Azerbaijan Fights Inflation and Looks for Culprits

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