A fund responsible for foreign loans under state guarantee to be established in azerbaijan

The Fund on Insurance of Foreign Loans under State Guarantee will begin functioning in Azerbaijan. Establishing this fund is the order of the time and one of the important points in Law on State debts. In accordance with the regulations which were approved by the Azerbaijani Cabinet on 10 April, the mechanism of management, registration and utilization of the Fund's reserves was defined.

Considering the structure of the public finances formed by the funds of the Public budget, oil revenues and international credits obtained under State guarantee, it become clear that small attention is being paid to the last component of the public funds (international credits obtained under State guarantee). At the same time, the amounts of these funds are incomparably huge and absence of control on them and transparency in their management bring to colossal losses of State.

Repeatedly the State paid off the debts of such big enterprises as State Oil Company of Azerbaijan, Azerigaz JSC, Azerenergy JSC, State Railway Department of Azerbaijan and other enterprises. Attracting expensive credits in realization of various credits in line with the international financial institutions, they were legalized under State guarantee. It is beneficial for both sides: on the one hand, the creditor becomes sure in repayment of the credits, and on the other hand, the companies allocate funds, not being concerned about timely re-payment of the loan and not casting this obligation on the government. The international credits presented by the IFIs to Azerbaijan's Ministry of Education, Ministry of Health, Ministry of Ecology became hard burdens for Country's Public budget. Thus, these credits which were not registered under State guarantee also have direct connections with the citizens and the interest in them should be similar with those in oil revenues.

As for 1 January 2008, the foreign borrowings in Azerbaijan reached $2.441.9mln, that make up 8.2% of GDP. The volume of foreign borrowings increased by 23.8% compared to early 2007. According to the data by Azerbaijan's Ministry of Finance, 15.3% of the foreign loans was spent on the economic reforms. Of them, $100.6mln (4.1%) was obtained from the International Monetary Fund and $272mln (11.2%) - World Bank.

The Azerbaijani Finance Ministry said on 11 April that the public budget allotted AZN 50mln for establishment of this Fund. A manat account and accounts in other currencies will be opened to offer credit under state guarantee for timely implementation of Azerbaijan's fiscal obligations.

The average annual volume of reserves in the Fund should not be less than 25% of the expected in that period aggregated volume of fiscal obligations on the credits and liabilities insured under the state guarantee.

Through the saved reserves the Fund may pay out the foreign liabilities on the loans in case the main borrower fails to pay it, a default threat. In this case, within 30 days till the payment the borrower should appeal to the Finance Ministry and state the cause of non-fulfillment of liabilities. Finance Ministry, in its turn, in agreement with Cabinet may direct the funds to pay the debt.

The funds may be transformed to the high rating banks management in order to save them from depreciation. The funds are placed in the corresponding currency accounts depending on the currency structures of Debt Instruments and taking into consideration liquidity and risks.

Reserve record of the Fund is carried out by the Finance Ministry's corresponding structure.

To 2008, the funds to provide international credits in Azerbaijan were put on different accounts in the State Budget and charged off in the end of year. Establishment of the Fund will provide purposeful use of the funds. The new development was introduced after adoption of the new Bill on State debt in 2007. Under the Bill, the record and management of foreign borrowings under state guarantee is implemented by Finance Ministry.

Structure of attracted foreign loans in as of 1 January mln USD
    По использованным кредитам, составляющие госдолг
I. Loans in total     2441,9  
In % to GDP     8,2%  
Foreign debt per capita     283,9
II. Structure of credits        
1. Loans for economic reforms     372,6 15,3%
Including: IMF     100,6 4,1%
World Bank     272,0 11,2%
2. Loans for investment projects     2069,3 84,7%
 Including:        
Energy sector     870,6 35,7%
Agriculture and melioration     185,4 7,6%
Road construction and transport     467,0 19,1%
Chemical sphere     36,7 1,5%
Нефть и газ     153,9 6,3%
Re-establishment of released territories     54,7 2,2%
Social sector     180,9 7,4%
Other spheres     120,1 4,9%
III. Loans used in 2007 441,2
IV. Expenses on foreign debts in 2006 170,5
Key debts 102,2
Percentage 68,3
Including:  
From Public budget 61,7
Re-payment of key debts to IMF 36,5

Source: Finance Ministry of Azerbaijan

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