The Role of Fiscal Policy in Development of Non-Resource Sector

The research investigates the impact of the fiscal policy on the non-oil sector of Azerbaijani economy in the framework of cointegration and error correction modeling over the quarterly period 2000-2009. For increasing robustness of the obtained results, we employed two different cointegration methods: the residual-based Engle-Granger approach and the system-based Johansen approach. The empirical results from these approaches are quite close to each other and indicate that the government expenditures have significant positive influence on the non-oil GDP both in the long- and short-run. Therefore, the fiscal policy can play a supportive role in developing the non-oil sector. We further showed that ability of the fiscal policy to support the non-oil sector development, among others, is heavily determined by the degree of dependence on the oil revenues. Therefore, one of the urgent remedies for the Azerbaijani policy makers is to loosen gradually the dependence of the government budget on the oil revenues and oil prices. Instead, non-oil taxes can be considered as an alternative source of the government revenues. We also recommend that the policy makers should also pay particular attention to the investment issues as it has a positive effect on the non-oil sector development. Finally, we reemphasize the importance of future detailed research on improving the efficiency of the fiscal policy in the non-oil sector