Azerbaijan: The oil windfall must be used carefully
Overview:
The massive economic growth rates seen in recent years are unlikely to be repeated as oil output stabilizes. However, high oil prices continue to boost the value of the State Oil Fund dramatically. With economic growth likely to be close to zero in 2011 the authorities have succumbed to the temptation of using the budget to boost non-oil GDP growth. The authorities are running a massive non-oil fiscal deficit and it is likely to widen next year. Clearly, as a net creditor, there are no financing concerns here. The question remains, though, whether this is the best way to spend the oil windfall. Loose fiscal and monetary policy mean inflation remains high. Moreover, public spending splurges often lead to waste. The non-oil sector must be developed in a sustainable fashion with the private sector playing a more important role.