Samir Sharifov, the Executive Director of the SOFAR, made an interesting statement on management of SOFAR funds. According to Sharifov, at present the SOFAR is involved in designing proposals on diversification of its financial reserves on three portfolios вЂ" expenditure (at the moment the SOFAR implements expenses on the improvement of the housing and communal conditions of refugees and internally displaced people on payment of stake in the project on the Baku-Tbilisi Ceyhan main export oil pipeline and in the form transfer to the public budget), stabilization (resources, which will be directed at covering the deficit of the public budget in case of establishment of world prices lower than the figure projected in the Azerbaijani public budget) and special investment portfolio (as the Fund was established for future generations). Two milestones вЂ" stabilization and expenditure portfolios turned out more significant among the ideas given in the statement by the head of the SOFAR.

According to Sharifov, while adopting the proposals on the distribution of funds of the SOFAR in three portfolios in the stabilization portfolio, it would be more expedient to accumulate funds in the amount of 3% of the GDP.

The establishment of the stabilization portfolio within the composition of the SOFAR assets can be referred to tasks with increased efficiency of funds management. According to the specialists of the SOFAR, the use of the funds for covering the budget deficit might lead to forced sale of assets where the funds are were invested.

From the aspect of funds management such sale can be regarded as inexpedient, as in this case there are risks for sale of assets at lower prices. After the establishment of the stabilization fund its reserves will be used namely for this purpose.

There is no such diversification of assets into portfolios in many crude funds the management is implemented on the base of common principles of investing, when only instruments for investing (shares, bonds).

From the aspect of increase of efficiency of the management of SOFAR funds in current state an idea on establishment of stabilization portfolio seems very reasonable and can be hailed.

The same time the proposals by the SOFAR specialists indirectly testify that no changes are expected in the mutual relationships between the public budget and the SOFAR in the near perspective. The mutual relationships will be more probably restricted with transfers, and the SOFAR will maintain its form of existence.

An idea on the formation of expenditure portfolio of the SOFAR indirectly testifies for it. It means a principle of existence of two big public budget sources (public and the SOFAR) will be maintained. It is not profitable for two major reasons.

The first reason is linked with a problem of full and fair distribution of oil revenues. Here it is dealt with funds, which are offered for accumulation in a special investment portfolio. Sharifov said that the head of the SOFAR distribution of such funds will simultaneously result in minute unjustified rise in prices in shops and do not increase the solvency of citizens in the near future.

From the aspect of long-term fair distribution of the funds of SOFAR Azerbaijan will be better to apply to distribute the capital via the public budget, like in Norway. Through the public budget the funds of the SOFAR can be invested or directed at further cut in tax burden in the country, which will cover all citizens, but not special categories.

The second reason is linked with undesirable macro-economic results of existence of difference mechanism on formation and distribution of oil revenues. In this case the coordination between the mechanisms cannot be ensured entirely. Absence of necessary coincidence in actions can evolve inflation due to rise of internal aggregate demand. To remove the inflation results of the use of oil revenues it is necessary to coincide them by time.

Theoretical base for such coincidence could be a concept on limit of economic firmness of the non-oil deficit. In this case, the non-oil balance of the public budget will become a direct figure demonstrating the activities, financed at the expense of oil revenues and turns out an important indicator for tax-budget policy.

A concept on non-oil deficit has been included in the Long-term Strategy on use of oil revenues, undersigned by President Ilham Aliyev in spring 2005.

However, the situation existing in Azerbaijan around the formation and use of oil revenues enables to make a conclusion that it will be impossible to implement this strategy. There are 4 major accumulators of oil revenues in the country:

1. The State Oil Fund of Azerbaijan (SOFAR), established late 2000. The Fund accumulates the revenues linked with the participation of the state in oil contract like PSA.

2. The public budget, which accepts profit taxes of the SOCAR and all companies, functioning under oil contracts like PSA (for the time being the companies do not work on net profit and respectively do not pay profit taxes). The budget also receives 25% of incomes, calculated as a difference between domestic oil prices and world oil prices.

3. Special account in the Treasury, opened while designing 2004 public budget. Excess revenues of the public budget, obtained due to difference between the domestic and world oil prices.

4. The State Oil Company of Azerbaijan (SOCAR), which takes 75% of incomes, obtained from domestic and world crude prices.

Coordination among the said strictures is implemented weekly. Even with all will it will be impossible to achieve the necessary to level of coordination within along period.

Therefore, the government should take urgent steps in the sphere of efficient use of oil revenues through forming unified accumulator-distributor. It could be the SOFAR, which has all opportunities for it. It would be more expedient to reconsider the mutual relationships between the SOFAR and the public budget.

The current system based on transfers cannot be acceptable from the aspect of macro-economic perspectives, as well as efficient management of SOFAR funds. A principle of communicating vessels, applied in Norway, could be a good alternative for mutual relationships. In this case the necessity for partition of the SOFAR resources into different portfolios omits and here appears real field for successful evening out oil revenues timely.

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