Analysis Materials 25 October 2006 12:04 (UTC +04:00)

The International Monetary Fund (IMF) continues insisting on cut in indirect grants-in-aid for the fuel and energy complex of Azerbaijan. The Deputy Director of IMF Department for Near East and Central Asia, Vitaliy Kramarenko, announced that the government was proposed to increase the amount of grants-in-aid, liberalize the market and get rid of indirect subsidizing.

Goods supply in the domestic market at lower prices actually mean indirect subsidizing. At present the consumers in Azerbaijan pay less for energy resources as compared to many countries. As a result the energy resources are consumed more economically.

Beyond the economic theory, which enables the country with a priority not to increase domestic prices of goods in line with the world prices, the IMF assures that if the country wants to integrate into the world economy, it must be adjusted to. Obviously, the consumers are keen to avoid the payment of charges for energy resources considering that had rich energy reserves and can buy them at privileged prices, whereas they are not interested in their at all.

The IMF offers to focus on self-supply of Azerbaijan with gas in the near future to make the situation with indirect grants-in-aid more and complete and clear. Delivering gas to the domestic market at low prices the country might face with the problem of exhaustion of resources in shortest period (20-25 years). Finally, in 25 years Azerbaijan will have enterprises used to function on cheap fuel, while no capital will be collected at the banking accounts for the new and future generations. A present the country is to choose: to have in the 25 years a prosperous non-oil sector adjusted to world economy, plus tremendous capital at the bank accounts, or industrial sector used to free energy resources, that will face great problems after the exhaustion of hydrocarbons.

If to distribute 10 billion cu m of gas a year free of charge, the future generations will not receive the lost volume of gas and money, which could be obtained as a result of gas export. Therefore, it is important to make right resolutions for the development of Azerbaijani economy.

Gas Production in Azerbaijan, in ths. cu m

Energy Generation and Consumption in Azerbaijan, in bn KW/h

Since 2006 the indirect subsidies were maintained for Azernergji JSC. The big amount of grants-in-aid of this organization is conditioned by two reasons: sale of electricity at price lower than its direct cost and non-payment of charges by the energy distributing companies. Subsidies for Azerenerji are accounted as a difference between the cost of delivered goods (mazut, gas) by the SOCAR and sum of payments for the goods by Azerenerji. If to guess Azerenerji to receive charges for energy supply by 100%, it will hardly be able to settle the accounts with the SOCAR fully for the supply of mazut and gas. Obviously, the situation does not promote the improvement f the financial state of the company.

As a result of reconsideration of the 2006 public budget forecasts the indirect subsidies for Azerenerji were increased from 103.1m to 438.5m manats. The necessity in correction was linked with increase of the cost of import gas purchased by Azerbaijan from Russia. If earlier the subsides were put at $60, not Azerbaijan pays $110 per 1000 cu m of gas.

The draft 2007 public budget defined indirect subsidy for the fuel and energy complex in the amount of 330m manats (up to $388.2m) and the same amount of funds were allocated Azerenerji in 2006. They will be repaid at the expense of tax debts as of 1 January 2007.

In other variants the volume was consideration of increase (due to statement by Russia on increase of gas prices next year), while in the final variant no subsidies were planned, which is possible in case of increase of electricity tariffs.

Meanwhile, the Azerbaijani government does not regard expedient the refusal from the indirect subsidizing in current conditions. The Azerbaijani Finances Ministry came out with a statement, which necessitates the maintenance of the energy subsidizing at least till 2010.

The Azerbaijani Finances Ministry Samir Sharifov said that it is possible to refuse from tariffs in case if gas, energy and water tariffs will be defined the amount which could reimburse the company's expenses for gas or electricity transportation. In this respect it is necessary to have big margin rate to support the communal network.

The government predicts to apply these tariffs till 2010. Annual subsidizing is equal to $0.5bn, whilst with the consideration of lost incomes - $1bn.

The Cabinet of Ministers Informed that increase of tariffs for electricity and natural gas is not scheduled either for 2006, or 2007. The Azerbaijani Ministry of Economic Development sent to the Cabinet of Ministers and the Azerbaijani President's Executive Apparat proposals on reformation of the country's communal sector. Without researches in this field it would not be right to consider further increase of tariffs.

So, the government seems to approach carefully to the issue on increase of tariffs in the communal sector, despite the World Bank's obligations on its increase to the level of direct cost and IMF's recommendations by 2010. Basically, the tariffs should be in line with the world standards if we strive to become a developed country. However, our policy stipulates approaching the issue by slow steps, Azerbaijani Prime Minister Artur Rasizade. First of all it is necessary to bring an order in this sector, the community incomes should increase, and after the tariffs should rise. The process will be held by stages, as namely by-stage increase of prices would held people easily adapt to mew prices. The government assures that it would be right to increase prices in few stages and more than the frequent and inconsiderable increase.

Despite comparatively lower prices of natural for community consumers in Azerbaijan ($53 per 100 cu m) than the neighboring countries ($190 per 1000 cu m), the collection of charges in these countries reaches 100%. The government assures it is necessary to increase this figure in Azerbaijan to 95% in current and after consider the possibility of increasing the tariffs.

Respectively, the position of the Azerbaijani government is not the cancellation of existing grants-in-aid, but their financing in the budget and gradual decrease. The major problem was linked with non-payment for energy resources obtained from the SOCAR, cut in these grants-in- aid should be reached through collection of charges for energy consumption, as well as increase prices of oil products and toughening of financial discipline in the state-run enterprises.

However, it is difficult to bring an order in the gas economy when the amount of delivered fuel is not fixed on the level of consumers. An only rise in prices could hardly resolve the problem. Its basic resolution is related to the definition of a commercial status of Azerigas, and perhaps while transfer of gas delivery to management of commercial companies. Thus, it would be better for the IMF and especially, for the government, not to get involved in increase of prices, but in serious problems, for instance the institutional reformation of the fuel and energy complex.

Finally, let's have a look into the post-Soviet countries that successfully overcame the stage of increasing the domestic prices of energy resources in line with the world prices. Thus, in 1992 Estonia increased the process of energy resources in line with the world standards. There appeared a very strange situation, as people in Estonia pay for petrol two times more than in those in the United States. But if to view the economic situation in Estonia, one could note that the country is developing dynamically and leader among new members of the European Union for per capita incomes.