Azerbaijan has two key tiers of government, including the central government headed by the chief executive, and the Local Executive Authority (LEA), which represents an extension of the national executive branch of power. There is also a third—effectively nominal—tier of governance, represented by municipalities (Bələdiyə). However, municipalities are de-facto subordinated to the LEA.

Legal acts governing fiscal decentralisation

The foundations of municipal finance are established by a triad of laws: the Law on the Transfer of Assets to Municipalities; the Law on Municipal Finance; and the Law on Municipal Territory and Lands. (December 7, 1999). The other key legal document dealing with fiscal issues in the country is the Tax Code of Azerbaijan, which does not however enable fiscal autonomy and fiscal decentralization.


Qualifying fiscal decentralisation

The degree of fiscal centralization has remained considerably high in Azerbaijan. The high degree of centralization in Azerbaijan and the closed nature of the country’s political system accounts for the fact that very limited systematic over-time data are publicly available on the revenue, expenditure, and borrowing aspects of municipal governance. Only a very limited range of municipal functions are independently performed by municipalities. The vast majority of municipal functions are shared with central authorities or LEAs. In some cases, municipalities can be involved as implementing bodies, but the funding tends to come from LEAs.
Azerbaijan’s municipalities have limited revenue autonomy. The majority of functions related to the provision of key public services fall within the scope of the authority of the LEAs. On some issues, the LEAs are required to take into consideration the views of municipalities. However, funding from state budget goes directly to the LEAs, and it is the latter, rather than municipalities, that are responsible for submitting budget proposals to the state. The role of municipalities is therefore limited to being ceremonial.

The current share of local government revenue as a percentage of GDP is between 0.05-0.5%. In 2014, 1715 municipalities collected 49.06 m manats (0.08% of GDP. Azerbaijan’s GDP in 2014 totaled around 59 bn manats). Out of this number, 27.3% fell on taxes. The remaining share of municipal revenue falls within the revenue scope of the LEAs. Local charges and local taxes constitute between 2 to 10% (based on the data for 2002-2012) of overall national income. Available data (from 2002) indicate that around 35-40% of municipal revenues come from taxes (namely property tax on land), with a record minimum collected in 2007 (18%), and maximum in 2003 (48%).

Over the last five years, local government revenues, relative to national GDP, have decreased in percentage share terms but increased in absolute values. Due to the sharp increase in Azerbaijan’s GDP (because of high oil prices) the share of local government revenues naturally decreased although in absolute terms there has been some increase.

Precise data on municipal expenditures are not available. The two main municipal expenditure items are salaries for employees and mandatory fees to the State Social Protection Fund. Information on local budget expenditures has not been recently made publically available on the websites of local authorities. However, available information for the years 2003-2005 indicates that the biggest share of all expenditures in 2003-2005 (between 40% to 30%) fell on administrative costs of running municipalities such as the payment of salaries. The second biggest share of all expenditures (between 12% to 23% of all revenues) fell on repair and pavement of municipal roads.

The composition of municipal expenditures does not reflect the range of competences devolved to the sub-national level. The current fiscal legislation provides municipalities with little discretion over a significant portion of the responsibilities granted to them by the Law on the Status of Municipalities. Municipal expenditures are completely detached from municipal competences and responsibilities.

Deficit, debt at the sub-national level and borrowing capacity

There are no legal barriers to municipal borrowing, but formal mechanisms for applying for, or for receiving loans, until recently have not been stipulated in the legislation.
According to the Law on The Budget (Article 34.2-24.5), municipal deficit can be covered from state budget within the particular threshold stipulated by the government. In December 2014, amendments to the law on the budget system were adopted, which cover municipal subsidies. According to the amendments, subsidies will be calculated taking into account the number of people living on the territory of a municipality, their share in forming financial resources of the country, income and expenditures of a municipality, location of the municipality on state borders or in the highlands, living standards of the local population, expected social and economic projects, etc. However, the amendments contain no information as to the per capita fiscal capacity threshold within which subsidies would be activated.