INFLATION WILL NOT BE EXCESSIVE

Azerbaijan ended last year with its lowest level of average annual inflation - just 1.2%. And this positive trend has been maintained in the January-August period of this year. Moreover, the government believes that in the year as a whole the inflationary spiral will be kept in the 3-5% corridor. Such predictions are based on the government's consistent economic policy which itself is based on eradicating factors causing an increase in consumer prices on the domestic market and averting such global risks as "imported inflation".

A firm course

According to the State Statistical Committee's figures, the increase in prices in the January-August period of this year was just 2.2% compared with the corresponding period last year. Prices for foodstuffs went up by 2.2%, other consumer products went up by 0.5% but the biggest increase - 3.4% - affected tariffs for services.

Meanwhile, there have been deflationary processes in a number of commodity groups for five months in succession. Back in April the base index of consumer prices went down by 0.2% compared with March, and in January-April this increase remained at a level of 0.4%. The deflationary processes intensified appreciably in May-June. Specifically, prices for foodstuffs went down by 2.6% and starchy foods and groats, dairy produce, poultry and fish, vegetable oils, sugar and, of course, seasonal produce like fruit and vegetables decreased appreciably in price. In the non-foodstuffs group, there was also a reduction in prices for certain building materials, household equipment and other durable consumer goods. At the same time, there was deflation at a level of 0.3% in Azerbaijan in August.

The efforts of the Azerbaijani government and the Central Bank to curb the inflationary processes may be measured against the processes that predominate in the countries of the former Soviet Union. In January-July the level of average annual inflation in the countries of the CIS was 2.6%. Moreover, in countries such as Belarus, Moldova, Armenia, Russia and Kazakhstan, price increases in this period exceeded Azerbaijan's figure (2.1%) by 1.5 - 3 times.

But the most striking difference between Azerbaijan and its neighbours in the CIS and the near abroad is its almost complete absence of factors that spark price increases caused by errors in macroeconomic policy. By that I mean, among other things, protecting the firm rate of exchange of the national currency, the manat. The base index of consumer prices calculated in April confirmed the absence of core inflation in the country. Stability of the monetary situation was also recorded in the May-July period of this year.

As a comparison, it was the monetary factor that became the key catalyst for the wave of inflation in neighbouring Turkey and Iran. The disturbances in Istanbul and the escalation of the Syrian conflict in the spring and summer were an important factor in the fall in the rate of exchange of Turkey's national currency against the US dollar.

The dollar strengthened by 12.7% against the lira, causing an increase in inflation which reached 8.17% in Turkey. Iran's macroeconomic stability has been subjected to even tougher tests for several years now. A tough regime of sanctions, a manifold reduction in domestic and foreign investments and a slump in non-oil exports led to a sharp fall in the exchange rate of the national currency, the rial, in October of last year. These ongoing negative processes have sparked inflationary processes in the Islamic Republic, and in August the price increase in the neighbouring country reached an unprecedented level of 35.1%.

Azerbaijan has in many ways been insured against such scenarios, mainly because of the resolute policy of the Central Bank, which for many years now has maintained the steady rate of exchange of the manat. As a report of the Asian Development Bank "A look at the development of Asia-2013" points out, the Azerbaijani government is continuing its policy of targeting inflation. The steady volume of transfers of the Oil Fund, which are mainly directed at funding state-run investment projects, helps to maintain a high balance-of-payments surplus, which in turn keeps the exchange rate of the national currency at a stable level, without giving cause for a spiral in monetary inflation.

However, the increase in incomes and the strengthening of the exchange rate of the manat could boost an increased demand for imports. Does this not threaten to attract inflationary processes from neighbouring, less trouble-free countries? 

Import risks

There are, of course, certain risks in this sphere. Trade with states where there is growing inflation leads to an accumulation of unpaid liabilities, and an increase in the currency exchange rate leads to increased import costs. The result of this is a transfer to the market of a partner of so-called "imported inflation". This process spread simultaneously with the globalization of the economy and became more acute in the pre-crisis year of 2008, when inflation in Azerbaijan reached a record level of 20.8%. Generally speaking, in the opinion of many world experts, any developing state that exports primarily raw commodities and imports science-intensive products is always in the inflation risk zone. By selling oil and gas and purchasing industrial or science-intensive products, the suppliers of raw materials lose irretrievable natural resource royalty, whereas their supplier partners of more complex output obtain surplus profits which are used to further enhance scientific-technical dividends. Thus, the money invested in new knowledge and industrial modernization constantly increases the added value of goods, as distinct from natural resource royalty. This gap increases from year to year and the situation develops to the detriment of the supplier of raw materials, gradually turning into a latent inflation factor.

To be fair, it should be noted that the Azerbaijani government is making every effort to eradicate this imbalance. For four years now a policy of new industrialization has been implemented in the country - new technology parks and industrial townships are being created, the proportion of intellectual production and, of course, goods produced by the heavy, light and food industries is increasing. The country has achieved its most obvious successes in the sphere of food products: today the country's food industry provides the population more than 80%, and every year local products are more and more squeezing out their imported equivalent. Thus, today the ratio of food to the total volume of the country's imports is a little over 10%, whereas five years ago it was almost one quarter. In the opinion of the expert Oqtay Ahverdiyev, this is a very good figure because in a number of the developing states the ratio of food in the import structure is still in the 40-50% bracket. The experts of some international financial organizations believe that the annual growth of volumes of state expenditure and increasing investment state programmes may also be described as inflationary risk factors. Indeed, the efforts made by the Azerbaijani government to curb the rise in prices are being implemented against a background of an unprecedented increase in state expenditure on investment programmes in the last eighteen months. In 2012 state budget expenditure increased by 13.1% and in the first half of 2013 even by 31.6%.

"The balanced monetary and tax-budget policy that has been conducted by the Azerbaijani government for many years now has made it possible to keep inflation at a low level despite the systematic increase in state spending," Finance Minister Samir Sarifov said recently. "One may cite as a clear example Ilham Aliyev's historic decree on the payment of one-off compensations - AZN 597m for 1.62m citizens as redemption of their contributions to the USSR Savings Bank."

Such a massive volume of ready cash which has come onto the market in a comparatively short space of time has had virtually no impact on the increase in consumer prices because the anti-inflation mechanisms used by the government - a well-considered fiscal and monetary policy - have easily neutralized the inflationary pressure on the economy and social life of the country.

However, such a carefully organized macroeconomic balance of the country can expect another serious test in the next few months - an increase in wages, pensions and other social benefits in line with instructions signed recently by President Ilham Aliyev. "This most important social package of measures will all in all affect about 3 million Azerbaijani citizens, a large number of whom - about 700,000 - are the employees of state-funded organizations," the finance minister said.

The aforementioned factors will undoubtedly be able to play the part of a catalyst of the inflationary processes, especially if you take into account the cumulative amount of these funds. Thus, additional budgetary payments of about AZN 200m are envisaged in the remaining quarter of this year. And next year another AZN 600m is planned to be allocated for these purposes.

There is every likelihood that the government and the Central Bank will successfully absorb these risks, too, especially, as the experience of the past decade has shown, the inflationary processes in Azerbaijan remain appreciably short of the real growth in personal incomes. Since 2003 the minimum wage in the country in nominal terms has increased more than tenfold, whereas prices in this same decade have only just about doubled. In January-August of this year the real rate of growth of personal incomes was 7.4%, i.e. it exceed almost three and a half times the level of current inflation. In this index Azerbaijan again occupies one of the leading positions among the post-Soviet countries.

In terms of the experience acquired in recent years and the new system of macroeconomic model building - Autoregressive Integrated Moving Average (ARIMA) - Central Bank experts claim that one should not expect such intermittent growth before the end of the year. According to a CBA report on monetary policy in the first half of this year, the adaptation of the ARIMA model has enabled a prediction of consumer inflation of about 3-7% by the end of the year to be made. That said, a more likely scenario, taking into account inflation, is 3-5%.

It remains to be hoped that the near future will confirm the Central Bank's ability to maintain macroeconomic stability in the most difficult circumstances. This hope is backed by recent history: Azerbaijan, with minimal damage to its economy, has avoided the global slump of the past four years and the country has been virtually unaffected by the financial-debt crisis that has raged in Europe over the past eighteen months.