The per barrel oil prices set in the 2006 public budget is the highest in the young economic history of Azerbaijan. The calculation price, set as $40 per barrel, left behind the figure of $25 per barrel projected in the 2005 public budget and calculation prices indicated in all previous budgets.

Earlier the government economists sounded the figure at $35. How real does the final $40 seem? How optimal is it from the aspect of macroeconomic stability?

The difficult optimum

Obviously, high calculation prices of oil mean more opportunities for the public budget. In 2006 the pubic budget incomes will rise 50% and comprise $3.4bn. The expense will increase 49.6% and comprise $3.5bn. According to officials, the 2006 public budget will leave behind all previous budgets on the social and investment directions with the accent on investment direction.

The major part of the public investment will be directed at the improvement of the infrastructure and in particular, the infrastructure of the regions. Next year the social expenses of the public budget will increase considerably. Finally, it will probably benefit the economy and society.

On the other hand, high inflation will be a payment for such a scaly мpublic budget. In accordance with the government’s forecasts, next year it will comprise 9%. The key objective of the monetary policy will be the prevention of the said level.

Hugh inflation rate, firstly, reduces the efficiency of social actions by the government. Besides, the attempts taken for prevention of inflation higher than the forecast level leads net and real consolidation of manat, which in its turn has negative impact the state of non-oil sector of economy.

According to forecasts by the National Bank of Azerbaijan, by the end of the year, manat will grow 10% and comprise 4500 manats per dollar. It indicates that the rates of 4550-4600 manats per 1 dollar, set in the macroeconomic indices, will not be followed next ear
and, more probably we will pay less than 4500 manats a day for it.

According to the same source, in January to June manat rose 9.4% as compared to 2004 on the foreign goods turnover, 7.3% - on export and 11.1% - on import. The nominal consolidation of manat comprised 81% of entire real consolidation, while inflation - 19%.

The issue of definition of the optimal oil prices while compiling the draft public budget is critical point in the activities of the oil export countries. If the actual oil prices turn out higher than the calculation one the government accumulates tremendous incomes, which evolve problems with their use. It is almost impossible not use the incomes, as they could bring concrete benefits to the society.

During the use of the incomes additional unpredicted demand appears with its all negative outcomes: inflation, consolidation of real exchange rates, loss of competitive capability, delay in the economic growth in the log-term perspective, delay in the pace of scientific-technical progress, increase of the dependence on the import. How to define then the optimal price?

The general recipe

The definition of an optimal oil price in the public budget is a difficult task. The results of some work, concerning the dynamic of world oil prices, testify that the decisive factors defining the dynamic of oil prices are of political character.

Thus, the world oil prices essentially affect on the economic and political situation in the East Baltic countries, as well as a resolution on the volume of export, which are accepted by the OPEC.

The definition of the optimal price will resolve a problem linked with the exact definition of parameters of the public budget. What to do with the oil wealth, to accumulate in case the world oil prices remain higher than the optimal figure? How to avoid the inflation processes? In this case the most spread recipe is a concept on structure (non-oil) deficit.

In accordance with the concept, an annual structure deficit of the public budget, which would be financed at the expense of the high oil revenues, should be defined. On the one hand it enables to use the oil revenues, on the other reduces the inflation risks.

The representatives of the Finances Ministry have not publicized the methods, on the base of which the prices were determined as $40 per barrel. Therefore, it is difficult to say how optimal the price is. Simply, the figure will ensure 50%-rise in the budget revenues and the similar rise in expenses with a 30%- rise in the GDP.

To be clear, the 2006 budget бюджеС' will pressure on the inflation, while the maintenance of the inflation with in the forecast figure will turn out a difficult task.

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