Increase in prices: pros and cons

Different ideas have been sounded in the Azerbaijani society by independent experts, government officials and ordinary people since a resolution by the Tariff Council on the increase prices of energy resources and communal services has come out. Some of them support this price rise, while others. In such a variety of idea it is of course to find an objective estimation of the happened, but we will try to through analyzing the viewpoints by different sides.

Thus, The Tariff Council of Azerbaijan has made a resolution on introducing new tariffs of electricity, communal services, police services, as well as passenger transport starting from 8 January 2007.

As per the resolution of the Council, the price of petrol A-95 is increased to 60 gepiks, Рђ-92 and Рђ-80 - 55 gepiks, diesel fuel вЂ" 45 gepiks.

The price of 1 KW/h of electricity is raised to 6 gepiks.

The fairs at city transport in Baku were increased by 5 gepiks to 20 gepiks. The fairs at Baku-Sumgayit route will comprise 35 gepiks, New tariffs were established in transport outskirts of Baku depending on the distance.

The price of 1 cu m of water is now 18 gepiks for the residents of Baku, Sumgayit, Ganja, Khirdalan, Mingachevir, Ali Bayramly and Absheron peninsular and 70 gepiks вЂ" for other consumers. Residents of other regions will pay 14 gepiks for 1 cu m of water, while other consumers - 70 gepiks. Tariffs in sewerage services were also increased for the community of Baku, Sumgayit, Ganja, Khirdalan, Mingechevir, Ali Bayramly and Absheron peninsula. The community will pay 4 gepiks for 1 cu m of sewerage water, other consumers вЂ" 20 gepiks. Residents of other regions will pay 3 gepiks for 1 cu m of sewerage water, while other consumers - 20 gepiks

PROS

It is not secret that the oil sector is the rapidly developing field of national economy and most of all is integrated into the world economy. Taking into consideration that the world prices of energy resources rise constantly, then the prices of Azerbaijani energy resources should be brought closer to the world tariffs. In case of the market economy the domestic prices should met the international prices. It is a strategic objective. However, even with the today's price rise the country could not come closer the world standards.

Comparative prices of fuel in different CIS countries

Moreover, Russia increased this year the gas prices for Azerbaijan. Azerbaijan refused from expensive Russian natural gas and decided to use its own resources. So, the local electric power grids are obliged to work on mazut, which was earlier allocated for export. A resolution on increase of prices of energy resources was made with respect to sustain the profitability of the energy sector.

Rise in world prices of oil and oil products and maintenance of low prices at the domestic market of Azerbaijan actually caused many negatively milestones. The current prices are in the level that can make profitable the activities of many companies. The direct cost of water supply services exceeds the electricity prices by 40%. Therefore, the Tariff Council, decided to include some changes to tariffs for services rendered by Azersu Joint Stock Company. Along with increase of water prices, the volume of water consumption for community subscribers was decreased from 12cu m per capita to 6 cu m per capita.

Rise in domestic prices of oil products will cause an additional 200mln manats in remittances to the Azerbaijani public budget. Moreover, the Azerbaijani Ministry of Finances refuses from direct financing the fuel and energy complex (FEC), though the 2007 public budget forecasts stipulated 330mln manats in this respect. The resolution was linked with the increase of electricity tariffs more than 3 times.

Thanks to increase of tariffs for community from 2 gepiks to 6 gepiks per 1 KW/h of electricity, the country's major energy generator will be able to cover the direct cost of energy generation. In 2007 РіРѕРґСѓ, lie in 2006, the direct financing was envisaged only for Azerenergy. By this Azerbaijan has fulfilled one more recommendations by the international financial organizations, which offered to refuse the policy of direct financing, because closeness of the problem opened a way for misappropriation of finances in big amounts.

Additional remittances to the public budget and saving of funds as a result of refusal from direct financing of the fuel and energy complex amid increase of prices of energy resources will promote the increase of minimum wage and pensions ahead of schedule вЂ" in March. The Chairman of the Permanent Social Policy Commission of the Azerbaijan Parliament, MP Hadi Rajabli, informed that amendments have been prepared and will be made to the rules of providing addressed social aid to the poor layer of the Azerbaijan population. The new rules should come into force in the near future.

It will enable the low-incomes people to adapt easily the increase of prices, he assures.

The officials of the Ministry of Industry and Energy said that low prices of petrol at the domestic market in Azerbaijan and increase of prices at the world markets causes contraband of petroleum products from the country. Rise in fuel prices assists in the resolution of the problems. Upgrade of oil refinery enterprises, which are part of SOCAR, is being carried out.

According to the SOCAR representatives, rise in petrol prices at the domestic market of Azerbaijan is good and effective step for the Azerbaijan economy. As a result the quality of petrol is brought up to international standards. The wholesale prices of the product remain lower than those in the rest countries of the region despite of increase

Cons

A resolution by the Tariff Council on rise of prices of energy resources, tariffs of communal services put the people in shock. The process will be accompanies by a chin of price rise for all types of goods. The market trades people increased the price of all types of products, and more probably rise in prices will continue. At present the electricity comprise 60-70% of the direct cost of output in production of aluminum, diesel fuel - 10-15% of the direct cots in agriculture, petrol - 70-80% of the direct cost in transport deliveries.

So, following increase in tariffs of diesel fuel and mazut in January 2006 the Azerbaijani Railway Department came out with a proposal on increase of tariffs. The current rise in tariffs pushed the railway to raise this issue once more. The prices of newspapers of Zerkalo and Ekho have increased from 0.2 to 0.3 manats, while daily weekly publications rose вЂ" from 0.4 to 0.6 manats. The fairs in some city transport routes were increased willfully and the drivers justify it with the increase of fuel prices.

Due to the special weight of electricity in production being 35-40%, considerable influence of the price rise will be felt in the agriculture sector. The rise in prices will also impact on the development of agriculture, the growth rate of which have gone down over the past few years. In 2003 special weight of this sector in GDP made up 15%, in 2005 it dropped 9%, while over 11 months of 2006 it fell by 5%.

Growth pace of inflation ratio at 8-9%, forecasted by the National Bank of Azerbaijan in 2007, cannot not stand such increase. In this respect in 2007 the country will more probably see two-digit inflation. It will particularly affect the low-income people in the country. In the case of non-changing the mechanisms, the number of underprivileged stratus of the society, which reduced from 40.2% to 29% over the past year, will increase again.

5%-rise in salaries will turn out insufficient step, while targeted social aid, envisaged for support to law-income layer of population, cannot be compared with the pubic budget assignments for this goals and price rise in the country. Until the Government reconsiders of community incomes, excess money mass will be withdrawn from the population. At present the poverty ratio in the country is calculated on the basis of the minimum wage, which in 2007 will be increased to 64 manats. For instance petrol prices in the United States vary from $0.52 to $0.67. Thus, petrol prices in Azerbaijan are higher than. Here it is necessary to note that average annual income of an average statistical American is some $40,000, whereas an average statistical Azerbaijan earns only $2,000 a year.

The expected growth of the shadow economy in the country is expected cause price rise. One of the indicators of this already exists. According to the 2005statistics, the annual conception of the electric power per capita in European countries equals 1,452 kg while in 2004 it equaled 100,2 and in 2005 106,5 in Azerbaijan. It is a lag of nearly 150 times and is the indicator of the shadow economy, independent experts urge.

Here it is necessary to take into consideration the psychological factor. Not only the Government, but also the economic subjects [enterprises] and even a family and an individual is involved in compiling the 2007 budget. The problem is that the enterprises, including the private sector, compile their budget, conclude agreement on goods delivery, borrow credits on the base of parameters projected in the public budget. A family saves money for purchase of an apartment, or car. However, after the total rise in prices all the agreements on goods delivery, the commitments undertaken while approval of credits have become senseless, while the hope for improvement of financial welfare burst like a soap-bubble'

CONCLUSION

We leave for a reader to weight the pros and cons. However, the Government should carry out consistent policy through taking measures on social security of people and soften the price shock. The increase of prices in line with the world standards makes the Government of Azerbaijan to bring the living subsistence up to international standards. In this stage the government should hold firm the anti-inflation measures, which would enable at least cover the negative milestones.