On June 18, Azerbaijan’s president issued 17 different orders increasing salaries. One of those orders is related to an increase in the minimum wage. In accordance with the order, as of September 1, 2019, economic entities, irrespective of organizational or ownership structure, will no longer be able to pay salaries of less than 250 AZN to their employees.

That is an increase in the minimum wage of 40%, from 180 AZN to 250 AZN. The remaining 16 orders increase the salaries of state employees. The salary hike will affect a very broad range of positions: employees in the justice and police systems, the Ministries of Defense and Emergency Situations, the State Security, Foreign Intelligence and Migration Services, and finally the education sector will see an increase in the range of 20-40%.[1]

Although in the last 15 years, since the government began to receive major oil revenues, the salaries of state employees have increased several times at intervals, their raises have never been the subject of public debate until now. Several important reasons for this should be noted. First of all, in previous years the salary increases in different areas for different positions were staggered. For example, employees in social spheres (education, health care, culture) would receive a raise, and only well before or much later would the salaries of law enforcement officials or civil servants be increased. Secondly, as a rule such increases occurred in pre-election periods (on the eve of presidential or parliamentary elections). For example, before the 2005 and 2010 parliamentary elections, and the 2008 and 2013 presidential elections, there were wage increases for all state employees. Thirdly, in previous years, the wage increases were relatively small (except for 2005, when the salaries of law enforcement officials and civil servants were increased by several times) in the range of 10-20%. Finally, there have been fairly long periods of time between wage increases (especially the minimum wage). For example, there was a wage hike just before the 2010 parliamentary elections, but the next one didn’t occur until the eve of the 2013 presidential election. This time, however, increases of the minimum wage occurred at a six-month interval, and the salaries of state employees which are tied to the Unified Price Chart are being indexed. The minimum wage was previously increased on March 1, 2019, from 130 AZN to 180 AZN. By the last order, it will rise to 250 AZN starting September 1, 2019.

Due to these anomalies, various explanations of the recent wage increases have been offered. Most discussion has focused on the possibility of early elections. On social media in particular, there were quite a number of people looking for indications of an early election in the fact that the wage increase would affect the broader population, and in the high percentage of the increase. However, it wouldn’t be right to write off the near doubling of the minimum wage in 1 year, and a 50% increase in the salaries of state employees, as simply preparation for early elections (although we don’t have any information refuting the idea that such elections will take place). There are other reasons for this. First, in 2015, the manat dropped sharply in value, then the economy faces three years of double-digit inflation, resulting in a serious rise in the cost of living. For example, according to the State Statistics Committee’s price statistics, it is clear that when compared to the price of a basket of the most important food products consumed daily, the cost of groceries is on average 50% higher than in January 2015. It is clear that, in recent years, in the spheres of education and health, culture and food services, as well as clothing and electrical equipment, non-food prices have been rising at higher rates. Our estimates based on various consumer baskets show that the cost of living in 2015-2019 (the first six months of the year) has risen by at least 60%. In 2015-2018, however, with the exception of those employed in secondary education in 2015-2018, the government has increased the salaries of employees, as well as social benefits and pensions, by 15-20% at best.

In recent years, with sharp price increases conditioned by import inflation, the government has limited state spending as much as possible, and tried to avoid raising salaries and pensions. For example, in 2015-2017 state expenditures increased by a total of 2.3%.[2] Only in 2018, once the government was sure that there was no risk of inflation, it decided to increase its spending all at once by about 40% compared to the previous three years. As a result, over the last 3 years, the growth rate of state salaries and payments received in the form of social benefits has lagged on average 2 times behind the inflation rate. There is another fact that has officially confirmed this: in 2015, about 3.3 bln AZN was spent from the state budget to finance salary payments, while in 2018 that figure was 4.4 billion AZN. As you can see, salary expenditures have increased approximately 30%, while the cost of living has increased by over 50%.[3] To briefly summarize, in 2019, the doubling of the minimum wage, and the 30% average increase in the salaries of state employees, is the government’s compensation to the population for an indexation mechanism which works very badly: since the mechanism for income indexation did not work effectively in 2015-2018, the rise in incomes seriously lagged behind the inflation rate, and the government had to do something about it. There are severe political consequences when the social policy compensation mechanism doesn’t work. For now, the government of Azerbaijan, which has huge oil resources at its disposal, can study the situation and respond, although with a slight delay.

Undoubtedly, the government is aware that such a situation has aggravated social tension, and recent political activity in surrounding countries has had the effect of pouring gasoline on social dissatisfaction. Everyone can see that in Georgia and Armenia, poor economies with no natural resources, the regular increase in salaries occurs in parallel with the populations’ demands for democratization in those countries. In such circumstances, the fact that Azerbaijan has fallen behind according to several parameters (especially average and minimum wages), in comparison with the salaries and pensions in poorer neighboring countries, has put Azerbaijan’s state propaganda in a difficult position. Immediately after the minimum wage rose to 250 AZN, pro-government media could call it confirmation of their numerous reports about wages in Azerbaijan substantially exceeding those in neighboring countries.

State expenditures for 2015 amounted to 17.8 bln AZN, while in 2019 expenditures are expected to total 25.2 bln AZN. As you can see, compared to the budget four years ago, there has been an increase in spending of 7.4 bln AZN or 43%. In the absence of real economic growth, if the nominal volume of GDP grows by about 40% while state expenditures are up by more than 40%, this involves a change in the price scale due to high inflation and, in turn, a sharp rise in the cost of living. Let’s take into consideration that in 2015, almost 3.5 bln AZN, or 20% of all expenditures, was allocated for salaries. In 2019, in order for salaries to at least maintain their share of the budget at that level, it will cost 5 bln AZN, which is approximately the amount that is expected to be spent from the state budget on salaries in 2019.

One of the reasons for raising the minimum wage from 130 AZN to 250 AZN is income tax reform. Since January 2019, the salaries (up to 8,000 AZN per month) of the employees of all business entities in the non-oil and non-government sectors have been fully exempted from income tax. Additionally, in accordance with an amendment to the social insurance legislation, the social insurance premium for the entrepreneurs’ salary fund was reduced by 7% starting from January 1, 2019. These two measures create the conditions for the legalization of the salaries of 40% of employees in the private sector. Apparently, the government’s data indicated that the number of those in the non-governmental sector receiving official salaries of less than 250 AZN per month was either very small or non-existent. This problem was solved for the most part in the public sector, too. After an increase of almost 40%, the minimum salary among the almost 180,000 teachers who passed a diagnostic assessment in secondary and vocational education in 2016, was not below 250 AZN per month at that time. For large state-owned companies, the law enforcement system, and the civil service, which employ at least 600,000 people, the 250 AZN per month minimum has been left far behind. At present, this lower limit is relevant for approximately 200,000 people working in the areas of public health and culture.

But here it is worthwhile to share a serious concern: using all of its resources, the government took a decision that will increase the nominal income of the population in response to the sharp price hikes over the last 4 years. However, an analysis of budgetary policy for the near future shows that for at least the next 3 years the government does not plan to increase the budget, including salaries. In particular, the 3% limit on the annual increase in budgetary expenditures set by the budgeting procedure strengthens this argument. Even if this limit is not taken into consideration, it is very likely that the budget will not increase in light of the very low potential of the non-oil sector in Azerbaijan, and the projections that oil prices will not rise above their present level. These increases, which are considered relatively high, will serve as an argument supporting official propaganda justifying budgetary performance for the next few years.

Finally, two important points which are indirectly related to the latest salary increases must be brought up. First of all, the government did not disclose to the public, nor even to the parliament, which formally controls the budget according to the Constitution, what changes would occur in the structure of expenditures in the 2019 state budget as a result of the decisions in February and June to raise wages. In the state budget law for 2019, approved on November 30, 2018, how much funding was earmarked for salary payments and social benefits, and how has the size of these expenditures changed after the February and June decisions? The parliament members who voted for the law have not been informed. The bill on amendments to the state budget of 2019 was submitted to parliament and the Chamber of Accounts issued a statement on it. The bill, however, consists of only 5-6 lines, and gives no information about the economic structure of expenditures or a functional classification. The only thing that is clear is that defense spending will increase by 150 mln AZN while spending on social security will decrease by the same amount. The source of the government’s non-transparent approach can most likely be found in the Budget System Law. According to article 23.7 of that law, if a change in the state budget occurs based on a change in budget revenues and expenditures, an explanation for the changes must be disclosed, as well as the changes in the functional, administrative, and economic classifications of expenditures. If a change is made without altering total budget revenues and expenditures, however, in accordance with Article 23.8, the government itself decides which documents to disclose. In the present case, since the government has not altered total budget revenues and expenditures, it has chosen to have a very opaque discussion of the budget. The law, which was adopted 17 years ago and doesn’t satisfy the demands of modern public financial management, has repeatedly encountered criticism from experts.

The second very important point is that the salaries in most of the areas where they have been increased are unknown to the public. You know what the most interesting thing is? Everyone knows how much a teacher or a doctor makes. But no one knows how much the police or justice officials earn. It is very difficult to explain why this information is protected as a state secret. Let’s imagine that it would be possible, if you tried, to find reasons to protect as a state secret the total amount of funding spent on salaries for these agencies. But why should the public remain unaware of the amount of monthly earnings of individuals? How does the public know how much a doctor makes, or a police officer, or a teacher, or a prison guard, or a soldier, and how fair the government is being in this matter? Civil society and the media have the right to investigate and criticize these things. But there is something even more interesting: let’s even say that there could be a reason for classifying the monthly salaries of a police officer, an intelligence officer, or a soldier.. But how can civil servants explain the secrecy of their salaries?

Prior to last year, the salaries of civil servants were regulated based on a presidential decree adopted on July 9, 2008. The annexes to this decree were not classified and the monthly salaries of all civil servants holding administrative and auxiliary positions throughout the Presidential Administration were public. On March 13, 2018, however, a new decree was adopted which repealed all the annexes in which salaries had been published. When you access the order online, you see the following note: “The annexes are not published.”

It’s impossible to establish a new budgeting system when the government, which has declared it a priority to move to a results-based budget, behaves in such an nontransparent way with regard to public finances. Reforms are not just declarations – first you have to be prepared to change your mindset and behaviors.

References

[1] All the recent presidential orders related to salary increases were signed on June 18, 2019, and can be found online at http://www.e-qanun.az

[2] http://www.e-qanun.az/framework/33023http://www.e-qanun.az/framework/35811,

http://www.e-qanun.az/framework/39153

[3] This data was derived from budget envelopes from the relevant years and annual budget execution reports which the government allows only parliament to see and which, although not open to the public, were obtained through the personal relations of the expert group.