EurasiaNet Business & Economics - Azerbaijan’s Fuel Price Hike Stirs Controversy

BUSINESS & ECONOMICS

AZERBAIJAN’S FUEL PRICE HIKE STIRS CONTROVERSY
Rovshan Ismayilov 1/12/06

Azerbaijan’s January 6 decision to sharply increase retail prices for diesel, kerosene and burner oil has sparked a fierce debate over the government’s economic policy and its desire to bring domestic fuel prices into alignment with world markets.

As set by the Tariff Council, a government body under the ministry of economic development that sets fuel retail rates, the retail price for one liter of diesel fuel, a cheaper alternative to regular gasoline, has doubled to reach 0.36 AZN, about 40 US cents, the same cost as gasoline. The price for kerosene, an important heating source in Azerbaijan’s regions, has increased 2.3 times, and burner oil 3.3 times.

In a January 6 statement, the Tariff Council explained the increase by the need to bring prices for domestic and international oil products into closer alignment. The International Monetary Fund has reportedly long lobbied for such an increase in a bid to facilitate Azerbaijan’s integration with the global economy. "After the rate between the euro and dollar increased, the price for a Mercedes increased. Nevertheless, Azerbaijani consumers . . . continue to buy [Mercedes]. And no one complains," commented Basil B. Zavoico, head of the IMF office in Baku, in a November 2004 interview with Trend news agency. "Why should it be different with energy?"

The government says that it expects the price hike to increase 2006 state budget revenues by 82 million AZN (about $85 million), help stamp out smuggling, eradicate the illegal export of oil to neighboring markets in Georgia and Russia where prices are higher, and improve the quality of oil products on the domestic market.

Increased inflation is the most immediate expected result of the new prices – a politically sensitive area for a government that campaigned in the November 2005 parliamentary elections on promises of improving the social welfare of average Azerbaijanis.

Tariff Council Chairman and Minister of Economic Development Heydar Babayev told reporters at a January 6 press conference that the rate of inflation would increase by only 2 to 3 percent, adding that "in the future even this rate of inflation may decrease."

Some independent experts, however, contend that the price hike means that the government will be unable to meet its 2006 inflation target of 5 percent. "I think that the last increase of prices for oil products is the beginning of a new phase of inflation in Azerbaijan and that we have to be ready for that," said Inglab Akhmadov, director of the Public Finances Monitoring Center, a Baku-based non-governmental organization.

Some local observers say that they expect an increase in prices for electricity, natural gas and gasoline as well. Prices for the natural gas Azerbaijan imports from Russia recently increased from $61-62 to $110 per thousand cubic meters of gas. Babayev, however, maintains that no further price increases for energy products will occur in the near future.

Finding ways to soften the blow for average Azerbaijanis is also on the government’s agenda, according to Babayev. A possible wage increase and ways to encourage domestic competition for oil products are reportedly among the responses under consideration. Babayev has also stated that the government will soon consider granting financial compensation to underprivileged groups in the regions who rely on diesel fuel and kerosene for heating.

The increase, which took place while President Ilham Aliyev was abroad, is the fourth such price hike since 1991. The most recent increase occurred in November 2004 when prices rose by 10-12 percent.

Despite the government’s assurances, though, independent experts and ordinary Azerbaijanis say that past practice prompts them to expect increased prices for certain consumer goods and services as well. Economic activities that rely primarily on diesel fuel -- agriculture, the construction materials industry, and public buses -- are seen as the areas likely to be the worst hit

In a January 6 interview with the television station ANS TV, Agriculture Minister Ismet predicted that higher diesel prices could potentially double prices for agricultural products. Akmed Mammadli, a wheat farmer from Guzanly village in the Agdam region, 350 kilometers to the west of Baku, is a case in point. Mammadli forecasts that increased diesel prices mean that he will probably have to double the price for a ton of his wheat to $140 per ton – a hike likely to kill his business, he fears. "[A]ll the wheat imported to Azerbaijan from Kazakhstan costs $80-85 per ton. So my product will not be competitive any more," Mammadli said.

The cost of local vegetables and fruits in Baku markets is expected to increase as well. Eighty percent of the trucks that transport these products run on diesel fuel, the city’s Gun newspaper reported on January 7. One Kamaz truck driver who carries potatoes from the western Tovuz region to Baku told the newspaper that he would have to increase the hauling price charged farmers by nearly 60 percent to $350 per 18 tons of potatoes.

A similar situation exists for construction materials, such as crushed stone for concrete, which is transported mostly by diesel-fueled trucks.

Public transportation prices are likely to increase for the same reason. Although the government has banned private companies from raising prices for bus fares, several wildcat strikes have been staged in Baku by private bus drivers who want to increase fares from 0.10 AZN to 0.20 AZN. The Baku Department of Transportation has since appealed to the Tariff Council to increase bus fares for passengers in the capital city, APA news agency reported on January 7. The Tariff Council is expected to approve the appeal shortly.

Tariff Council Chairman Babayev has argued, however, that diesel fuel does not account for a sufficient portion of these products’ costs to justify doubling retail prices.

But, so far, that objection is passing unheeded. Opposition and pro-government parties are already at loggerheads over the price hikes and likely consequences. A front page headline in the Yeni Musavat newspaper, a publication associated with the opposition Musavat Party, proclaimed that "[t]he regime is going to bankrupt the country’s economy." In a January 9 statement, a small group of MPs from the centrist opposition bloc YeS (Yeni Sisayet – New Policy) and some small opposition parties in parliament stated that they would attempt to overturn the Tariff Council’s decision during parliament’s spring session. "Before raising the prices for energy resources to the level of the world market the government should improve the standard of living in the country," the statement read. The Azadlig (Freedom) bloc, Azerbaijan’s largest opposition movement, has not yet commented on the price hike.

In response to the criticism, Azer Amiraslanov, a pro-government MP and the deputy chairman of parliament’s permanent commission on economic policy, commented that the price hike had been expected. "Previous prices for energy resources in the home market did not reflect current trends in the world market. And such a situation encouraged unfair competition and was damaging the country’s image, especially in terms of negotiations on Azerbaijan joining the World Trade Organization," Amiraslanov said.

Price liberalization should continue, so that basic costs can be met for public utilities, energy resources and water, he argued. "At the same time, the government must compensate poor groups of the population for any increased prices," he added

For now, however, the news appears unlikely to appease many Azerbaijanis. "Every morning I am a witness to conflicts between bus drivers and customers who do not want to pay twice as much for tickets," said Nigar Arpadarai, a 24-year-old office manager in Baku. "Some marshrutkas [shuttle buses] have already increased prices . . . people cannot afford this. People are getting angry."

Editor’s Note: Rovshan Ismaylov is a freelance journalist based in Baku.

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