BAKU, Azerbaijan, November 4. Deviations in Azerbaijan’s inflation from the forecast level are expected to have a limited impact on fiscal indicators in the medium term. At the same time, rising inflation could lead to a deterioration in the consolidated budget-to-GDP ratio, while lower-than-projected price increases could lead to an improvement in this indicator.
This was reported in the fiscal risk analysis included in the draft state and consolidated budgets for 2027.
The document notes that persistent high uncertainty in the global economic environment, price trends among major trading partners, and volatility in international commodity markets are the main external risk factors for inflation.
“In particular, continued geopolitical tensions in the Middle East could create additional volatility in energy and other commodity prices. At the same time, a weakening of the nominal effective exchange rate could accelerate the pass-through of imported inflation to domestic prices.
As for domestic factors, under current fiscal and monetary policies, the likelihood of aggregate demand rising to a level that would significantly increase inflationary pressure is assessed as low,” the report notes.
In assessing the potential impact of inflation on fiscal indicators, the effects of price-level changes on nominal GDP, government budget revenues, and the ratio of fiscal indicators to GDP were taken into account.
To this end, various scenarios were developed for 2027–2030 based on inflation deviating from the baseline forecast by 0.5, 1, and 1.5 percentage points above and below.
According to the calculations, changes in inflation will have a limited impact on the ratio of the non-oil primary deficit to non-oil GDP under the existing scenarios. However, according to projections, this ratio, which stands at approximately 18% in 2026, is expected to approach 12% by 2030 under the baseline scenario.
The document emphasizes that, under the most pessimistic scenario, the 12% interim target for the ratio of the non-oil primary deficit to non-oil GDP could be exceeded by 0.5 percentage points in 2030. Thus, under this scenario, the ratio is projected to reach 12.5%.
As for the consolidated budget balance-to-GDP ratio, the data show a surplus of 6.6% in 2022, 8.7% in 2023, 4.7% in 2024, and 3.4% in 2025. In 2026, this figure is projected to approach zero and amount to approximately 0.2%.
According to forecasts, the consolidated budget balance-to-GDP ratio is expected to shift to a deficit of approximately 2.2% in 2027, followed by a gradual improvement in subsequent years, reaching a deficit of 1.1% in 2030.
Inflation exceeding the baseline scenario is assessed as a factor that worsens the consolidated budget balance-to-GDP ratio, while inflation below the baseline scenario is assessed as a factor that improves it. The scenario ranges also show that, by 2030, this indicator could settle at different levels depending on changes in inflation.
Measures to Mitigate Inflationary Risks
The document notes the importance of implementing flexible fiscal policy and targeted social protection programs to manage fiscal risks in an inflationary environment.
It is reported that the use of preventive financial mechanisms to minimize the negative consequences of unexpected price increases can both protect government revenue and ensure sustainable economic growth.
