Drastic Price Hikes in Azerbaijan Fuel Tension

A dangerous economic discrepancy is taking hold in Azerbaijan, in which the state's booming economy is offset by the population's languishing living standards. The government's recent implementation of massive price hikes for basic items – including fuel, water, electricity and public transportation – has brought the country's growth dilemma into sharper focus.

Officials announced the drastic price hikes on January 8. The cost of electricity experienced the highest rise, up 320 percent. In addition, subsidies to poorer Azerbaijanis are being phased out, meaning that all citizens will be paying the same rate for electricity. Meanwhile, gasoline prices rose 50 percent, 25 percent for diesel fuel. Azerbaijanis will now pay more for gasoline than do Americans. The fare for city buses in the capital Baku increased 33 percent.

The government implemented a similar hike in early 2006, although the scope of increase was not as broad. [For background see the Eurasia Insight archive].

At the time, Economic Development Minister Heidar Babayev held a news conference, during which he explained the government's reasoning behind the increases. Babayev also serves as the chair of the country's Tariff Council, which authorized the price hikes.

In sharp contrast to 2006, top government representatives did not initially comment on this year's increases. The announcement, for example, came at a time when President Ilham Aliyev was reportedly out of the country on vacation. The official silence appeared to compound public anger. Finally, Babayev, in comments published January 16 by the official Azertag news agency, claimed that the price hikes were linked to the government's reform plan.

Babayev's reasoning seemed convoluted, according to the Azertag report. The decision to raise prices was made "after conducting analysis and estimations, including increasing local prices to match world prices under the ruling of the Cabinet of Ministers on changing excise-duties on oil products given the growing domestic demand for oil products as well as given the necessity to regulate budgetary income from oil product sales, and suggestions of oil companies," the Azertag report quoted Babayev as saying.

Babayev indicated that the 2007 price hikes would bring in an additional 200 million manats (roughly $220 million USD) to the Azerbaijani treasury. He insisted that the government would continue programs designed to help low-income Azerbaijanis afford basic living necessities. He provided no indication that state-sector employees would receive salary raises anytime soon.

The hikes for gasoline and electricity have already sparked a chain-reaction of rising prices. Over the past week, the cost of many goods and services has climbed, highlighted by a 50 percent rise in the price of bread. Editors of 14 leading newspapers likewise decided to increase prices 50 percent. Meanwhile, the number of vehicles on the streets of Baku, including taxis and minibuses, has experienced a sharp drop.

The hikes naturally caused widespread discontent. Some local journalists dubbed January 8, the day of the price-hike announcement, "black Monday." A group of local lawyers has announced it will challenge the legality of the price hikes. According to Alasgar Mammadli, one of the lawyers, the Tariff Council's decision violated several legal and procedural norms. The hikes were implemented, for example, before the country's Cabinet of Ministers formally approved them, Mammadli asserted. "Besides, according to 2005 adopted law, "On the Right of Obtaining Information," the government has to inform the public about any price increase at least 30 days before [implementation], but they [the government] did not do that," Mammadli added.

Opposition political parties have demanded the repeal of the price hikes. The Azadlig (Freedom) opposition bloc has announced its intention to stage a mass rally in Baku on January 26, while the Musavat opposition party wants to hold a rally of its own two days later. It is unclear whether or not authorities will sanction the opposition rallies.

Officials are clearly concerned that the price hikes could produce popular unrest. This concern is underscored by the authorities' moves to hinder access to two websites www.tinsohbeti.com and www.susmayaq.biz, both of which initiated a petition drive, trying to gather signatures of those against the price increases.

The price-hike controversy is set against the backdrop of staggering economic growth, driven by the rapid expansion of energy exports. In its Transition Report 2006 published in November, the European Bank for Reconstruction and Development said Azerbaijan had the highest growth rate in the world. GDP growth in 2005 was estimated at 26 percent. According to Anita Taci, the EBRD's economist for Azerbaijan, growth for the first 10 months of 2006 was 34 percent. Some estimates call for Azerbaijan to maintain a growth rate in excess of 30 percent in 2007.

"It's an anomaly in the history of former socialist countries," Taci said. Despite this, Taci and other representatives of international financial institutions do not see Azerbaijan as having a healthy economy. "Living standards are failing to rise at the same pace with economic growth," said Taci. "We have to still say the country is quite poor." Meanwhile, Inglab Akhmedov, director of the Public Finances Monitoring Center, a Baku-based non-governmental organization, said that Azerbaijan's economy was showing signs of "overheating."

Helping to explain the economic discrepancies is the fact that the oil sector in Azerbaijan employs only 5 percent of the population, while more than 40 percent are involved in agriculture. Economists have warned that Azerbaijan's non-oil-and-gas-related economic sectors could shrivel because of the rapid increase in energy export revenue, a phenomenon dubbed Dutch disease. [For background see the Eurasia Insight archive].