Dollar remains dominant currency in Azerbaijan
Annual definition of currency reserves management strategy also leads to revision of its currency structure. Currency reserves structure is defined on the basis of currency structure of foreign trade, foreign state debt, and currency, in which money and credit policy is pursued.
It is to conclude from analysis of these three components on Azerbaijan that assets in US dollars make up the key part of the country's currency reserves. Azerbaijani export goods are traditionally priced at international markets in the US currency.
As the State Customs Committee of Azerbaijan reported, in January-September 2011, 96.44 percent of Azerbaijan's total export went in hard currency, of which the US dollar keeps its dominant position. Even those Azerbaijani exporters, who export raw materials and goods and receive earnings in euros, then convert euros into dollars that go back to Azerbaijan.
Given that the bigger part of Azerbaijan's foreign debt is counted in US dollars and in Special Drawing Rights (SDR) where US dollars also dominate, the US dollar, indeed, is the dominant currency in Azerbaijan's liabilities. The Finance Ministry of Azerbaijan reports that in 2010 the currency structure of debts consisted of 32.3 percent as US dollars, 27.8 percent as euros, 23.7 percent as SDR, etc.
As for Azerbaijan's money and credit policy, US dollar plays the major role here, too. As is known, the Central Bank of Azerbaijan (CBA) fully denied the use of bi-currency (dollar/euro) basket to calculate exchange rate of Azerbaijani manat and has been practicing two-sided - manat/dollar - exchange rate targeting since January 10, 2011.
Bi-currency basket had been applied in Azerbaijan since March 2008. The CBA explains it refusal from such basket use by that the exchange rates of major hard currencies have lately been highly volatile and that it is essential to keep the national currency stable. Macroeconomic analyses illustrate that the two-sided - dollar/manat - exchange rate targeting in the existing conditions is best of all complied with CBA goals, especially from the point of impacting inflation rate. The use of such mechanism will allow the CBA to launch the mode of a floating exchange rate in the long-term period.
As compared to a couple of years ago when Azerbaijan firmly went toward revaluation of the value of its assets in US dollars, today the CBA is not in a hurry to rid of the US dollar currency reserves, stressing that the currency structure of reserves requires no essential correction today. In addition, Azerbaijan is not the only country where the portfolio of currency reserves consists largely of US dollars. China, Russia and Japan, which are in a similar situation, also undertake no action on this occasion.
Azerbaijan is expected to receive an inflow of a comparatively large amount of petrodollars either this year or next year. The State Oil Fund of Azerbaijan (SOFAZ) reports that following the results of January-September 2011, its portfolio of investments consisted of 55.32 percent ($17.832 billion) as US dollars, 39.57 percent (9.432 billion euro) as euros, and 5.11 percent (1.57 billion GBP) as UK pounds.
As for 2012, the Government of Azerbaijan plans to keep the forecast of national currency/US dollar exchange rate unchanged: 0.79 manat/$US1.
Azerbaijan and WTO: pros and contras
Azerbaijan is not in a hurry to join the World Trade Organization and explains its position by that it is necessary to think of all pros and contras related to this step. As a matter of fact, in all post-Soviet countries, which have passed or have been passing not an easy process of joining the WTO over some latest years, benefit from the WTO membership is estimated in quite different ways. For some countries, say, Georgia, Armenia, Kyrgyzstan, etc. this is a matter of prestige as there is no real WTO effect on these countries but nevertheless, all neighbors know that a republic has become part of the process of economic globalization. But such country as Russia has been trying to become a WTO member state since 1993 as it thinks over the issue of joining the organization very thoroughly.
Azerbaijan is almost to the same extent cautious. There is quite a logical explanation: as has been stated, WTO membership gives the country, apart from trade advantages, a lot of "contra" moments.
Definitely, prices for goods and service in Azerbaijan will decrease after the country joins the WTO. From the point of impact related to the country's joining the WTO, there are three groups of impacts: impact on state budget revenues, impact on producers, and impact on consumers. From this point, the latter wins most of all. Certain problems for local producers are not denied, and such risks must be assessed to be avoided so the Government should stand for its position at the talks with WTO member states and with the very organization.
Risks are also inclusive of a sharp decrease of import tariffs, which will make domestically produced goods noncompetitive. However, the WTO membership will provide conditions to eliminate the existing bureaucratic barriers disturbing entrepreneurship in Azerbaijan.
In addition, decrease of interest rates of bank credits will become highly probable after Azerbaijan joins the WTO. But considering the fact that Azerbaijan's bank sector is only developing and thus can not really compete with Western partners, the Government should get fulfillment of the WTO requirements postponed for several years.
Proposals pertaining to the maximum limit of customs rates, which will be imposed on imported agricultural and industrial goods, should also meet national interests, and high tariffs should be offered for sectors, which may face problems in their further development.
The practice of countries with transitional economy joining the WTO illustrates that some customs rates may exceed the existing ones by two-three times. Particularly, it is necessary to apply customs tariff tied rates on those import goods, analogues of which are produced in the republic.
As initially proposed by the State Customs Committee, the maximum customs rate and the average customs rate on agricultural produces were 50 percent to 80 percent and 23 percent, respectively. As for tariffs for industrial goods, the rates are more liberal and equivalent to 30 percent to 50 percent and up to 15 percent, correspondingly.
Azerbaijan will have to stand for its customs tariff tied rates before such WTO member states as the United States and EU member states. The European Union, as one of the world's biggest exporter of agricultural produces, suggests reducing Azerbaijan-offered rates. As for some kinds of goods, it is proposed to decrease the rate to zero.
Import customs rate of 15 percent and 0-0.5 percent are applied on readymade industrial goods and on industrial raw materials, respectively, in Azerbaijan at the moment. No tariffs on industrial raw materials are applied at all in international practice; however, in connection with the supposed changes of Azerbaijan's tariff system - transition from a multi-step customs tariffs system to a few-step one - these rates will be decreased to zero.
Given that low-quality imported goods have lately emerged at the markets of some countries, including Azerbaijan, it is quite essential to observe quality standards under the import of goods to the country's market. For this reason, it is necessary to create border's regulation laboratories, which will identify elements of agricultural produces, and the composition of plasma of products imported to the country. A "pro" moment of joining the WTO is that it provides sophistication of phyto-sanitary control; laboratory quality level check; and creation of information center to notify the WTO Secretariat of list of goods that meet the organization's requirements.
The WTO membership gives the country a lot of advantages. This is the pragmatic aim of joining the organization. Specific objectives of joining the WTO are as follows:
- Getting better, as compared to existing ones, nondiscriminatory conditions for local products' access to international markets;
- Access to international trade disputes solution mechanism;
- Creation of a more favorable climate for foreign investments through bringing the existing legal provisions in compliance with the WTO norms;
- Expansion of opportunities for native investors in WTO member states, particularly, in the bank sector;
- - Creation of conditions to upgrade the quality and competitiveness of native produces as a result of expansion of flow of foreign goods, services, and investments to local market;
- - Participation in development of international trade rules with respect to its national interests;
- - Improvement of the international image of the country as a full participant of international trade;
- The task of the WTO membership talks is to get best possible conditions of joining the WTO, i.e. get most of advantages and make least concessions in the field of reduction of tariffs.
Trans Adriatic Pipeline: chances for success
The last remaining project, of three ones considered a potential route of gas export from Azerbaijani field Shah Deniz, which has not yet been "PR-ed" in Baku, is the Trans Adriatic Pipeline (TAP). At last, following the visit of the President of Austria who voiced his backing to project Nabucco, and the arrival of Greek Energy Minister who is the supporter of project Interconnector Turkey-Greece-Italy (ITGI), Swiss Energy Minister Doris Loytard arrived in Baku to meet senior governmental officials of Azerbaijan. In a statement for press released several days prior to Mrs. Loytard's visit, the Swiss Embassy said the key objective of the visit was to back TAP, one of which shareholders is Switzerland's EGL.
One fact draws attention at once. As reported recently, the throughput capacity of TAP can be increased up to 20 billion cubic meters per annum. "Though the TAP initial designed throughput capacity is 10 billion cubic meters a year, several options of construction of the pipeline make it possible to double it due to insignificant investments. A large-diameter pipe can be used for a submarine section to cross the Adriatic Sea at a depth of not more than 810 meters. Under such choice of pipeline dimensions, any further increase of throughput capacity requires just an additional compression," the report reads.
The possibility of doubling the pipeline's capacity with insignificant investments is a weighty argument favoring this project, especially with the consideration of statement of US Secretary of State's Special Envoy Richard Morningstar. On his visit to Baku, Morningstar said, unexpectedly to many, that it is expedient to start implementing the Southern Gas Corridor Project with a pipeline with a smaller throughput capacity, which is expected to increase subsequently in future. Certainly, one of the most decisive factors, if not of utmost importance, in choosing a route will be gas transit tariff. But possibly, the Shah Deniz Consortium partners are forced to take the financial crisis in the Eurozone area into account not to a lesser extent. Perhaps, exactly the sad financial situation that forces the EU to cut investments for large projects, at a time when there is no EU specific agreement with Azerbaijan and Turkmenistan, makes Nabucco, with its value, a load too heavy to lift. At least, Morningstar has now spoken on this thought diplomatically through shifting accent toward cheaper projects.
The EU, in the face of its leaders, Germany and France tries to make every effort to prevent collapse of the Eurozone, with Greek's potential leaving it considered first step toward collapse. In this connection, there is one more argument favoring TAP. In August, the TAP Consortium officially announced an increase of the pipeline's extent by 300 kilometers (the Greek section) up to a total of 800 kilometers. TAP Consortium officials said this decision confirms and will strengthen further TAP commitments on Greece, and will make it possible to create new jobs in Greece and supply the country with investments worth more than 1 billion euros in the period of sad financial crisis in the country.
Another fact that should be kept in mind is that Norway's Statoil is one of the shareholders of TAP (42.5 percent interest) and at the same time holds 25 percent interest in the Shah Deniz Consortium. Thus, it is to assume that the TAP has one "pro" vote amongst the Shah Deniz shareholders, which would have been quite natural.
Murad Heydarov, Adviser to SOCAR Head, stated yesterday that choice of a route of Azerbaijani gas export to Europe is quite essential from the point of exporting gas from not only Shah Deniz but also such promising deposits as Nakhchivan and Babek, deepwater gas from the fields Azeri-Chirag-Gunashli, etc. Undoubtedly, this increases the chances of the TAP having the potential of a further considerable increase of its throughput capacity.
But do not also forget the fourth, BP-offered transportation route, which assumes gas export via the territory of Bulgaria to Southeastern Europe, a region that needs gas supply routes diversified, probably, most of all.
The TAP is one of projects of the Southern Gas Corridor. The pipeline will take its start in Greece, pass the territory of Albania and the Adriatic Sea and onward to Italy. The project is preliminarily valued at 1.5 billion euros. In Italy and Greece, the pipeline will be linked to the existing gas transportation infrastructure. The pipeline's total extent is around 800 kilometers.
TAP shareholders are Switzerland's EGL (42.5 percent), Norway's Statoil (42.5 percent), and Germany's E. ON Ruhrgas (15 percent).
Zero inflation in Azerbaijan may remain
Consumer prices in Azerbaijan did not change in October so the State Statistics Committee reported zero inflation rate. Zero inflation rate last time was registered in Azerbaijan in April 2010. In October, prices for foods and nonfood produces increased by 0.1 percent and 0.4 percent, respectively. Prices for paid services in October decreased by 0.5 percent against September. For comparison: official inflation rate in Azerbaijan in October 2010 was equivalent to 0.9 percent.
The stagnation at the internal consumer market is caused by a seasonal fall of prices for a whole range of foods such as flour, bread, buckwheat, eggs, lemons, bananas, oranges, tangerines, apples, pears, quince, pomegranate, persimmons, nuts, chestnuts, cabbage, carrots, garlic, onions, and potatoes.
The decrease of tariffs for services covered mostly Internet-services, international transportation of passengers, and air and railway transportation of passengers to CIS states.
The inflationary process slowed down also due to a rich harvest of agricultural produces grown by farmers, and abundance at bazaars. In January-September 2011, the collection of agricultural produces increased by 7.6 percent against the respective period of 2010.
Particularly, plant-growing produces and cattle-breeding produces were up 10.6 percent and 3.7 percent, correspondingly. The population spends the bigger part - 65.9 percent - of its earnings for meals and goods of everyday use. Thus, the established situation favors purchases.
Besides, the exchange rate of manat has strengthened, the increase of money supply has slowed down, and so have the paces of influence of trade market instruments: all this reduces global inflation's pressure over the internal market of Azerbaijan.
Zero inflation rate may further continue basically due to a decrease of flour and bread prices in the country in November.
The key objective of the Government of Azerbaijan this year is to prevent a two-digit inflation rate. Average annual inflation is forecasted to be 6 percent in 2012, 5 percent in 2013, 5.3 percent in 2014, and 4.8 percent in 2015. The Government expects inflation rate to be equivalent to 9.8 percent in 2011.
Azerbaijan to resolve refugees and IDP problem independently
Azerbaijan considers the problem of existence of refugees and internally displaced persons (IDPs) in the country its problem number one. Currently, all needs of this category of citizens are satisfied by the Government at its own expense.Owing to the country's economic growth, annual state donations for these purposes also grow. The Government has made IDPs and refugees tax free; approved free-of-charge education for them; provided thousands of families with homes; and helps them find jobs. The third State Program entitled "On Improvement of Living Standards and Increase of Employment of Refugees and Internally Displaced Persons" is under implementation; and a program envisioning IDPs' return to homelands has been prepared for implementation.
The UN World Food Organization (WFO) and the Norwegian Refugees Council had been responsible for the full provision of foods to refugees and IDPs in Azerbaijan but halted their work in the country in 2008.
In 2012, it is planned to assign 201 million manat from the state budget for the reasons of improvement of social security of refugees and IDPs and ease their payments for housing services. The bigger part of this money will be paid in the form of monthly allowances for foods to refugees. To improve the socioeconomic position of refugees and IDPs, the State Oil Fund next year will assign 110 million manat for the construction of living houses, schools and other necessary infrastructure objects. The Government of Azerbaijan since 2001 has been implementing projects jointly with the World Bank to develop social infrastructure of refugee and IDP camps and give residents of the camps jobs. The World Bank reports that loans worth a total $107 million and grants worth $2 million were spent for the implementation of these projects, including the third project of improvement of living standards and earnings of IDPs in Azerbaijan. Owing to this money, hundreds of IDP families get a broader access to the infrastructure and services, and improve their living standards and earning abilities.