Forecasts on inflation in Azerbaijan are the culmination in the discussions over the last resolution of Tariff Council on increase of prices of energy resources and public utilities. Earlier the issue was an apple of discord between the Government and international organizations, which has disputed the viewpoints on two-digit inflation in Azerbaijan over the past few years.
The International Monetary Fund (IMF) allows changes in forecasts by the National Bank of Azerbaijan (NBA) on inflation in 2007 with the consideration of a resolution on Tariff Council on increase of prices of communal services and energy resources.
Basel Zavoico, the IMF Baku Office Head, exclusively informed Trend that it would be very difficult for the Government of Azerbaijan to achieve a single-digit inflation ratio this year.
The National Bank of Azerbaijan (NBA) usually does not include into the calculations the prices of foodstuff and administratively regulated prices while forecasting and targeting the inflation processes, because they fluctuate and the NBA cannot foretell the Government's actions for next year. So, the NBA did not take into consideration rise prices while forecasting growth pace of consumer prices, but two-digit inflation is inevitable, Zavoico stressed.
The increase of tariffs and their impact on inflation and public budget will be on focus of discussions during the February mission of IMF headed by Deputy Director IMF Department for Near East and Central Asia, he added.
Regarding the last rise in prices of energy resources and its impact on inflation in Azerbaijan he IMF experts state that it is necessary not to mix the direct influence of the advance in prices from the inflation process. According to calculations made by IMF experts, the energy carrier prices and public utilities will have a direct effect on the index of consumer prices at a level of 4-5% and be restricted by once-for-all growth. In a time, the increase in the energy carriers prices may lead to the growth of other consumer prices, however, the calculations show that the influence will be lower than the direct effect.
Such once-for-all combined increase will be linked with the pressure as a result of expanding consumption, therefore, it is necessary not to mix the process from the fixed inflation. The pressure is a result of the lack of correspondence between goods and services supply and the rapidly-increasing demand on them. The recently-occurred advance in prices on consumer goods at about 10-15% significantly exceeds the level stipulated by the increase in prices on energy carriers. Such an increase in the consumer costs was most likely the result of the Azerbaijan Government carrying out expansionist macroeconomic and income policy in 2006.
According to other calculations made by IMF, the Government summary expenditures in 2006 increased by about 76%, the significant growth of salary in the state-controlled sector and the increase in the minimal wage since January 1, 2007 has led to the total increase in the salary by 33%. The rise in manat money supply in 2006 was at the level of 133%. All the factors have led to the significant increase in demand in the not so large-scale non-oil sector, that, in its turn, has had effects on the inflation rate. The increase in energy carriers prices and tariffs on public utilities could only speed up and intensify inflation expectations, which have already fortified their position in the light of continuation of expansionist policy
At the same time, the regulation of prices on energy carriers will bring more advantages from redistribution of resources from indirect subsidizing of fuel and energy complex to needs of economic development and reduction of poverty. However, it is necessary to take essential auxiliary measures in order to maximally use it:
• Azerbaijan should immediately take the inflation under its control through the macroeconomic and income policy to avoid potential threat on the rise in prices and salary spiral. It is necessary to reduce the fiscal expansion rates (rapid increase in budget expenditures) to an acceptable level and strengthening the monetary policy. These measures will become a decisive step in restoring the balance between the goods and services supply and the face consumer capability of the population and enterprises. In addition, it is necessary to take well-coordinated and efficient measures to eliminate the monopolist policy experience. The rise in prices in Azerbaijan will further to it as well.
• The Government should ensure taking the following measures simultaneously with the recent advance in prices on energy carriers: to increase the quality of public utilities (to take urgent steps to improve the financial discipline and introduction of corporative management in state-run enterprises, as well as fully compensate the recent rise in the prices not to allow worsening the situation with special indigent groups within the address social allowance programme).
The increase of tariffs and their impact on inflation and public budget will be on focus of discussions during the February mission of IMF headed by Deputy Director IMF Department for Near East and Central Asia, he added.
No doubts in this respect , because during the previous visit to Baku in September 2006 Mr. Kramarenko forecasted two-digit consumer inflation in Azerbaijan even in 2006. IMF assets that the public expenses with 6-month delay actually affect on inflation ratio. Therefore, fiscal outcomes of the 2006 public budget will demonstrate the results in mid 2007, even not mentioning the impact of the current price rise.
As to the difference in calculation of the growth rate of inflation by the Fund and Government of Azerbaijan, there are two forms of calculation of consumer price index вЂ" general and basic. The common inflation is calculated through combination of all prices that the consumer faces and the difference between the two periods is calculated. IMF calculates the general inflation basically through the difference between the indexes for December 2005 and December 2006. The NBA calculates the average indicator for 12 months of one year and compares it with the similar period of previous year. Sometimes, it leads to different results.
At the end 2006 IMF forecasted 11.5%-rise in inflation in Azerbaijan, whereas the NBA calculated the basic inflation for 2006 in the amount of 8.5%. It means that NBA has achieved its objectives on preservation of single-digit inflation in the country.
While comparing the growth rate of inflation from year to year the inflation rate turns out higher if price rise occurs at the end of the year. If to imagine that no changes have occurred over 11 months, then a big difference will be obtained while comparing the indices for December of two years rather 12 months of 2 years. So, it is necessary to know the periods of coverage while calculating the inflation.
As to the difference between the general and basic inflation, the index of consumer prices includes several indices and one of these groups cannot be resulted by NBA. The National Bank cannot forecast them in advance. This group includes electricity, water prices, transport tariffs, etc. NBA cannot be aware of further steps by the Government in this direction.
Another indicator that cannot be forecasted is the prices of foodstuff, because it depends on many factors, particular the climatic conditions. The production of foodstuff reduces even in unfavorable weather conditions and prices at the market grow. While shaping its monetary policy NBA takes into consideration this group of indices. So, basic inflation was taken into consideration while forecasting a single-digit inflation ratio in 2006.
We have to agree with the calculations by IMF. The National Bank of Azerbaijan (NBA) announced that in November 2006 the basic inflation rose by 9% as compared to 2005.
In December rise of the Consumer Price Index was 1.4% as compared to November, while average annual calculation was 6.5%. The calculations were made in line with the first methodology, which removes all fluctuations of administrative regulation of prices (prices of energy resources) and prices of seasonal character (fruits and vegetables).
In accordance with the second methodology of calculation, which uses average principle of smoothing, the basic inflation made up 1.1% in December 2006 as compared to November 2006. Last year the Consumer Price Index rise was 5.7%, while average annual вЂ" 4%. During the calculation the NBA cleans the basket by 16%, from the goods and services that have administrative and seasonal prices.
As to general inflation, despite the statements by the Government of Azerbaijan on single-digit inflation in the country, in December 2006, the growth rate of prices on consumer goods and tariffs on services went up by 2.1% as compared to November 2006. The National Bank of Azerbaijan informed that the annual rise of inflation made up 11.4%, while the average annual was 8.3%.
According to the econometrical model of the National Bank of Azerbaijan (NBA), 77,2% fell at monetary factors in the formation of 11,4% of the inflation. .The increase in monetary factors in the reporting period was linked with NBA converting the National Currency, 97% out of which was carried out to finance budget expenditures.
It does not actually justify the threats and forecasts by IMF. The financial organization still urge that the 2006 public budget represented a risk of increase of inflation and warned the government against the review of the public budget for its further increase, because sharp rise in the expenses of 2006 public budget expenses will lead to two-digit inflation. IMF advised to study the impact of big expenses on the macro-policy and take measures with respect to regulate the process and apply cut in budget expenses.
The Government adhered and continues adhering another stance in this respect. There is an anti-inflation decree issued by the Azerbaijani President which outlines concrete measures to be taken by the National Bank and other bodies to maintaining the inflation. To decrease risks the Government plans to increase emission of short-term notes by the National Bank and state short-term bonds by the Finance Ministry. The Government forecasts the inflation not to exceed 9% in 2007. There could be an increase, but two-digit inflation ratio is out question, Oktay Hagverdiyev, the Division Head at the Cabinet of Ministers said. One of the points is the maintenance of prices through administrative methods. Use of the administrative resources with this respect is very normal for transition economy. We are now very well that Azerbaijan has monopolies, corporative agreements, etc. It is necessary to struggle with it. Another point is to increase prices of petrol and other in accordance with the requirements of the market economy, he said.
The recommendations to the Government of Azerbaijan on adjusting the tariffs to the world standards came from the international organizations, particularly IMF. If Azerbaijan agreed to take such step, should not the Government accept as right IMF's methodology on calculation of inflation and put an end to unnecessary dispute?