The State Oil Fund of the Azerbaijan Republic (SOFAZ) was created in 1999 to promote macroeconomic stability, preserve oil revenues for future generations and channel Azerbaijan’s resource wealth into more productive assets.

However, SOFAZ’s contribution to effective resource revenue management and long-term economic development remains questionable: transparency applies only to the income side of Azerbaijan’s oil fund and expenditures remain opaque. Unlimited and unconditional transfers from SOFAZ to the state budget have threatened fiscal sustainability and made development planning much more difficult.

Since its inception, SOFAZ has gradually become the critical component of the country’s public finance system. But SOFAZ’s organizational set-up is not the only precondition for fiscal sustainability. The government of Azerbaijan also needs fiscal policy rules to help it adequately respond to volatility and avoid spending inconsistently.

In this article in the Journal of Eurasian Studies, I quantitatively and qualitatively analyze whether the government’s spending of oil and gas revenues – especially through SOFAZ – promotes long-term fiscal sustainability. Different fiscal rules applied in oil-exporting countries such as the “permanent income hypothesis” and “bird-in-hand” concepts, and oil price assumptions were modeled for Azerbaijan. The article also explores the role of sovereign wealth funds in macroeconomic management, drawing on a study of 58 sovereign wealth funds by NRGI.

NRGI’s 2013 Resource Governance Index highlighted several of SOFAZ’s shortcomings, including the government’s unrestricted power to determine its expenditures; weak parliamentary oversight; and the absence of a law setting governance rules of the fund. On a positive note, it reported that the “fund’s financial reports are audited annually and include information on its assets, transactions, and investments.”

Kenan Aslani is an independent policy analyst from Baku, Azerbaijan.