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Expert of TrendCapital: Azerbaijan Requires Improvement of Inflation Reckoning Strategy (video)

Business Materials 10 August 2007 17:40 (UTC +04:00)

Azerbaijan, Baku / Trend corr E. Khankishiyeva / In macroeconomic forecasts for 2008, the inflation rate is fixed up to 10% in order to retain economic stability and security of the Azerbaijani population's incomes.

However, it is not easy to keep inflation at a one-digit level if taking into consideration that Azerbaijan has all prerequisites for inflation. According to the State Statistics Committee, inflation made up 15.9% in Azerbaijan in the first half of 2007.

The amount of money circulating in Azerbaijan is increasing. However, the rise in the number of goods and services lags behind the monetary growth rate, which causes a rise in prices in the consumer market. Inflation is caused by an increase in incomes of the Azerbaijani population (38%) and wages (26%). In developed countries a 3-5% increase in incomes results in 1-2% inflation, but in Azerbaijan, which is a country enduring a transitional economy, the level of wages and incomes of the population is increasing very rapidly. In this situation, demand prevails in the mechanism of supply and demand.

Expense inflation is also underway in Azerbaijan, thus expenses are increasing, sometimes even groundlessly.

A rise in oil prices in the world markets, on the one hand, leads to an increase in export potential and an increase in Azerbaijan's currency reserves, but on the other hand, results in inflation in the countries purchasing oil. If we consider Azerbaijani import's structure we will see a dramatic rise in prices, which is natural for oil consuming countries.

A 70-80% rise in expenses in the public budget also is a reason for inflation in Azerbaijan. The International Monetary Fund and other international organizations indicate that activity of the Government in expenditures leads to inflation exceeding 10%.

Analysis of inflation dynamics in the first half of the year shows that non-monetary factors still impact price growth rate. Thus, a rise in prices for fuel, electric energy, and transport in the beginning of the year resulted in inflation. The expected season effects, for example a drop in agriculture prices in summer, did not occur. One of the important reasons is the unfavourable weather.

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