'How To' of Fiscal Sustainability in Oil-Rich Countries: The Case of Azerbaijan

Abstract

Assessing fiscal sustainability – i.e. considering whether or not a country can maintain its current fiscal policies without running into solvency problems and possible default – requires projections on a government’s future revenue stream, expenditures and contingent liabilities within a macroeconomic framework. Such an exercise is always subject to uncertainty. In commodity-rich countries dependent upon resource revenues, this is intensified by unpredictable and volatile commodity prices. We apply the Framework for Fiscal Sustainability and Managing Uncertainty to Azerbaijan: we explore the link between non-oil primary deficit and Oil Fund allocation rules and assess their impact on fiscal sustainability in Azerbaijan and allow for explicit analysis of the effects of uncertainty through scenario analysis and full stochastic analysis allowing Value-at-Risk assessments.