In recent days, leading international financial institutions have approached Azerbaijan with proposals to elevate cooperation to a new level. Considering the importance of this issue, Vusal Gasimli, Executive Director of the Center for Analysis of Economic Reforms and Communication (CAERC) of the Republic of Azerbaijan and Doctor of Economic Sciences, answered questions on this topic.

What is the current level of Azerbaijan’s external public debt and what are the future forecasts?

At the beginning of this year, direct external public debt amounted to 8.32 billion USD, while contingent liabilities under state guarantees for external borrowing by state-owned enterprises stood at 771 million USD. In total, external public debt reached 9.1 billion USD.

Our analysis shows that once priority projects are financed, the ratio of external public debt to GDP will continue on a downward trajectory. According to the state debt strategy, repayments exceeding new borrowings are expected to gradually reduce this indicator, reaching 12% by 2025.

At present, Azerbaijan has significant capacity for additional external borrowing. The external public debt-to-GDP ratio is around 17%, placing the country among the top 10 globally in terms of fiscal position. For comparison, Japan leads globally with a ratio of 238%. In our region, the average external debt-to-GDP ratio exceeds 40%.

Due to the COVID-19 pandemic, the number of countries requesting loans from institutions such as the IMF, World Bank, EBRD, ADB, and the G20 has reached 150, with some countries even declaring insolvency. A new global debt cycle is emerging.

Last year, Azerbaijan’s debt service expenditure accounted for 6.2%, significantly below the 15% threshold set in the debt strategy. The Public Debt and Liability Service Guarantee Fund in the state budget serves as a strong institutional safeguard.

The debt strategy for 2018–2025 targets keeping total public debt below 30% of GDP; in Azerbaijan, this figure is currently around 20%. The share of variable-interest debt in the portfolio is also below the strategic limit, reducing interest rate risk. In addition, both Azerbaijan’s external debt and its strategic foreign exchange reserves are largely held in US dollars, which helps minimize currency risk.

How do you assess the global situation regarding public debt?

Globally, public debt is projected to increase by 13 percentage points this year, rising from 83% to 96% of global GDP. Azerbaijan’s indicator is five times lower than the global average.

At the same time, fiscal balances in developing countries are expected to deteriorate significantly, reaching -9.1% of GDP in middle-income countries and -5.7% in low-income countries.

Capital outflows from non-resident portfolios in developing economies have reached 100 billion USD since the beginning of the year. Despite historically low global interest rates, borrowing costs for many developing countries have increased significantly: sovereign bond spreads have more than doubled since the beginning of the year, reaching 600 basis points (6%).

More than 100 countries have requested emergency financial assistance through the IMF’s Rapid Financing Instrument (RFI). Additionally, the IMF has proposed debt restructuring and partial payment deferrals for 76 developing countries under the World Bank’s International Development Association and 25 low-income island states.

Why does Azerbaijan attract external borrowing despite having strategic foreign exchange reserves?

For example, in 2019, interest rates on government-borrowed loans were determined based on Euribor and LIBOR rates. Since both indices were negative at the time, borrowing costs were below 1%. Meanwhile, the return on the State Oil Fund’s portfolio was 5.3%.

This means that while external funds were borrowed at a cost of 0–1%, they were invested abroad at a return of 5.3%, generating an approximate 5% gain for the country. Additionally, loans from the French Development Agency and the Asian Development Bank included grace periods of 3–6 years.

Cooperation with leading international financial institutions strengthens Azerbaijan’s credibility and reputation as a reliable partner. It also facilitates the adoption of international standards, improves transparency, accountability, and efficiency, and encourages high-quality investment inflows. Such investments also provide additional guarantees for national development.

It is important that externally borrowed funds are used efficiently so that their returns cover costs and generate added value for the country. Efficient use of external debt must remain a top priority.

How efficiently are external loans being used?

For instance, the Asian Development Bank evaluates the success rate of its projects in different countries. In Azerbaijan, this rate is 80%, which is a strong indicator for the region. For comparison, it is 75% in Georgia, 67.6% in Kyrgyzstan, 65.5% in Uzbekistan, and 53.8% in Kazakhstan.

However, this should not lead to complacency; the efficiency of external debt usage must be continuously monitored and analyzed.

Proper debt management determines a country’s long-term stability. As an illustrative historical example, Mexico in the late 1970s rapidly increased external borrowing after discovering large oil reserves, but declared bankruptcy in 1982, leading to the Latin American “lost decade.”

This highlights the importance of risk management. Azerbaijan’s debt strategy incorporates exchange rate risk, interest rate risk, refinancing risk, and operational risk analysis. The main objective is to ensure debt sustainability and gradually reduce the debt-to-GDP ratio.

Why are international financial institutions interested in lending to Azerbaijan?

Azerbaijan’s low debt-to-GDP ratio and strong foreign exchange reserves create a positive assessment of the country’s creditworthiness. State strategic reserves are currently five times higher than external debt.

In addition, political, economic, and social stability, clear policy direction, and favorable prospects significantly reduce risk levels. Relatively strong credit ratings in the region also contribute to lower borrowing costs and insurance premiums.

The net foreign assets of commercial banks have improved significantly, rising from -4 billion AZN in 2016 to +4 billion AZN today. The ratio of foreign liabilities to total assets in the banking sector has also declined from 211% in 2016 to 27% in 2020.

Overall, Azerbaijan considers external borrowing an integral part of fiscal sustainability and prioritizes efficiency in its use.

As a result, while most countries actively seek external financing, leading international financial institutions themselves are now approaching Azerbaijan with such proposals.

How has the pandemic affected the state budget?

This issue remains a priority for the government. Both pandemic-related expenditures and the impact of temporary tax regimes on revenues are being analyzed.

According to budget legislation, savings from one-time allocations during budget execution may be directed to the state budget reserve fund and used for other expenditures within the year. This mechanism allows pandemic impacts to be managed within the budget framework.

Last year, during the implementation of a major social package, savings from one-time allocations were also transferred to the reserve fund, and approximately 1.4 billion AZN was utilized from it.