WHY ARE PRICES STARTING TO BITE?

The pessimistic forecasts by international financial institutions and organizations of an imminent global food crisis have had a negative effect on the economies of many developing countries. These statements have provoked a sharp increase in food prices on world markets which has led to a leap in inflation in some countries, including Azerbaijan, and a halt in the export of food from producer countries (for example, Kazakhstan and Ukraine have cut back on grain sales). This has even put the Millennium Development Goals under threat.

Speaking at the 12th UN Conference on Trade and Development (UNCTAD), UN Secretary General Ban Ki-moon said that the increase in food prices is seriously hampering the efforts of the international community to eliminate starvation and hunger and is creating social instability in some countries. He said that all countries should increase investment in agriculture and make the system of trade in agricultural produce more open. "One thing is certain: for the past three years, the world has consumed more food than it produces. Grain stocks are at their lowest in 30 years," the secretary general said.

The International Monetary Fund gave gloomy predictions for the development of the world economy in a report published in April, naming the continuing increase in energy and food prices as the biggest risk element. World Bank President Robert Zoellick thinks that the crisis could mean seven years lost in the fight against world poverty.

Objective or subjective?

The international crisis has, of course, already affected Azerbaijan. First of all, it can be seen in the 16.5 per cent annual inflation figures at the end of March. This is despite the hopes of the government to keep the increase in the consumer price index to 13 to 14 per cent or less.

"When we made the forecasts, we said that they will be kept only if there is no leap in prices on world markets," Azerbaijani Economic Development Minister Heydar Babayev told journalists recently. "But unfortunately, prices for rice increased by more than 25 per cent and for food grain by 82 per cent. All this also affected prices for animal produce. The government of Azerbaijan is ready to review forecasts for inflation in the current year against the backdrop of the processes under way in the world economy." Heydar Babayev said that the forecasts would be adjusted after analysis of the macroeconomic situation on the results of the first quarter.

Meanwhile, practically all the developed and even developing countries are stepping up their efforts to replenish food stocks and protect the domestic consumer. What is the state of affairs in Azerbaijan, which has historically seen itself as an agricultural country?

Objective factors behind the price rises in the country include developments in the world economy such as the rise in fuel prices, restrictions on export introduced by some producing countries, the cancelling of subsidies, bad weather and other factors. Unfortunately, these have somewhat pushed into the background the subjective factors, which President Ilham Aliyev has instructed be tackled. The head of state has often spoken publicly of the effect on prices of unhealthy competition in the production and import of some types of produce. Clearly, problems in this area have not yet been completely eliminated, as the president had to return to the issue at the recent Cabinet of Ministers sitting on the results of the first quarter. "We can see that both imported goods and goods produced in Azerbaijan, especially foodstuffs, have gone up in price," the head of state said. "I am sure that a complex of measures, including administrative measures, will allow us to introduce regulatory mechanisms in this sphere."

He has again given precise instructions on curbing inflation: increase as much as possible the domestic production of foodstuffs, eliminate unhealthy competition and strengthen social protection for the population.

Higher output means higher prices?

Work on the first instruction has been under way for some time. Statistics show results in terms of an increase in the area sown to crops and in the volume of agricultural production. This can be seen clearly in the tables. Strange as it may seem, agricultural output in Azerbaijan is growing in line with prices, despite the market economy axiom that the higher the supply on the market, the lower the prices.

Fuel prices are indeed growing worldwide, but in Azerbaijan the state subsidizes farmers, paying half their fuel costs. The president said that the cost of gas sold in Azerbaijan is eight to 10 times lower than world prices. Diesel and petrol are significantly cheaper. The cost of electricity is considerably lower than world prices.

Farmers are almost completely exempt from tax. They receive a large part of the favourable credits of the National Fund to Support Business, while the Agrolizing joint-stock company provides their equipment on favourable terms. In other words, the state has created all the possible conditions for them to develop their business. "We have been living in market conditions for 17 years now, but we have not applied all its principles in Azerbaijan and that is correct. Otherwise, very serious and unwelcome processes might begin in Azerbaijan," Ilham Aliyev said.

Judging from statements by the minister for economic development, further steps will be taken in this regard in the near future, although this will harm the negotiation process for Azerbaijan's accession to the World Trade Organization. All this is being done so that domestic production develops, lessening the impact of worldwide processes on the domestic market.

As we have seen, the natural and climatic conditions favourable for the development of agriculture have been augmented by well thought through and no less favourable economic benefits. It follows from this that, with the exception of the influence of external factors, there are practically no objective causes for the increase in food prices in Azerbaijan. There are subjective causes, the main one of which is the presence of unhealthy competition in the market, individual dealers who "control" prices. The fight against this phenomenon must become tougher, with the application of specific administrative and economic measures.

Income increasing together with inflation

Meanwhile, the state, using all its financial levers, is doing everything possible to reduce the negative effect of inflation on the public, especially the less well-off sectors of society. In the first three months of the year the population's financial income increased by 33 per cent. At the same time inflation grew by 16 per cent. Taking together the financial income of the population and level of inflation, it can be seen that in the first quarter real incomes increased by 17 per cent. This figure is rare, the president rightly said.

In January to March 2008 the average monthly salary in Azerbaijan was 229.8 manats, 26.5 per cent more than during the same period in 2007. Workers in the extracting industries, financial sector, property and consumer services have the highest salaries.

As for the state sector, there is also a tangible increase in salaries here, thanks to regular increases in the minimum wage. Another increase in the minimum wage and pensions is expected this year. But this is not all. "Social security for people working in budget-funded organizations needs to be strengthened further, there are concrete proposals and programmes for this, and, most important, this will allow our material possibilities to be increased too," the Azerbaijani president said.