AZERBAIJAN

According to the Constitution adopted in 1995, Azerbaijan is a unitary republic with a presidential form of government. Executive power is held by the directly elected president. According to the 2016 amendments to the Constitution, the presidential term was extended from five to seven years without term limits. The president is the head of state, and appoints the prime minister, who is the head of government. Legislative power is vested in the unicameral parliament (Mili Majlis), composed of 125 members who are directly elected for five-year terms. Parliament membership is not based on regional or local considerations.

Decentralisation is acknowledged in the Constitution, according to which, local government in Azerbaijan is exercised both through local bodies of state administration and through municipal governments. The National Constitution recognises municipalities’ right to local self-government and the principle of their autonomy. The Nakhchivan region, located in the exclave territory, enjoys a special status as an Autonomous Republic.

Municipalities were created in 1999, following the approval, in the same year, of the laws “On the Status of Municipalities”, “On Municipal Servants” and “On Municipal Elections”. The normative framework of local self-government is in the process of further development and improvement. In the Nakhchivan Autonomous Republic (NAR), municipalities are regulated in accordance with the Constitution of the NAR and the decisions of the cabinet of ministers of the NAR. Presently, there are over 20 laws which regulate different aspects of local self-government (or municipalities). The national government began a process of municipal amalgamation in 2009, reducing the number of municipalities by 40%. The latest amalgamation process took place in 2014, entailing a reduction in the number of municipalities from 1718 to 1607. Besides mergers and consolidation of municipalities, no other reforms are envisaged for the future. Conversely, the central government and its territorially-deconcentrated entities have increased administrative supervision over municipalities and municipal administrations.

Local bodies of state administration are regulated by the 1999 Constitutional Provision on Local Executive Authority. Relations between the municipalities and local state administrations are only vaguely described in current Azerbaijan legislation. There are no explicit standards for the division of authority in current legislation and the topic is not mentioned in the Constitution. The Centre for the Work with Municipalities and a special department of the President’s Office coordinate and oversee the national government’s relationship with local self-governments.

TERRITORIAL ORGANISATION
Municipal Level [1]	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
68 city municipalities in cities of district significance, 162 intra-city municipalities in cities of republican (or central) significance, 1 376 rural municipalities (Bələdiyyə)		The Nakhchivan Autonomous Republic (Naxçıvan Muxtar Respublikası)
Average municipal size: 4 375 inhabitants
1 606		1	1 607

[1] Name and number of sub-municipal entities:
261 urban and
1 726 rural settlements,
4 248 villages

OVERALL DESCRIPTION: Local government in Azerbaijan comprises both elected municipal governments and deconcentrated local state administrations, representing the national government at the local level. Organs of local executive power and organs of local self-government are not subordinated to each other, although their powers are intermingled and overlap. Azerbaijan’s largest cities are Baku (with 2 293 000 inhabitants), Gyandja (with 336 000 inhabitants), Sumgait (with 345 000 inhabitants), Khyrdalan (with 101 400 inhabitants) and Nakhchivan (with 95 000 inhabitants). With the exception of Khyrdalan, the country’s largest cities do not have the status of municipalities. They do not have elected representative bodies and their executive governments are centrally appointed.

REGIONAL LEVEL: There is only one regional government in Azerbaijan, acting in an exclave territory in Armenia - Nakhchivan. This territory enjoys a special status of an Autonomous Republic. As an exclave in the Armenian territory, it does not have a common border with mainland Azerbaijan. The Nakhchivan Autonomous Republic has its own Constitution, which is hierarchically subordinated to Azerbaijan’s National Constitution as a source of law. The chief executive of Nakhchivan Republic is elected by members of Nakhchivan Parliament.

STATE TERRITORIAL ADMINISTRATION: At the intermediate level, state deconcentrated entities are governed by the Law on “Territorial Structure and Administrative Territorial Divisions” (2000) and the Presidential Decree “On Local Executive Authorities” (2012). This level is represented by 11 cities (including the capital city of Baku) and 66 districts (rayons). Of these, seven districts and one city are part of the Nakhchivan Autonomous Republic. Each district is comprised of one central city with the same name and a number of settlements and villages. These cities and districts are governed by state deconcentrated entities at territorial level. Heads of executive power and executive committees in cities and districts are appointed by and accountable to the president. The heads of local executive bodies of the NAR are appointed by the president of the Republic of Azerbaijan upon a recommendation of the chairman of Supreme Parliament of the NAR. City and district governments then appoint state representatives in villages and settlements located within their boundaries. Baku as a capital city does not carry any special status. It is governed by the centrally appointed executive government and is subdivided into 12 administrative districts.

MUNICIPAL LEVEL: The Constitution does not clearly define local self-government and merely refers to it as “municipalities”, which are elected bodies. There is one-tier of elected municipal governments in Azerbaijan, including those located in Nakhchivan Autonomous Republic. The Law on the Status of Municipalities does not specifically define the territorial organisation of municipalities. There are currently three types of municipalities: a) city municipalities in cities of district significance, where there are parallel deconcentrated administrative units of the central government; b) intra-city municipalities in cities of republican (or central) significance, c) rural municipalities, which may unite several villages or rural settlements (in total there are more than 6 000 villages and settlements which are not self-governed). The current system of local self-governance excludes the establishment of any municipality in larger cities, including Baku. However, there are 162 intra-city elected municipalities in these larger cities. Article 142 of the Constitution stipulates that municipal councils are elected every 5 years. The last municipal elections took place in December 2020. The elected members to the representative municipal body then elect the municipal chair amongst the council members. Land maps indicating precise borders of municipalities are not yet agreed in some municipalities, giving rise to some controversy as to the ownership on resources produced on a piece of land, whose classification is not clear.

HORIZONTAL COOPERATION: The main legal framework for inter-municipal cooperation in Azerbaijan is the Law on Joint Activities, Amalgamation, Splitting and Liquidation of Municipalities. However, no inter-municipal cooperation examples exist based on the mentioned form of agreement, the main reason being that provision of communal services, which could be the object of inter-municipal cooperation, is mostly delegated to state agencies or state-owned companies.

According to the Constitution (Art. 144), municipal councils are responsible for introducing local taxes and duties, adoption of the municipal budget and implementation of local development programs. Municipalities’ competences are established in more detail by the national law “On the Status of Municipalities” which entrusts municipalities with quite a number of functions, including pre-school and school education and health. In practice, all of these activities remain under the authority of local state administrative bodies and other state government institutions. The responsibilities of municipalities in the Nakhchivan Republic are outlined in the Constitution of the NAR. The National Constitution establishes that the central government can delegate some of its functions to municipalities, together with the provision of adequate funds. However, the government made use of this opportunity only in 2019. The division of powers between municipalities and local state administrative bodies are not regulated by explicit legal mechanisms. The actual scope of local self-governments’ competences across the country remains quite unclear and appears to be marginal.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Regional level	Municipal level
1. General public services (administration)	Administrative services; Public buildings and facilities	Administrative services; Public buildings and facilities
2. Public order and safety	Public order and safety
3. Economic affairs / transports	Economic affairs; Transports	Park spaces; Urban transports
4. Environment protection	Environment protection	Parks and green areas; Waste management; Street cleaning
5. Housing and community amenities	Housing and community amenities	Distribution of drinking water; Public lighting; Urban and land use planning
6. Health	Health (joint with the central government
7. Culture & Recreation	Recreation, culture and religion
8. Education	Education (joint with the central government)
9. Social Welfare	Social protection (as a supplement to the central social policy)	Social programs

Scope of fiscal data: State government units/entities of the Nakhichevan Autonomous Republic and municipal government units/entities, including NAR municipalities.

SNA 2008

Availability of fiscal data: Medium

Quality/reliability of fiscal data: Medium

GENERAL INTRODUCTION: The Constitution of Azerbaijan empowers the municipal councils to impose local taxes and levies, to approve local budgets and to possess, use and dispose of municipal property. The 1999 laws “On the Status of Municipalities” and “On the Fundamentals of Municipal Finance” contain detailed rules on the “economic basis of local self-government” and specify the financial resources of municipalities, the conditions of their economic activity and their financial and economic management rights. The 2002 Law “On the budget system” of Azerbaijan guarantees the independence of municipalities with regard to preparing, approving and spending their own local budgets and enshrines the key principle that legislative and executive authorities must not interfere with the budget activities of the municipalities.

However, despite the formal guarantees of the economic basis of local government autonomy, Azerbaijan’s municipalities are in an extremely weak financial position. Recently, an Automated Municipality Information System has been introduced, allowing electronic payments to and from municipalities, thereby enhancing transparency and improving the collection of local taxes and fees.

It should be noted that the differences between the 2015 figures (published in the previous 2019 country fact sheet) and the 2019 figures (published here) for average PPP dollar expenditure (and revenue) per capita are due not to a decrease in the absolute value of expenditure (and revenue) over the period but to the increase in the population figure and the conversion rate to PPP.

Subnational government expenditure by economic classification
2019	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	106	0.7%	1.9%	100.0%
Inc. current expenditure	85	0.6%	2.5%	80.4%
Compensation of employees	30	0.2%	5.0%	28.8%
Intermediate consumption	11	0.1%	3.7%	10.4%
Social expenditure	3	0.0%	0.4%	3.0%
Subsidies and current transfers	40	0.3%	2.7%	38.2%
Financial charges	-	-	-	-
Others	-	-	-	-
Incl. capital expenditure	21	0.1%	1.0%	19.6%
Capital transfers	-	-	-	-
Direct investment (or GFCF)	21	0.1%	1.0%	19.6%

EXPENDITURE: Municipal governments’ spending is marginal, representing 1.9% of the total public expenditure in the country. Such level of local expenditure is very low compared to other countries of the region, even to countries with a similar territorial organisation. Among the expenses incurred at the subnational level, 80% are devoted to current expenditures, of which 29% are used to pay for personnel expenses. Approximately 20% of subnational expenditure corresponds to direct capital investment, and almost entirely refers to NAR.

DIRECT INVESTMENT: Municipalities do not incur capital investments. In most cases, the central government invests directly via deconcentrated local executive governments or imposes mandates on local entrepreneurs to invest in municipal property (when it is not too large or expensive). The NAR, in contrast, invests significantly (22.2% of total expenditure). These investments seem to be made out of own resources as the budgetary reporting does not indicate that the NAR receives earmarked capital transfers. In 2019, government finance statistics reported negative direct investments at the municipal level which indicates negative change in inventories and depreciation of municipal property.

Subnational government expenditure by functional classification
2019	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure by economic function	106	0.7%	-	100.0%
1. General public services	34	0.2%	3.6%	32.4%
2. Defence	0	0.0%	0.1%	0.3%
3. Security and public order	9	0.1%	2.9%	8.5%
4. Economic affairs/transports	30	0.2%	2.1%	28.2%
5. Environmental protection	0	0.0%	0.7%	0.0%
6. Housing and community amenities	5	0.0%	7.9%	4.7%
7. Health	6	0.0%	3.4%	5.4%
8. Recreation, culture and religion	3	0.0%	4.2%	2.6%
9. Education	16	0.1%	3.7%	14.6%
10. Social protection	4	0.0%	0.3%	3.3%

The largest expenditure line both for the NAR and for municipalities corresponds to the provision of general public services (31.6% and 49.6% respectively). The next most important expenditure lines for the NAR are economic affairs/transports (28.6%) followed by education (15.4%), while in municipalities, housing and community amenities represent the second largest expenditure (22.5%), followed by economic affairs/transports (20.7%). For the NAR, expenses in security and public order correspond to 8.9% of the Republic’s total expenditures, while health and social protection account for 5.7 and 3.2% of expenditure, respectively. For municipalities, social protection plays a more important role and amounts to 5.0% of municipal expenditure, while the share of such expenditure devoted to environmental protection corresponds to 0.4%.

Subnational government revenue by category
2019	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	106	0.7%	1.6%	100.0%
Tax revenue	19	0.1%	0.9%	17.6%
Grants and subsidies	83	0.6%	-	79.2%
Tariffs and fees	3	0.0%	-	3.0%
Income from assets	0	0%	-	0.2%
Other revenues	-	-	-	-

OVERALL DESCRIPTION: The Law “On the Fundamentals of Municipal Finance” defines the sources of income for the local budget, which include fiscal, non-fiscal and transfer sources of revenue. Tax revenues constitute 46% of total municipal revenues and only 16% of NAR revenues. User charges and fees make up 25% of municipal revenues. The major source of NAR revenues are current grants (82%), while the share of grants in municipal revenues is much smaller (25%). The reason is that NAR is assigned with significant spending obligations in education and road construction that appear to be supported by central government general purpose grants. Total municipal revenues represent about 0.04% of the consolidated general budget (this share has shrunk since 2012). This low level of revenues is clearly insufficient even to fulfil the municipalities’ very limited tasks and functions.

TAX REVENUE: Local taxes established by the Law “On the Fundamentals of Municipal Finance” include land tax on individuals and recurrent residential property tax, mining tax on construction materials of local importance and corporate income tax on municipally-owned enterprises. Recurrent residential property tax is the only tax effectively retained by municipal governments – it constitutes 100% of municipal tax revenue and 46% of total revenue. Local tax bases and rate ceilings are prescribed by the National Tax Code. Registration of local taxpayers is the responsibility of a municipality. Municipalities can also exempt certain categories of taxpayers from local taxes or reduce the tax rate for them. Deconcentrated state administrations may centralise a portion of municipal tax collections in their budgets.

The NAR is totally dependent on shared taxes (PIT, CIT, VAT, sales tax and excises). Shared taxes are assigned to the NAR through the Law “On the National Budget” every fiscal year. These shares are not established on a permanent basis but differ from year to year depending on revenue projections and estimated expenditure needs. Thus, the shared taxes play the role of regulating taxes. The most important sources of tax revenue for the NAR are the VAT (39.3% of tax revenues) followed by the PIT (26%). The roles of the excise (18.8%), sales tax (5.7%) and CIT (2.6%) are quite small. All taxes are collected by the National Ministry for Taxes and Duties.

GRANTS AND SUBSIDIES: According to the Law “On the Budget System”, the NAR and municipalities may receive matching subsidies and grants from the State budget when it is impossible to finance subnational social-economic development programmes from own-source revenues. Central government grants account for about 25% of municipalities’ total revenues (an increase since 2016, when it accounted for 20%), whereas they are nearly the only source of revenues for the NAR (accounting for more than 80% of its total revenue). The criteria laid down in the law for distributing fiscal transfers for municipalities are not clear, and the entire allocation process is therefore not fully transparent. The Law “On the Budget System” only states that subsidies are calculated taking into account the number of municipal inhabitants, its contribution to financial resources of the country, revenue and expenditure of a municipality, location of the municipality (whether in the highlands, plains or on the border), cost of living, expected social and economic projects, etc. However, there is no information as to the per capita fiscal capacity threshold within which subsidies would be activated. This results in uneven allocation of transfers between various municipalities.

In addition to the block grants, targeted funds can also be allocated from the central government for specific purposes on the request of the NAR or particular municipalities. There is no data available on the amount and form of these subsidies. Although this mechanism might provide subnational governments with extra resources, this kind of central government support does not increase the transparency of the financial system as a whole.

In addition, the law also guarantees that if the revenue of municipalities fall or their expenditure rises as a result of the decisions taken by central executive authorities, the relevant loss of revenue or excessive spending should be compensated.

OTHER REVENUE: Other revenue of subnational governments includes fees and property income. Municipal fees include fees for advertising, fees on hotels, sanatoria and health resorts and on persons providing tourist services, parking fees, fees for retail trade, fees on public catering and other services and fees on lotteries. The amount of a fee is established by municipalities themselves within the limits prescribed by national legislation. Property income includes revenue from privatisation and lease of municipal or NAR property. User charges are collected by state-owned enterprises and do not appear in public budget lines. Fees and property income represent a major source of revenue for municipalities (29.3%) while they are negligible for the NAR. These revenues have stayed stable over the last years. Municipalities (except those in the NAR) may decide on voluntary one-time payments for the financing of local activities. Voluntary one-time payments are used only for the intended purposes.

ⓘ No detailed data available for this country

FISCAL RULES: There are few fiscal rules for municipal budgeting. The 1999 Law “On the Fundamentals of Municipalities Finance” (last amended in 2018) states that compensation of employees should not exceed 50% of total municipal spending. The Law “On the Budgetary System” states that each level of government may establish its own limits for the deficit of the corresponding budget. In the case where expenses are not covered by own revenues, the gap can be compensated by subsidies from the central budget.

DEBT: Subnational deficits may be covered by contracting short-term and long-term loans from banks and other national credit organisations. There are no legal barriers to municipal borrowing, but formal mechanisms for applying for or receiving loans are not stipulated in the legislation. The size of public debt and credit resources are established by representative bodies while approving budget provisions for the next fiscal year. The state (central government or NAR, depending on the case) is not responsible for the municipalities’ commitments to credit organisations. If municipal forecasted revenue appears to be overestimated and the deficit exceeds the established limitations during the process of execution of the subnational budget, the municipality or NAR has to exercise the sequestration of its budgeted expenditure.

TERRITORIAL MANAGEMENT OF THE CRISIS: On 30 January 2020, the cabinet of ministers adopted an Action Plan to prevent the spread of the COVID-19 in the country. The COVID-19 Task Force (Strategic Headquarters) consisting of senior officials of the relevant authorities was established at the end of February 2020. Working groups within various ministries and at the Central Bank of Azerbaijan were tasked with developing specific response measures and coordinating them. Participation of subnational governments has not been reported.

Like in a number of other unitary states of the region, the major government functions impacted by the COVID-19 crisis, as well as those necessary to fight the pandemic, lie within central government powers. Nevertheless, public institutions under the auspices of the central government do not have equal capacity across the country. In most of the cities and rural areas, there are fewer than 20 doctors per 10 000 people, while in the capital city of Baku the figure is 89. The main challenges for the local health systems are poor infrastructure, absence of medical equipment, shortage of health workers and lack of training – all factors limiting the scope and quality of primary health care services. Only 8% of all primary health care facilities have a central water supply. As a result, anti-crisis measures in each region had to be developed and implemented taking into account regional specificities which best of all is known to local authorities.

The quarantine regime was not identical across all regions and cities. Its length was extended in 13 cities and districts, especially in Baku, Sumgait and Absheron, which were periodically announced as “strict quarantine regime zones”.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: The immediate measures announced by the central government required the involvement of local authorities. Those included:

− the closure of organisations such as shopping malls, cinemas, and museums in the capital and major cities, and requiring permits for people to leave their homes in these cities,

− the launch of local campaigns to help low-income families to cope with the pandemic,

− the provision of rehabilitation and social services to persons with disabilities at their homes,

− the provision of social services for lonely people over 65 at their homes,

− the provision of services in social care facilities for persons in need of special care, and

− the provision of energy and education subsidies to people.

The municipality of Baku, in line with Azerbaijan’s national anti-pandemic measures, suspended the operation of the city’s metro, and simultaneously concentrated on ground transportation, with a programme to disinfect all buses, taxis and parking areas, as well as interchanges and stations.

At the same time, the transition of schools to distance learning appeared to be a problem in remote or rural locations, as internet service and coverage was not adequate. The government did not lower the price for internet service and did not help with the purchase of electronic devices for pupils and students, so this burden and additional pressure fell on parents and guardians.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: Azerbaijan’s economy has been severely affected by both containment measures and the decline in global oil prices. In 2020, the GDP dropped by 4.3%. The 2020 military conflict with Armenia has worsened the economic situation.

Data from the National Statistical Agency allows a comparison of municipal finances in 2020 compared to 2019. It shows that the crisis has had a significant impact on municipal budgets. In nominal terms, local budget revenue fell by 3.9% and expenditure by 5.5% between 2019 and 2020. However, in relation to GDP, both municipal revenue and expenditure demonstrated a slight increase (from 0.04% in 2019 to 0.05% in 2020) due to a contraction of the country’s GDP amid the pandemic. The total share of taxes and fees in municipal revenue has not changed, because the increment in property tax collection (from 35% to 38%) was compensated mostly by the reduction of fees from health resorts, hotels and tourism services (from 5.4% of total revenues to only 1.8%). The share of transfers from the central government has not changed.

The coronavirus also had an impact on municipal spending: the share of municipal expenditure on general public services and administrative functions increased from 61% to 66%, while most of other spending was reduced. This might be explained by the fact that during the pandemic, the role of municipal authorities was limited to administrative functions to support central government decisions.

To mitigate the impact of quarantine measures on business, on 2 June, the president approved amendments to the Tax Code, providing tax benefits to businesses affected by the COVID-19 pandemic. The amendments granted a one-year exemption from land and property tax to selected sectors, including tourism, passenger road transportation and cultural facilities. Moreover, the rental property tax rate in areas affected by the COVID-19 was reduced from 14% to 7%. These taxes are to be credited to municipal budgets. Thus, in the context of the COVID-19 pandemic, Azerbaijani municipalities have been largely side-lined and their budgets have been considerably reduced. Only direct financial support to businesses from the central government prevented a further contraction of local budgets’ tax base.

ECONOMIC AND SOCIAL STIMULUS PLANS: At the beginning of 2019, the Regional Development Programme for 2019-2023 was adopted in Azerbaijan. Its main objective is to contribute to the diversification of the economy and sustainable regional development in Azerbaijan, while reducing socio-economic disparities between regions.

In accordance with this program, 50% of tax revenues collected in excess of the budget plan are to be transferred to the district and city executive authorities. By the beginning of 2020, a number of cities and districts have benefited significantly from this measure. Among them were the cities of Sumgayit, Ganja, Sheki and Mingachevir, as well as Shamkir, Khachmaz, Gazakh and Guba districts. These financial resources appeared to serve as a reserve for local governments during the economic slowdown caused by the pandemic.