How to reduce the inflation rate in Azerbaijan?

The other day, Prime Minister of the Republic of Azerbaijan Ali Asadov signed an order "On additional measures to strengthen monitoring of inflation and prices." The Decree states that the recent intensification of inflationary processes has become one of the main challenges facing the world economy. The document further notes: "The ongoing geopolitical tensions in the world, the economic sanctions applied, the still incomplete elimination of the complications caused by the pandemic, the aggravation of climate change and the uncertainty of the prospects for the world economy continue to affect inflationary processes" ([1]).

The Government believes that the identification of factors affecting inflation in the country, the further strengthening of the system of monitoring and analysis of price dynamics, the formation of a close coordination structure in this direction are important for achieving an inflation rate that supports economic growth and social welfare. A working group has been established for this purpose.

The document also notes that, taking into account the activation of internal and especially external factors of inflation in the country, important work was carried out to form a framework for effectively combating price increases, and anti-inflationary measures implemented in this direction laid the prerequisites for preventing a sharp increase in inflation. When reading the document, some questions arise: 1) "What"important work has been done" to form an effective framework for combating price increases"? 2) What "anti-inflationary measures laid the foundation for preventing a sharp rise in inflation"? Recall that on February 21, 2022 (before the start of the war between Russia and Ukraine), Prime Minister Ali Asadov signed the Decree "On urgent measures to strengthen anti-inflationary measures in the Republic of Azerbaijan" ([2]). And although this document does not cite "ongoing geopolitical tensions in the world, applied economic sanctions" as the basis, However, it was noted that "along with climate change in the world, the coronavirus pandemic (COVID-19) also caused the acceleration of inflation and its adoption of a global character." In this document, it was noted that "in order to prevent high levels and fluctuations in prices in 2022, urgent measures should be taken in the field of stabilizing price-forming factors, as well as stimulating the production of necessary everyday goods." It should also be noted that the state structures represented in the working group (Ministry of Economy, Ministry of Agriculture, Ministry of Digital Development and Transport, Ministry of Finance, State Customs Committee, Food Safety Agency, State Service for Antimonopoly and Consumer Market under the Ministry of Economy, Central Bank, Ministry of Labor and Social Protection, The State Service for the Control of the Agency of Reserves) were given certain instructions. The Ministry of Economy, together with other government agencies, was instructed to prepare proposals to maintain inflation at a level acceptable for economic activity and take the necessary measures to reduce inflationary pressure. Despite all this, at the end of 2022, inflation in Azerbaijan reached the highest level in the last 15 years - 13.9%. According to the State Statistics Committee, in 2022, food, beverages and tobacco products rose in price by 19.5%. The government believes that "the anti-inflationary measures taken have created a prerequisite for preventing a sharp increase in inflation."

Speaking at a meeting dedicated to the socio-economic results of the six months of 2023, Head of State Ilham Aliyev, referring to the issue of inflation, said: "Of course, the double-digit inflation should make us think. I hope that by the end of the year, inflation may drop to a single-digit level. Here, along with natural causes, there are also subjective ones. They should be studied more seriously, and proposals should be made before the end of the year on the steps to be taken. Because against the background of the economic potential of Azerbaijan as a whole and the results achieved in the economic sphere, inflation at the level of 12% is certainly not desirable."

It should also be noted that in June of this year, the inflation rate in Azerbaijan was 12%, in neighboring Russia -3.2%, in Georgia -0.6%, and in Armenia -0.5%.

I believe that "making proposals on the steps to be taken before the end of the year" is not enough to reduce this year's inflation to a single-digit level. To reduce the level of inflation and eliminate its negative consequences, the Government must take concrete measures.

I think that the main causes of inflation in Azerbaijan are already known. The level of food inflation in Azerbaijan is very high, and there are two main reasons for this. Firstly, Azerbaijan, with all the resource possibilities and favorable soil and climatic conditions, cannot fully provide itself with basic foodstuffs.

The country is able to meet the need for food wheat by 25% due to its own production ([3]) for meat and meat products – by 44.8%, for milk and dairy products – by 55%, raw materials for the production of vegetable oil and sugar – by about 8-10%.

Due to insufficient production of domestic products, there is a shortage of goods on the market, which creates ample opportunities for monopolists engaged in the wholesale sale of these products. If the government wants to "achieve a level of inflation in the country that supports social well-being," it should organize food production in Azerbaijan in accordance with the annual rate established per capita by the World Health Organization and the food and Agriculture organizations of the United Nations.

The second reason is the presence of a monopoly on imports in the country. Monopolistic entrepreneurs who take advantage of the emergence of a shortage of goods receive superprofits by selling products imported at lower prices from foreign countries at higher prices. And since the import of food products is monopolized, the prices of food products and agricultural products in Azerbaijan are higher than in other countries.

Not only that, Azerbaijan cannot fully provide itself with basic food products, due to the fact that the logistics of manufactured products are not organized, access to the market, some of the products deteriorate in fields, warehouses, and are thrown into landfills. As an example, it should be noted that for many years fruit and vegetable producers have faced problems when delivering their products to the domestic market. Over the past 10 years, hundreds of materials, articles, and news have been published annually in the press under the headlines "Farmers in Azerbaijan cannot sell apples" ([4]), "Farmers cannot sell grown persimmons" ([5]), "Peasants cannot sell potatoes and onions again" ([6]), "We cannot sell a kilogram of tomatoes for 20 gapiks" ([7]).

11 years ago, in 2012, Jalilabad farmers complained to the newspaper "Azadlig" that buying and planting seed potatoes in winter at a price of 50-60 gapiks per kilogram, they cannot sell finished products even for 5-6 gapiks ([8]). Every year, reports appear in the media that farmers in Jalilabad do not they can sell grown potatoes. The Government is not taking measures to solve this problem. And this year, the peasants of Jalilabad, Shamkir, engaged in potato production faced the same problems. Potatoes, which were offered to customers in Baku markets in June for 75-80 gapiks, Jalilabad peasants could not sell for 20 gapiks. Their crops rotted on the plots.

Not only fruit and vegetable producers cannot bring their products to the domestic market in the country. Milk producers and those who sell their milk face serious problems.

According to the chairman of the Public Association "Producers and Exporters of Milk and dairy products of Azerbaijan" Samir Eyubov, Azerbaijani farmers offer their products at a price below cost, but enterprises still do not buy it ([9]).

About the same says the owner of the farm from the Samukhsky district Giyas Hasanov: "We sell milk with great difficulty. We used to cooperate with 5 companies. Now we hardly work with 1 company. This company sets its own prices. But we have to sell our products to this company."

Unfortunately, it was not possible to organize fruit and vegetable production, logistics, and product sales at the proper level in the country. Part of the finished products received deteriorates, rots on the sites during production, part - in warehouses during storage, part – in markets, in markets during sale. In order to get a high-quality harvest, increase yields and store the finished product in warehouses for longer, farmers and peasants must carry out all agrotechnical measures in optimal time during cultivation.

To do this, farmers and peasants must be stably provided with water for irrigation. Also, farmers and peasants should have access to equipment that meets modern requirements, high-quality seed material and mineral fertilizers. In crop production, it is very important to apply a crop rotation system. One of the very important issues is the long-term preservation of the quality of the finished product. Unfortunately, in the country, refrigeration and storage complexes that meet modern requirements are mainly at the disposal of oligarchs. The use of these warehouses for small farmers, peasants is practically inaccessible. The warehouse services provided are very expensive and therefore unprofitable for fruit and vegetable producers. For this reason, small farmers and peasants engaged in the production of fruits and vegetables cannot store the resulting crop for a long time. The lack of storage rooms and storage facilities creates a serious problem for farmers engaged in potato production. Due to a shortage of stocks, 40-50 thousand tons of potatoes are fed to cattle during the year, while crop losses exceed 70 thousand tons.

The government can provide some assistance to farmers engaged in the production of fruits and vegetables, in improving access to warehouse services or creating warehouse farms. So, the government can offer these entrepreneurs cheap credit resources. A sufficient number of refrigeration and storage complexes that meet modern requirements will help to avoid crop losses, will enable farmers and peasants to store the harvest for a long time and gradually implement its implementation. In this case, the price of fruits and vegetables will not rise sharply, but will change in a stable range. Monopoly and problems with market access also scare away producers and deprive them of the incentive to produce. The concentration of the wholesale market in the country in one hand limits the possibilities of farmers, and forces them to agree to an unfavorable price for them when concluding a deal. A product bought from a peasant at an inexpensive price is offered to buyers in the markets for 2-3 times more expensive. Monopolized import dealers, importing agricultural products from Russia, Iran, Turkey and other countries at low prices, displace domestic products from the market, create artificial barriers to the promotion of goods on the market.

Monopoly is one of the main factors contributing to inflation. Our research has shown that while the main food products in the world have been steadily getting cheaper for several months, in Azerbaijan the products of the same name (meat, milk sugar) are not getting cheaper or the prices of some products (wheat, vegetable oil) are slightly decreasing after a few months. When studying the reasons for this, it turned out that entrepreneurs engaged in the import of food products in Azerbaijan cannot give a correct forecast of the situation on the world market, therefore, when prices rise on international markets, large volumes of goods and products are imported into the country at high prices. Imported goods at a high price are stored in warehouses, as they exceed demand. Although prices for these products on the world market decrease some time later, Azerbaijani entrepreneurs put up for sale products that were stored in a warehouse as a stock, adding warehouse costs to its price. In fact, if the price of products on the world market decreases, then in accordance with the laws of the market, the price of these products on the domestic market should also decrease. But since there is no competitive environment in the domestic market, the oligarchs who import products dictate their conditions.

I believe that monopolists engaged in food imports, in accordance with their mercantile interests, import food products in volumes exceeding quarterly demand, and sell them at high prices. As a result, despite the serious reduction in the cost of basic foodstuffs on the world market, Azerbaijani consumers still have to purchase products on the domestic market at a higher price.

To prevent a serious increase in prices on the food market, the Government of Azerbaijan should eliminate the existing monopoly on imports and contribute to the creation of a competitive environment in the market.

I believe that the demand of the country's population for food and agricultural products should be met mainly through domestic production, dependence on imports should be reduced, the production of import-substituting local products should become a priority for the government. The soil and climatic conditions of Azerbaijan, unlike neighboring countries, make it possible to receive 2 or even 3 harvests from the same sown area during the year. Azerbaijan can fully satisfy its demand for food products and agricultural products at the expense of its own production. The Azerbaijani government should immediately review its agrarian policy.

In order to prevent inflation and optimize food prices, the Government of Azerbaijan should, along with ensuring stable local food production, eliminate the existing monopoly in imports and in the market.

[1] https://nk.gov.az/az/senedler/serencamlar/inflyasiya-ve-qiymetler-uzre-monitorinqin-guclendi-7165

[2] https://nk.gov.az/az/senedler/serencamlar/azarbaycan-respublikasinda-antiinflyasiya-tadbirlarinin-guclandirilmasi-ila-bagli-taxirasalinmaz-tad-5943

[3] https://marja.az/86117/prezident-erzaqliq-bugda-ile-ozumuzu-cemi-25-faiz-temin-edirik

[4] https://fed.az/az/aqrar/azerbaycanda-fermerler-almani-sata-bilmir-36130

[5] https://insanoid.com/samux-fermerl-ri-yeti-dirdikl-ri-xurman-sata-bilmirl-r/

[6] https://teref.az/gundem/246269-kendliler-yene-kartof-sogani-sata-bilmir-.html

[7] https://pravda.az/news/49023

[8] https://musavat.com/news/azerbaycanda-kendli-fermer-usyani-yetisir_127438.html

[9] https://report.az/biznes-xeberleri/azerbaycanl-fermerler-niye-sud-sata-bilmir/