EurasiaNet Business & Economics - Azerbaijan Fights Inflation and Looks for Culprits

BUSINESS & ECONOMICS

AZERBAIJAN FIGHTS INFLATION AND LOOKS FOR CULPRITS
Khadija Ismayilova 6/21/05

Rising food prices could emerge as a key issue during this fall’s parliamentary election campaign. President Ilham Aliyev’s administration appears anxious to reverse the current trend, but the government’s anti-inflation campaign is flagging due to opposition from monopolies and pervasive corruption, political experts suggest. If prices continue to rise, some hard-hit entrepreneurs could shift their support to opposition parties in the November election.

Economic statistics paint a troubling picture for the Aliyev administration in an election year. [For background see the Eurasia Insight archive]. The annual inflation rate now tops 15 percent, according to government figures, and food prices have doubled in the past year. The inflation rate from January to March 2005 alone � 7.6 percent � exceeded some forecasts for the entire year, according to Arif Veliyev, the chairman of the State Statistics Committee.

More inflationary pressure could be on the way. President Ilham Aliyev told delegates to the 2005 Petersburg International Economic Forum that Azerbaijan’s economy is expected to grow by 13 percent this year, the highest growth rate in the Commonwealth of Independent States. That could put Azerbaijan at even greater risk for the so-called Dutch disease, a condition in which a country’s economy becomes over-dependent on the oil-and-gas sector, causing prices to rise while the overall economy slumps.

The president has described the current inflation rate as "intolerable," and has pressed a variety of government agencies � including the ministries of economic development, finance, taxes, along with the State Customs Committee and the National Bank -- to take anti-inflation action. On May 25, for example, the National Bank raised its lending rate by half a percentage point to 7.5 percent. The rate hike was the first in nearly three years.

International financial organizations have cautioned Azerbaijan that failure to contain inflation could damage the country’s investment climate. To avoid a socio-economic crisis in an election year, the government has pledged to significantly reduce inflation by the end of 2005. Azerbaijani monopolies are now coming under particular scrutiny over their role in stoking inflation. On June 2, a presidential decree directed the Ministry of Economic Development to restructure monopolies in order to foster competition.

The continuing existence of monopolies has thwarted business development, thus hampering the emergence of a competitive pricing structure, said Emil Majidov, president of the Azerbaijan Investment Promotion and Advisory Foundation, an organization established by the Ministry of Economic Development and partially funded by the United Nations Development Program. "The problem is that during the past years of a so-called market economy we have lost the opportunity to develop a business elite with �fair play’ experience," Majidov said. "How many businesses have had no chance to start, how many investments have moved to other countries, how many of them [frustrated entrepreneurs] work in the shadow economy?"

Many monopolies exist because the government has chosen to look the other way, some experts contend. Alakbar Mammadov, head of the National Confederation of Entrepreneurs, an advisory group associated with the Ministry of economic development, argues that district executive committees illegally control food markets and bakeries, and are to blame for the recent food price increases.

"When the price for bread went up, nobody could explain that with market factors. [It was] as if someone ordered the price to increase," said Mammadov. In 2004, bread prices increased to 1500 manats (about 32 cents) per kilogram from 1000 manats (about 21 cents). Mammadov also cited the experience of a vineyard operator who bought refrigeration equipment in order to allow him to store grapes until winter. "In December, when he brought his grapes to market, they [local officials] refused to let the product in because only Iranian grapes are allowed to be sold in the markets," Mammadov said.

An April 11 report by Turan News Agency’s MarketWatch Group appears to confirm the role of monopolies in exerting undue influence over Azerbaijan’s food prices. According to the report, the joint stock company Alliance controls banana imports into Azerbaijan, while the joint stock company MER controls their distribution. Though one kilogram of bananas is priced at 1400 manats ($0.28) when it enters the country, that same kilogram is sold in shops for about 12000 manats ($2.47) -- a mark-up of about 900 percent. Government figures show similar mark-ups for poultry (370 percent), eggs (220 percent) and butter (240 percent).

Mammadov charged that government entities have also played a role in keeping prices high for hauling railway cargo, a factor that, in turn, determines consumer prices. The railway administration can offer a 50 percent discount on government-set cargo fees through the TRASECA program, an international initiative which seeks to restore traditional Silk Road transit routes from Europe to Asia, but, according to Mammadov, the discounts are not evenly distributed. "They give discounts to those they like, or create their own companies. So, while one company enjoys a discount, the others suffer," Mammadov said.

The anti-monopoly crackdown has fueled government infighting. One public spat involved Farhad Aliyev, the minister of economic development, who has publicly identified delays in customs and high tariffs as reasons for Azerbaijan’s rising prices, and Kamaladdin Heydarov, head of the State Customs Committee. Newspapers supporting Heydarov gave Farhad Aliyev the sobriquet of "emperor," and published the names of companies allegedly controlled by his relatives. Media outlets backing Aliyev launched similar attacks against Heydarov, with ANS, for instance, terming the customs boss the wealthiest man in Azerbaijan. President Aliyev eventually intervened to put a stop to the media jousting.

Corruption also appears to be playing a significant part in pushing up Azerbaijan’s inflation rate, Mammadov asserted. In Baku, where a building boom is underway, Mammadov charged that city officials now demand as much as $40,000 for giving a business store space � a 20-fold increase from 2004. Baku city officials deny that they take bribes for property leases.

The struggle to contain corruption is hampered in part by inter-agency rivalries. With the interior ministry still reeling from a kidnapping scandal earlier this spring that involved senior ministry officials, responsibility for prosecution of corruption cases appears to have passed to the national security ministry. [For background see the Eurasia Insight archive]. No clear set of rules exists, however, that establishes which ministry bears responsibility for fighting corruption, and the two ministries frequently tussle between themselves over the question.

Rena Safaraliyeva, the head of Transparency International Azerbaijan, an anti-corruption watchdog, suggests that a more fundamental problem is the government’s inability so far to back tough words with actions. Some officials have been outspoken on the need to crack down on corruption. But in Safaraliyeva’s view; "these are just statements by some ministers. No real work. The struggle with corruption needs coordinated work by all state agencies and not only at the minister’s level."

The head of one Baku law firm that frequently represents entrepreneurs in property disputes says little can be expected from state bodies responsible for fighting corruption. "I never heard about any high-level official punished for corruption," said Aslan Ismayilov, a member of the National Confederation of Entrepreneurs and an outspoken critic of monopolies. "We need court cases and a real punishment mechanism, which would work if the courts and law enforcement agencies would perform properly."

Some observers say the mind-set driving the government’s anti-inflation program is reminiscent of that which existed during the Soviet era’s command economy "I have set the task. Prices should go down," various media sources reported Aliyev as saying during an April 20 cabinet meeting. In another statement widely criticized by the media, Prime Minister Arthur Rasizade suggested that Azerbaijanis should not eat cucumbers during winter "because they are expensive out of season."

Ismayilov, the small-business advocate, suggested that if changes do not come, an increasing number of entrepreneurs could ally themselves with the opposition in this November’s parliamentary elections. If so, the opposition appears more than willing to embrace them. "The head of state is the head of corruption," said Fuad Mustafayev, deputy chairman of the Popular Front Party.

Editor�s Note: Khadija Ismayilova is a freelance journalist based in Baku.

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