Eurasianet,
8, August 2007
By Rovshan Ismayilov

Forget oil revenues. One of the hottest topics under discussion now in Azerbaijan is the possibility of a summer price increase for bread. The hike, if it comes, would arrive after months of steady price increases and double-digit inflation - a factor seen as having potential political repercussions for President Ilham Aliyev in the run-up to next year's presidential vote.

Over the last month, the prices Azerbaijan pays for grain imported from Russia and Kazakhstan have increased by roughly 50 percent. The supplies - about 1 million tons per year - meet 40 percent of the South Caucasus country's needs, the Ministry of Agriculture states. Increased grain prices have corresponded with higher flour prices - a 25 percent increase since June, according to official figures.

And higher flour prices could, in turn, mean higher bread prices. Though the government has so far publicly rejected such a possibility, a source in the Tariff Council, a government body responsible for setting state-regulated prices, told EurasiaNet that the government has examined the question of a bread price increase and considered such an event expedient. Prices are expected to increase 25-45 percent against the weight of bread in the near future, said the source, who requested anonymity. To prevent such a price hike, in late July the government instituted a one-year moratorium on the 18 percent Value Added Tax (VAT) applied to grain imports. However, one expert believes the measure is insufficient. The higher cost of grain imports will still need to be factored into bread prices, noted Gubad Ibadoglu, president of the pro-opposition Economic Research Center. "An increase in bread prices in Azerbaijan is inevitable," he commented.

Ibadoglu believes that higher bread prices could set off a chain reaction. "The prices of meat and milk products as well as some other agriculture goods will increase in Azerbaijan in the near future," he predicted.

The Agriculture Ministry is expected to report to the government on the impact of the VAT moratorium in late August, according to the APA news agency. The agency reported that the ministry has conceded that the amount of grain imported is not enough for the moratorium to impact bread prices within Azerbaijan.

Bread prices have traditionally played a key role in shaping popular attitudes toward the government in post-Soviet countries. One former Azerbaijani prime minister cautions that President Aliyev's government should tread cautiously. "Each nation usually has its own kind of equivalent for money," said Ali Masimov, now an independent member of parliament who served as prime minister in 1993. "For the Azerbaijani people, bread is such an equivalent. Therefore, the government should be very careful in the issue of raising bread prices."

That risk appears to be understood. On July 5, Agriculture Minister Ismet Abbasov told state-run AzTV that the government is using all available tools to prevent a price increase for "this strategic product." Said Abbasov: "We will not let it happen."

But the government's tweaking tactics can have only a limited impact, commented one former financial policy chief of Azerbaijan's Cabinet of Ministers. "The price of bread has been liberalized since 1992 and it is impossible to rein [in a] price rise administratively," Ogtay Hagverdiyev told APA.

Calls for the government to use social welfare programs to help poor Azerbaijanis offset a possible price hike have so far gone without a concrete response. Meanwhile, one observer argues that the threat of bread price increases brings into question government claims that poverty rates have plunged and some 500,000 new jobs been created in the past four years. "What kind of prosperity and poverty reduction is it if a simple . . . crop failure in Russia results in such nervous steps by the government?" commented Ilgar Mammadov, an independent Baku-based political expert.

A generally high rate of inflation, fed by massive inflows of oil revenue and heavy government spending programs, adds to the challenge. According to official data, Azerbaijan posted an 8.3 percent inflation rate for 2006.

In a December 2006 report, however, the International Monetary Fund forecast 17 percent inflation by the end of 2007. That figure was revised in June 2007 to 20 percent.

Failing to stop an increase in the price of bread is seen by Azerbaijani observers as a signal that the government will not be able to stop further increases. In January 2007, the government sharply increased basic fees for electricity, public transportation, fuel, and water.

The government has taken several measures to relieve inflationary pressure on the economy, but some analysts contend that these steps have succeeded only in delaying, not preventing, a steady rise in prices.

On July 1, for example, the National Bank of Azerbaijan lifted a requirement under which official permission was needed for inter-bank capital transfers higher than $50,000, thereby facilitating the outflow of cash from the bloated domestic economy. In June, the National Bank of Azerbaijan increased its refinancing rate to 13 percent after a three-and-a-half percentage point increase to 12 percent just two months previously. A $60 million state-subsidized long-term mortgage program, introduced a year ago, was also ended last month in what the government described as an attempt to stem inflation. Is it enough? Time will tell, but in Azerbaijan's bakeries the patience might not be long.