Discussions on Azerbaijan’s state budget for 2026 have begun, revealing that the country’s economy is entering a phase in which the old model—reliant on oil and gas revenues—is gradually running its course. The draft document, which can be described as “moderately conservative,” envisions revenues of 38.609 billion manats and expenditures of 41.7036 billion manats, resulting in a deficit of 3.0946 billion manats (about 2.3% of GDP). The calculations are based on a conservative oil price of $65 per barrel of Azeri Light for 2026–2029—an approach designed to shield the budget from external shocks and help the economy adapt to a reduced dependence on the resource sector.
A key feature of the draft budget is a shift toward non-oil and gas revenues. In 2026, their share is projected at 57.4%, while oil and gas revenues will account for 42.6%. At the same time, transfers from SOFAZ (the State Oil Fund of Azerbaijan) will be reduced by 1.646 billion manats compared to 2025. The government explains this decision as a measure to preserve reserves and strengthen fiscal discipline, but it also serves as a test of the tax system’s resilience amid declining oil income.
The expenditure side focuses on security, reconstruction, infrastructure, and social spending. Healthcare allocations will amount to 2.02 billion manats (a 1.5% increase), of which 900 million are directed toward compulsory health insurance funded by the state. Consequently, healthcare spending will rise to 4.9% of the total budget. Simultaneously, the tax base is expected to expand.
Value-added tax (VAT) revenues are projected at 4.47 billion manats, with more than 92% of this amount coming from the non-oil sector—an indicator of the growing importance of the domestic economy in generating budget income. However, this is one of the most sensitive and debated points. Experts warn that the increased reliance on VAT could ultimately burden small and medium-sized enterprises (SMEs), which are most vulnerable to higher fiscal pressure. The rise in VAT collection efficiency in the non-oil sector is seen as a positive sign of revenue management, but it raises concerns about declining profit margins for small businesses, higher administrative costs, and potential slowdown in entrepreneurial activity. Without parallel measures to support businesses—simplified procedures, better access to finance, and expanded development programs—increased tax pressure could have the opposite effect, constraining the very domestic market that the new fiscal strategy seeks to strengthen.
It is therefore crucial not to “go too far” and to design a tax policy model that allows the most sensitive sectors of the economy to adapt smoothly to the transition. This applies especially to SMEs, which account for a significant share of employment and domestic demand. If the fiscal burden grows faster than these enterprises’ turnover and productivity, there is a risk of reduced investment, informalization, or job losses. Hence, stronger VAT collection must be accompanied by mitigating measures: better tax administration, digital solutions, lower bureaucratic barriers, expanded entrepreneurship support, and easier credit access. Only in this way can the fiscal strategy maintain balance between revenue growth and the development of the real sector on which Azerbaijan’s post-oil economy will depend in the long term.
Thus, Budget-2026 can be seen as the beginning of the transition to a post-oil model in which fiscal stability is ensured not by high oil prices or large transfers, but by tax revenues, real-sector growth, and prudent debt management. Servicing public debt is identified as one of the main priorities: around 2.46 billion manats are earmarked for debt obligations, reflecting the need for tighter control over infrastructure project efficiency and the mitigation of external risks.
The State Audit Office has confirmed the accuracy of the budget’s forecast parameters while highlighting areas requiring further refinement. Experts point to several major challenges. The conservative $65 oil price assumption reduces external dependency but limits the potential for expanding social expenditures. Lower oil-gas transfers combined with higher tax pressure strengthen revenue resilience but make the real sector more vulnerable to fiscal stress. Changes in healthcare financing structure require monitoring of their impact on households. Although debt dynamics remain moderate, stricter evaluation of budget investment efficiency—particularly in reconstruction of liberated territories and digitalization—is essential.
Overall, the 2026 draft budget lays the groundwork for a new financial architecture in which stability is achieved through domestic resources and dependence on the oil-gas factor is gradually reduced. Unlike the previous model—largely based on SOFAZ transfers—the new strategy envisions a self-sustaining fiscal system focused on non-oil growth.
The main risks remain tied to global energy price fluctuations and the business sector’s sensitivity to taxation. Yet with a moderate macroeconomic policy and consistent diversification, the budget could become a key instrument in adapting to the post-oil era. Oil no longer plays its former dominant role in fiscal formation, and the country must now build mechanisms that ensure sustainable revenues and economic growth without relying on raw resources. The successful transition to this new economic era will depend on effective tax base expansion, real-sector support, and greater spending efficiency.
Ilgar Velizade
