Non-free inflation

Analysis Materials 12 December 2006 12:05 (UTC +04:00)

In 2007 the inflation will anew turn out in vigilant surveillance of the Government of Azerbaijan. The macroeconomic indices for next year set this figure at 10% next year so that to shake the economic stability and keep the incomes in integrity and safety.

However, it is not so easy to maintain inflation in on one-digit figure is not so simple taking into consideration that there are preconditions for its rise in the country. Azerbaijan sees rise in consumers demand, like in every developing country, which is not accompanied by increase of the goods and services in the market, but leads to rise in prices in the consumer market. Over the first 10 months of 2006 general inflation in Azerbaijan is 7.7% as compared to 2005.

In this period prices of foodstuff increased by 11%, non-food goods - 5%, service tariffs 0.2%.

Elman Rustamov, the Chairman of the Managing Board of the National Bank of Azerbaijan (NBA), characterized the inflation said that the inflation in Azerbaijan as expenditure one, when expenses increase even groundlessly. Even the price of cement, tough it does not enter a basket of goods for calculation of consumer price index (CPI), is enough for unpleasant signals on other consumers markets.

Impact of intensifying factors on the level of prices in the country

Rise in prices of construction materials

Rise in prices of agriculture products

Rise in electricity tariffs

Inflation processes in the country

Inflation is also caused by rise in Azerbaijani citizens' net incomes by 21-22% and salaries by 19.9%. Some 3-5% rise in people's incomes in the developed countries actually causes 1.2% rise in inflation, whilst people's salaries and incomes in Azerbaijan with a transition economy increases by high rates. In this situation demand prevails in the correlation between demand and supply.

Rise in world prices on the one hand leads to increase of export potential, country's currency reserves, but on the other boosts inflation in the oilconsuming countries. One can easily observe considerable increase in the structure of import and it is an obvious reply by oil consumer-countries.

One of the factors is the rise in net income by 23% and public budget expenses by 70%-80% in Azerbaijan.

The International Monetary Fund (IMF) and other international organizations indicate that the country's activity in the use of funds leads to inflation exceeding 10%-rate.

According to the European Bank for Reconstruction and Development (EBRD), in 2006 the public budget expenses rose 150%, while in 2007 it is expected to increase 50% more, which influences on the increase of the inflation. EBRD continues insisting on its initial forecasts - 13% inflectional expectation in Azerbaijan as a result of 2006. Raymond Konway, the head of the Baku Office of EBRD, said that the macroeconomic stability in Azerbaijan still remains unsolved, because in current growth pace of the Gross Domestic Product (GDP) the budget expenses increases rapidly. IMF in its turn asserts that the public expenses with 6-month delay influences on the inflation indices. Therefore, fiscal outcomes of 2006 public budget will mirror the results of mid-2007, while inflation next year is forecasted to 10.5%.

Over January-October, 45.1 percent fell at monetary factors in the formation of 7.6 percent of the inflation.

Among monetary factors, the main influence felt at money supply, where growth made up 92,6%, a source in the National bank of Azerbaijan told Trend. This growth fell at the period of Janury-August, 2006. The growth of the face efficient rate on the non-oil sector from December, 2005 to July, 2006 was 0.2%.

Non-monetary factors have had significant impact on the inflation rate (54,9%). The sharing of administratively-regulated prices in the reporting period reached 20,3%, that was connected with the double rise in diesel fuel prices in January, kerosene in 1,3 times, sugar -34,6%. The influence of season factors was at the level of (-16,8%), due to May-August 2006 prices increase. Due to the winter season of January-April and September-October, 2006, prices went up to 3,8%, that triggered the growth of inflation by 15,9%.

Thus, analysis of the dynamic of annual inflation enables to make conclusion that the non-monetary factors still affects the increase of the growth pace of prices. Therefore, the National Bank actively uses the monetary sources for compensation of part of the rise of prices. At present the NBA's influence on the currency market is estimated to $765mln, which is made with respect to prevent extreme consolidation of manat and increase of inflation. The notes are the better mean for sterilization of money mass and the amount of short-term notes in the portfolio of the NBA is 75mln manats and 50mln manats of short-term T-bills are in the portfolio of the Ministry of Finances.

The role of the State Oil Fund linked with the sterilization of currency monetary mass in conditions of increase of the impact of inflow of foreign currency to the country is obvious. Unless the currency obtained from the development of oil resources entered the State Oil Fund, but turn out in circulation fully, the negative impact of the foreign currency will be weighty. This situation would of course favor the increase of inflation by high growth pace and fall in export economy.

The Government's target in fighting with the inflation is the non-monetary factors and it carries out some institutional measures, including the agriculture product fairs. Thus, one can confidently state that by the end of the year the average inflation ratio in Azerbaijan will be one-digit, but as for next year it is a matter of time.