CBN, 25 April 2005

BAKU, Azerbaijan - The overall upward price movement for goods and services in Azerbaijan's economy has already become problem number one for the government. A special working group has been created by the government to study the causes of inflation.

Although the government forecasted that the annual rate of inflation would not be more than six percent in 2005, the rate has already gone up to 13-15 percent. According to the National Bank of Azerbaijan (NBA), the inflation rate for January-February 2005 was 4.6 percent, but the annual rate (in comparison to January-February, 2004) was 13.1 percent. For two months the consumer price index increased by 10 percent and the producer price index by 22 percent. NBA stated that inflation is mostly influenced by non-monetary factors; monetary factors made up only 47 percent.

The well-known Azeri economist, Oktai Akhverdiyev, believes that the main cause of inflation is growing money circulation, which is one of the important instruments for the control of inflation. "The recent growth of the inflation rate was actually predictable due to a significant increase of the money supply in the economy over the last year," he said.

According to Akhverdiev, the money supply for 2001-2004 was increased by 4.1 trillion manat ($820 million), in particular, the total amount of savings increased by 1.5 trillion manat ($300 million). If the rate of savings to the gross domestic product (GDP) was 16 percent in 2001, this figure, last year, reached 36 percent. A rapid rise in the monetary supply was observed during January-February 2005, when it increased by 2 trillion manat ($400 million).

"The growth of the money supply is usual for a country with a transition economy and Azerbaijan is no exception. The current rate of the monetary supply to the GDP is 12-13 percent, whereas it should be 20 percent. While the monetary supply is growing, the inflation rate is growing too," Akhverdiyev told CBN.

Inflation in Azerbaijan is also caused by drastic fluctuations in the price of energy resources in the world market, leading to rises in the price of food and industrial goods worldwide. As a result, imported goods appreciated. Inflation together with goods, notably from Russia and European countries, is also imported, said Akhverdiyev.

In addition, Azerbaijan following recommendations of international finance institutions raised the retail price of oil products (November 2004), natural gas (November 2004 and March 2005) and water (January 2005).

Akhverdiyev stated that the government is successfully following the main principle of its social policy consisting in achieving excess income growth over the rate of inflation. For January-March 2005, people's nominal income increased by 20 percent, while the rate of inflation increased by 13 percent. For 2001-2004, the total amount of nominal income in the country increased by 11 trillion manat ($2.2 billion). Notably last year the rise in this figure was by 5.6 trillion manat (1.1 billion manat) due to increasing salary and pensions for government officials. As a result, expenditures of the state budget increased by 3.5 trillion manat ($700 million) and this stimulated inflation as well.

Akhverdiyev said that the working group under the prime minister gathering on a daily basis was studying causes of inflation. He observed that the NBA should take necessary steps to keep inflation under control, particularly to run relevant currency policy preventing enhancement of national currency, which will stimulate local producers to export their goods instead of promoting import.

At the same time, he said that the NBA should work on reducing the share of cash in circulation. Almost all local products and services are paid for in cash. According to the economist, about 3.5 trillion manat are out of the banking system. This signals that approximately 50 percent of money circulation is in the shadow economy.

In his turn, the chairman of the NBA, Elman Rustamov, said that the increase of national currency was the result of a long-term trend due to fiscal expansion and the rapid development of the Azeri economy. In order to prevent the further increasing of the monetary supply and to restrain inflation, the government has to toughen monetary policy and to run credit policy with high rates. In that case funding of the non-oil sector will be restricted and it will lead to increasing unemployment. "Now, we can not take such actions," he said

Rustamov said that the government itself should strengthen macroeconomic coordination between governmental agencies and make decisions regardless of the interests of individual ministries. He suggested expanding the market of state securities that will be able to reduce the money supply in circulation.

Although some decrease in the rate of inflation is expected as usual in the summer period, Akhverdiyev forecasted further rises in inflation in the fall and winter.

Today, the government promises that there will be no further increases in the price of utilities and energy resources until the end of this year and it will take necessary steps to keep inflation under the control, as well as to provide a stable exchange rate for the national currency.