on fiscal tools to drive growth is becoming limited and that accelerated business and institutional reforms are needed to attract private investment.

How does Azerbaijan compare regionally in terms of fiscal support?

When calculated at purchasing power parity, per capita consolidated budget expenditure in Azerbaijan amounts to 6.6 thousand international dollars, making it the regional leader in the South Caucasus and Central Asia. This level exceeds that of Kazakhstan, Uzbekistan, and Ukraine by 1.1 times, Tajikistan by 1.4 times, Armenia by 1.5 times, Moldova by 2 times, Georgia by 2.4 times, and Kyrgyzstan by 3.8 times. Azerbaijan provides relatively strong fiscal support to its economy compared to regional peers.

What role will fiscal policy play in accelerating economic growth?

Efficient and results based fiscal policy supports growth but is not sufficient on its own. According to projections based on the World Futures Model of the Frederick S. Pardee Center, growth below 2.2 percent would hinder achievement of sustainable development goals. Azerbaijan’s growth is projected to reach 3 percent this year and 3.7 percent next year. Strengthened institutional reforms and accelerated human capital development could increase growth rates two to three times. This explains the strong focus on human capital by President Ilham Aliyev and First Vice President Mehriban Aliyeva.

Fiscal policy acts as a catalyst for investment. Since independence, per capita investment in Azerbaijan has approached 30,000 US dollars, with half directed to the non oil sector. To sustain growth, investment must exceed depreciation levels. Therefore, faster growth in fixed capital investment is needed.

The multiplier accelerator effect must function effectively: investment should drive growth, and growth should generate new investment. As the fiscal multiplier declines, the role of private investment becomes increasingly important. Azerbaijan benefits from a favorable business environment, stability, developed infrastructure, and affordable energy resources. Institutional development and skilled labor are now receiving greater attention.

Finally, fiscal reforms implemented under the leadership of President Ilham Aliyev have transformed Azerbaijan into one of the most competitive and socially prosperous states in the region.