Azerbaijan spending to increase by 35% with annual inflation rate of 17% in 2007-08

From 2009 it is projected that the rise in spending will slow down to about 10 percent p.a., APA reports.

The non-oil fiscal deficit is expected to peak at over 40 percent in 2007-08 and steadily decline thereafter. Such a government strategy would be fiscally sustainable with today’s oil prices. It would result in Oil Fund assets reaching about US$35 billion in 2010.

However, the current strategy contains substantial risks of over-heating the non-oil economy, and as experience in other countries shows, the risks of Dutch disease and the "resource curse" are substantial.

Inflation is expected to rise to about 17 percent p.a. in 2007-08, before falling back to the ten percent range.

Azerbaijan medium-term growth prospects are strong. Real GDP is projected to grow at an average annual rate of about 24 percent between 2006 and 2008, due to continued rapid growth in the oil and non-oil sectors.

The decline in oil-related investments is counter balanced by the government’s intensive efforts to rebuild the country's infrastructure and human capital to catch up with more than a decade of deterioration.

However, competitiveness of the non-oil sector is likely to be challenged by an appreciating real effective exchange rate due to higher oil revenues and rapid monetary expansion as a result of the fiscal stance.
 
The IMF and the Bank have expressed concern that this rate of public expenditure increase may cause new inflationary pressures.