Foreign debt of Azerbaijan: spending exceeds payment

As of October 1, 2009, the foreign debt of Azerbaijan attracted under state guarantee reached $3331.5 million, which makes up 8.7 percent of GDP and is considered very low in the world practice of external borrowing. External debt per head of population rose from $344.9 in 2008 to $380.6.

Such indicators of external debt of Azerbaijan show that the level of its weight in the Public budget and the gold resources correspond to the limits defined by international standards (40-60 percent) as acceptable. Moreover, the traditional parameters of the external debt of Azerbaijan are one of the best as compared to the same indicators in the CIS and Eastern European countries. This situation testifies the financial well-being of Azerbaijan and the lack of problems with payment capacity under global financial crisis.

For the nine months of 2009, the use of external debt 2.43 times exceeded the payment for it.

Thus, for the three quarters, $431.7 million loans were used. The expenditure of servicing external debt amounted to $177.3 million. At the same time, the share of the main debt totaled $130.5 million and the interest rate - $46.8 million. $64.9 million was directed towards repayment of loans through budgetary funds.

In the structure of the external debt, 10 percent ($334.4 million) accounted for loans directed towards economic reforms, of which $66.3 million (two percent) was borrowed from the IMF, $268.1 million (eight percent) - WB. Most of the loans was attracted to finance investment projects - $2997.2 million (90 percent).

Payments to the IMF are made by the Central Bank of Azerbaijan. The significant reduction in debts to the IMF is explained through the issue that since 2006, Azerbaijan has refused to receive IMF loans and deals only with debt payments, while new projects are concluded with the World Bank and loans are already attracted at commercial rates.

External debts of Azerbaijan as of 1 October 2009 and 1 October 2008, mln USD

Structure of attracted external debts in Azerbaijan, mln USD

On used loans,

state debt

As of Oct. 1, 2009

As of Oct. 1, 2008

I. Total loans

3331,5

2798,5

In percent in GDP

8,7% 

5,1%

Foreign debt per capita, $

380,6

324,3

II. Structure of loans

1. Loans on economic reforms

334,4

10,0%

350,2

12,5%

Including: IMF       

66,3

2,0 %

81,9

2,9%

World Bank

268,1

8,0 %

268,3

10,8%

2. Loans on investment projects

2997,2

90,0 %

2448,3

87,5%

Including

Energy sector

1354,0

40,6 %

1105,9

39,5%

Agriculture and melioration

420,5

12,7 %

216,9

7,8%

Construction and transport

792,7

23,8 %

585,3

20,9%

Chemical sphere, oil and gas

200,1

6,0 %

199,3

7,2%

Restoration of liberated territories

58,0

2,1%

Social sector

152,4

4,6 %

192,9

6,9%

Other spheres

77,4

2,3 %

89,4

3,2%

III. Used loans

431,7

477,6

IV. Expenses on serving foreign debt

177,3

201,8

Main debt

130,5

157,6

Percent

46,8

44,2

Including  

Of public budget

64,9

88,2

Returning main debt to IMF

14,4

19,9

Source: Finance Ministry

Of the investment loans, 40.6 percent ($1354 million) was directed towards the energy sector, 3.6 percent ($118.8 million) - agriculture, 23.8 percent ($792.7 million) - roads and transport, 9.1 percent ($301.7 million) - land reclamation and water supply, six percent ($200.1 million) - chemical and oil and gas sector, 4.6 percent ($152.4 million) - social sphere and 2.3 per cent ($77.4 million) - other spheres.

As of 1 Oct., the total amount of signed loan agreements with international financial organizations in order to continue socio-economic reforms in Azerbaijan and the implementation of priority projects was $7397 million. Of the total loans borrowed, today $3980 million have been spent.

The cost of servicing the state external and domestic debt in 2010 was determined in amount of 287 million manat. In the future, taking into account the interests of the state, attracting credits under state guarantees will be continued for the implementation of social and infrastructure projects by state-owned enterprises, the Finance Ministry said. In 2010, Azerbaijan intends to keep the focus on the management of external and domestic debt, as well as the obligations of membership fees to the international organizations. This is particularly important in connection with the global recognition of the country, the transformation of Azerbaijan into place for holding international events.

In this regard, for ensuring guarantee for external borrowing attracted under state guarantees and for timely fulfillment of obligations on them, in 2010 it is intended to transfer 100 million manat to the guarantee fund compared to 50 million manat in 2009.

The total project cost is estimated at €664.1 million. In the future it is planned to spend €117 million on construction work at the expense of foreign loans already approved under the project. Today already €434 million was approved.

To finance this project, funds worth €300 million were received from three banks - Bayerische landesbank, Societe Generale and Credit Suisse to finance this project. The loan was given for 10-year-state guarantee. Loan resources of the bank's consortium will pay off half of cost of operation connected with construction of the station. Cenub station will work both on gas and black oil. The Islamic Development Bank has already approved financing to the amount of $200 million for construction of Cenub station on October 20 (near Ali-Bayramli thermal station). The Asian Development Bank is ready to render guarantee support to the Azerbaijani government for drawing loans up to $200 million for construction of 800-megawatt thermal station Cenub from commercial banks.

According to estimates of the International Monetary Fund, in 2010 Azerbaijan will reduce the ratio of external state debt in relevant to GDP. According to the IMF, in 2010 Azerbaijan's state debt will amount to 8.4 percent compared to 9.1 percent in 2009 and 6.5 percent in 2008.

So, according to the IMF, the external debt of Azerbaijan at the level of 8-9 percent of GDP is the lowest in the world, for example, in Estonia the figure totals 108 percent of GDP, Ireland and Russia - 34 percent, Latvia - around 20-30 percent.

Indeed, as known from economic theory and practice, the impact of external debt is more difficult for the country than internal. Due to external debt, the nation is forced to give other countries the valuable goods and services, pay interest rate and repay the debt, which reduces the standard of living.

Also, large external debt reduces the country's international image and could complicate the generation of new foreign loans. Therefore, the government of any country with huge external debts takes steps to reduce external debt if it exceeds an acceptable level. However, in Azerbaijan, even in the tensest years when there is an urgent need for foreign funding, a cautious policy was pursued with regards to the issue of external debts, a system of effective state debt management was established. In particular, there were no delays in servicing external debt.

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