THE BASKET FULL OF PRICE

This year Azerbaijan's economy retains its lead in the CIS, but in two respects - in terms of the growth of the volume of GDP and in its inflation rate. And although anyone who knows a little about economic theory is well aware that these two indicators are almost always interrelated, one should still acknowledge that ordinary citizens are much more concerned about the rise in the Consumer Prices Index (inflation) than about how much GDP has grown.

Therefore it is inflation that is today at the centre of the government's attention too. Not the least evidence of this is the fact that at a government meeting devoted to the first half year results, the Azerbaijani president devoted the lion's share of his speech to the inflation processes of the past few months and ways out of the current situation.

You can't argue with inflation

Let us start with some gratifying facts. Thus, GDP growth amounted to 35 per cent in the first half year. That is the world's highest rate. So, our economy has effectively grown two-fold in the space of three years, which is unique in the world.

In the first half year, industrial output increased by 35 per cent. An increase of about 5 per cent was observed in agriculture. The income of the population increased, too - by 37 per cent and wages by 26 per cent.

However, this wonderful economic backdrop is spoiled by the rise in the consumer prices index. Thus, inflation in Azerbaijan amounted to 16 per cent during this period. President Ilham Aliyev said that there are various objective reasons behind inflation. First of all, there is the worldwide oil price rise, as a result of which consumer goods have also become more expensive.

One of the objective reasons is that there is a very large growth in the budget of Azerbaijan. Our budget expenditure currently stands at 7.5bn dollars, while the composite budget is close to 9bn dollars. This means that there is a large financial load on the economy. Moreover, the country's budget is both socially and investment-oriented this year. Major funds are being allocated for investment projects which could be channelled for the wrong purpose and aggravate the price situation in the market. Therefore, ensuring the transparency of budget expenditures is relevant today as never before.

Another objective factor in the rise in inflation is an increase in the minimum salary, pensions, and salaries of people working in organizations financed from the budget. The minimum salary and the minimum pension in Azerbaijan currently stand at about 60 dollars. The average pension in the country is 70 dollars.

However, there are also subjective reasons - discussed on more than one occasion but never definitively resolved. We mean artificial increases in prices provoked by businessmen, firms and companies engaged in unhealthy competition in the market. The head of state once again called on the relevant agencies to put an end to this, and they seem to have started doing something. To be exact, they say they have: in reality prices continue to rise for the time being.

Where does the consumer prices index come from?

In the meantime, according to the National Bank of Azerbaijan (NBA), 40 per cent of the inflationary process depends on monetary factors and 60 per cent on other factors. At the same time, only 54 per cent of the consumer basket falls consists of food. And if prices in this sector have changed, say, by 5.5 per cent, then eventually this means 3 per cent inflation. The NBA is currently looking into the process of change in consumer prices during one month, a year or in the middle-term. In the first case inflation may be linked to short-tem shock events in the economy and structural changes. Thus, the NBA considers the annual indicator to be more important. For calculating so-called basic inflation, the NBA has studied the experience of over 50 central banks (Canada, Brazil, Turkey, Thailand, the European Central Bank, etc). Most of them, like the NBA, do not include in their calculation of basic inflation the change in prices of energy carriers and public transport as they are regulated by the state and have a major impact on inflation. The difference between general and basic inflation is about 1-2 per cent. When calculating basic inflation, the NBA clears the basket, approximately by 16 per cent, of the amount of goods and services for which administrative tariffs and seasonal prices (fruit and vegetable produce) are set.

So, according to a recent statement by the deputy chairman of the board of the NBA, Avtandil Babayev, basic inflation in Azerbaijan will be in single figures by the end of 2007, while it was 9 per cent in January-July. As for consumer inflation, it may reach 15-16 per cent, judging by the current trend.

It is the last indicator that is the most pertinent one for ordinary citizens, because it realistically reflects the change in the cost of the consumer basket - a list of goods and services without which it is impossible to live a normal life.

The minimum for life

The composition of the minimum consumer basket is endorsed by a resolution of the Cabinet of Ministers of Azerbaijan, while the presidential decree on the application of the law "On subsistence level" contained an instruction for the consumer basket to be identified. The consumer basket is reviewed once every three years and involved in its preparation are the Economic Development Ministry, the Labour and Social Security Ministry, the Finance Ministry, the Health Ministry, the State Statistics Committee, the Confederation of Trade Unions of Azerbaijan, state scientific agencies and non-governmental organizations.

Incidentally, the structure of this basket changed in mid-2005: earlier it had comprised 380 goods and services and now there are 585 of them. It also identifies the volume of consumption of products and services per capita during a month (table 1 gives some examples).

At the same time, there is one more body in Azerbaijan - the Confederation of Trade Unions - which calculates the consumer basket. And it has its own norms which, as a rule, do not coincide with official statistics.

It should be said that this year the cost of the monthly consumer basket and services by population group - labour force, pensioners and children - stands on average at 66.2. manats (one dollar is 0.87 manats) per capita. This indicator is 3.4 per cent higher than subsistence level. However, if these expenditures are looked into in terms of population groups, then one can see that 74.2 manats applies to the labour force, 61.6 manats - pensioners, and 62.9 manats - children.

Naturally, inflation is a very unpleasant thing for ordinary citizens because it has a tangible impact on their well-being. And if well-to-do members of the public, or the "middle class" which has taken shape somewhat in our country, are very worried about the price rise, then for those who have to live their every-day life at subsistence level, it is simply a tragedy. And this is about 20 per cent of people in Azerbaijan today.

At the same time, it should be noted that against the backdrop of current inflation, the indicators of the minimum income level set at the beginning of the year give rise to major doubts. However, back then too, few believed that one could live on 64 manats a month in Azerbaijan (for the labour force - 70, pensioners - 49.7 and children - up to 52.4 manats). But, as government officials say, these are the possibilities within our budget for the time being.

What is to be done?

There are several ways out of the current situation. First, as the president fairly noted, there is rigid control over inflationary processes. Here, one-off monitoring and light administrative penalties are not enough. Constant market research, the establishment of serious measures with regard to profiteers and monopolists, the creation of favourable conditions for manufacturers to sell their produce in marketplaces are necessary, and what is more, not only at weekends, when the salvation fairs operate, but constantly. Also, it is necessary to improve conditions for local manufacturers to produce goods and services. The greater the supply in the market and the more competition, the lower the prices.

Besides this, the NBA, with its interventions in the country's currency market, may and will help to restrain inflation.

Third, if a price rise is accompanied by an adequate increase in salaries and pensions then, at the social level, the population may not feel the negative impact of inflationary processes so much. The additional supply of money that will be released onto the market as a result of an increase in the population's incomes also facilitates an upward change in the consumer prices index. However, this will relieve social tension in the short-term in any case, which is extremely important. As the president said, this tool for affecting the country's economic stability as a whole, and the well-being of each of its citizens in particular, will also be used in the near future.