The high-level inflation was the most actual and largest economic problem of Azerbaijan in 2007. According to the data by the State Statistics Committee of Azerbaijan, as a result of 2007, the inflation indicator in Azerbaijan made up 16.7% as compared to 8.3% in 2006. According to unofficial information, last year inflation equaled 29%. At the beginning of 2007, the Government of Azerbaijan was expecting the inflation no more than 9%, but later the forecasts increased up to 16%. Despite this, the State Committee was expecting it no more than 16.4%. However, the forecasts did not justify themselves.
Let's try to make clear the results of the sharp inflation in 2007. It is necessary to mention that keeping inflation at same level is not a simple issue, considering that there are all prerequisites in Azerbaijan for its growth.
The key source of the inflation in Azerbaijan in 2007 was the inflation processes in the world economy. The prices for the consumer products in the world increased by 30% last year (cost of grain increased by 50%), and the consumer market of Azerbaijan significantly depend on import. According to the information provided by the National Bank of Azerbaijan (NBA), in 2001-2007 the inflation in Azerbaijan made up 68.2% while the prices in the trade partner countries increased by 83.5%.
The sharp raise in the oil prices had a significant impact on these processes. On the one hand, the rise in oil prices brings to the increase of the export potential, currency reserves, but on the other hand, causes inflation in the country. If to take into consideration the structure of Azerbaijan's import, we can see significant price increase. According to the assessment of the international organizations, the prices for the imported non-oil products increased by 24%.
The second potential source of inflation in Azerbaijan is the flow of huge additional oil revenues due to high oil prices. These unearned monies provoked to consequently inflation. Thus, the incomes of the State Oil Fund of Azerbaijan (SOFAR) in 2007 totaled AZN 1872.3mln and of them nearly 90% fell on profit oil. The currency reserves of the country in 2007 amounted to $4015.3mln, an increase of 104.1% ($2048mln) as compared to the beginning of the year.
The third source of the inflation is the increase of the money profits of Azerbaijani population. As a result of 2007, the incomes of the population increased by 38%, and considering the inflation, the real profits made up 22%. Due to the 3-5% increase of profits of population, the inflation growth makes up 1-2% in the developed countries. However, the salaries and profits of population of Azerbaijan, a country with transition economy, increase with high rates. In such conditions, the demand prevails in the mechanism of demand and proposal.
The specific factor of inflation in 2007 was the January 2007 decision of the Tariff Council of Azerbaijan to increase prices for the communal services, transport and energy resources. The seasonal impacts, like reduction of prices for agricultural products in summer, did not take place due to unfavorable weather conditions. According to the data by the State Statistics Committee, in 2007 the prices for food products increased by 16.2%, non-food products - 10.5%, tariffs for communal services - 25.3%.
Average market prices and indices of key foodstuffs in 2007
| Names of products | 2006 (kg, AZN) | 2007 (kg, AZN) | December 2007 as compared to November 2007 | December 2007 as compared to December 200 |
| Beef | 4,15 | 4,36 | 100,8 | 105,1 |
| Mutton | 4,58 | 4,91 | 101,8 | 107,1 |
| Bird | 2,79 | 3,12 | 100,6 | 111,9 |
| Butter | 3,08 | 5,13 | 106,8 | 166,4 |
| Vegetable oil | 1,24 | 1,88 | 103,3 | 150,9 |
| Margarine | 1,52 | 1,83 | 101,8 | 120,5 |
| Milk | 0,43 | 0,56 | 105,9 | 128,1 |
| Kefir | 0,61 | 0,83 | 105,8 | 135,8 |
| Brynza | 2,17 | 2,82 | 105,0 | 130,0 |
| Egg (10) | 1,30 | 1,45 | 103,8 | 110,8 |
| Granulated sugar | 0,67 | 0,68 | 100,1 | 101,7 |
| Sugar | 0,74 | 0,78 | 100,4 | 106,3 |
| Tea (500 gr) | 2,64 | 2,9 | 101,4 | 109,8 |
| Salt | 0,29 | 0,33 | 100,9 | 116,0 |
| Wheat flour | 0,36 | 0,51 | 101,3 | 142,8 |
| Bread | 0,36 | 0,54 | 102,5 | 149,8 |
| Rice | 0,93 | 1,05 | 102,2 | 112,9 |
| Manna-croup | 0,68 | 0,80 | 102,8 | 119,0 |
| Buckwheat | 0,79 | 0,93 | 102,5 | 117,6 |
| Macaroni | 0,73 | 1,02 | 103,8 | 139,4 |
| Vermicelli | 0,68 | 0,96 | 104,0 | 141,2 |
| Potato | 0,48 | 0,61 | 104,5 | 126,6 |
| Cabbage | 0,27 | 0,30 | 104,0 | 111,2 |
| Onion | 0,40 | 0,36 | 105,3 | 90,6 |
| Garlic | 1,17 | 1,51 | 103,2 | 129,3 |
| Maroon | 0,51 | 0,63 | 101,0 | 124,7 |
| Carrot | 0,50 | 0,71 | 98,1 | 142,1 |
| Cucumber | 1,00 | 1,17 | 105,8 | 116,2 |
| Tomato | 1,57 | 1,80 | 104,7 | 114,5 |
| Grain (1 bunch) | 0,09 | 0,12 | 109,1 | 136,9 |
| Apple | 0,72 | 0,83 | 111,6 | 115,5 |
| Pear | 1,14 | 1,22 | 112,5 | 106,7 |
| Date | 0,50 | 0,54 | 104,8 | 107,7 |
| Grape | 1,24 | 1,56 | 123,6 | 125,1 |
| Pomegranate | 0,95 | 1,16 | 140,0 | 122,3 |
Source: State Statistics Committee
In addition, expenditure inflation is observed in Azerbaijan as well. The price increase for the construction materials was caused by the oil projects, infrastructure construction, boom of housing construction and establishment of settlements for refugees and internally displaced persons.
The 60% growth of the State budget expenditures is also a reason for inflation in Azerbaijan. The IMF and other international organizations note that the activity of the government in spending monies brings to inflation more than 10%. Thus, in 2007 the expenditures of the State budget totaled AZN 6058.5mln, an increase of AZN 2268.4mln (59.9%). Currently the State expenditures on economy are high, with a growth of 188.5% as compared to the last year.
Along with objective reasons, there are subjective reasons for inflation in Azerbaijan such as monopoly and artificial price increase due to absence of healthy competition.
The anti-inflation measures envisage strengthening control on the implementation of the investment programs. In addition, the monetary policy implies expanding the amount of the issue of T-bills. Further, administrative measures are planned to be strengthened to combat monopolism, artificial price increase, cartel agreements. For instance, in 2007 administrative measures were strengthened with regards to VAT and excise tax, and as a result, the forecasts were over-fulfilled at 167.7% and 101.1% relevantly.
The key roles in regulating inflation will be played by the National Bank and State Oil Fund of Azerbaijan. The National Bank will actively use monetary tools to compensate the price increase, and the Oil Fund will continue the policy of sterilizing the money mass due to increase of the impacts of the foreign currencies in the country.