Azerbaijan extends VAT exemption for wheat imports, but prices are not falling

Azerbaijan has extended tax exemption for the import and sale of wheat, as well as for the production and sale of wheat flour and bread for another three years, according to an amendment to the Tax Code.  VAT exemption of 18% occurs regularly, and this time the cancellation will be valid until the beginning of 2027.

While the government usually exempts grain imports from value added tax (VAT), price increases for flour and bakery products in Azerbaijan are also regular. This is noteworthy, especially against the background of lower grain prices in Russia, the main supplier of grain to Azerbaijan.

The most recent spike in flour prices occurred in October, when the wholesale price of a 50-kilogram bag rose from 26.10 manats at the end of August to 27.25 manats in early October. This price increase has raised questions about the impact of global trends and changing forecasts for grain in Russia on the domestic market of Azerbaijan.

The Food and Agriculture Organization of the United Nations (FAO) reported that worldwide food prices remained relatively stable in September compared to August. It is noteworthy that the FAO food price index for September 2023 was 10.7% lower than in the same period of the previous year, and 24.0% lower than the record figure recorded in March 2022.

However, the State Statistics Committee (Goskomstat) of Azerbaijan presents the opposite point of view. In September 2023, the FAO Food Price Index (CPI) for Azerbaijan increased by 100.6% compared to the previous month and by 104.5% compared to the corresponding month of the previous year. The consumer price index for food in January-September 2023 also increased by 112.8% compared to the same period in 2022.

This discrepancy between global and local indices is evident from SSC data showing that while the FAO food price index for Azerbaijan decreased by 10.7% in September 2023 compared to the previous year, the consumer price index for food in the country increased by 4.5% over the same period.

Azerbaijan's dependence on grain imports is highlighted by the SSC's statement that domestic grain production is insufficient to meet demand. Taking into account that 3.1 million 900 thousand tons of grain and leguminous crops, including corn, will be harvested by October 1, 2023, Azerbaijan falls short of 4.93 million tons consumed annually. However, the data on the production of local grain are questionable, since the strategic grain fund of 750 thousand tons replenishes reserves due to imports from Russia.

Despite a 1.7% increase in grain production compared to the previous year, imports of grain products increased sharply in the first eight months of 2023. This increase of a total of $18 million compared to the same period last year casts doubt on assumptions that lower grain prices will lead to a reduction in imports.

Wheat, the most important component of food production in Azerbaijan, faced a decline in prices on the world market in September. FAO attributed this decrease to abundant wheat stocks in Russia and an upward revision of forecasts for the wheat harvest in Russia for 2023, which is currently projected at 90 million tons.

On the contrary, in Azerbaijan, wholesale flour prices have increased by 3.8% over the past month, which raises concerns about the consequences for consumers. While world wheat prices have been steadily declining over the past year, bread and flour prices in Azerbaijan have decreased only slightly, indicating a potential gap between the dynamics of international and domestic markets. In November last year, the price of bread weighing 550 grams decreased by only 0.05 manat, that is, from 0.60 manat to 0.55 manat.

Azerbaijan's dependence on imports is not limited to grain, but extends to other food categories such as rice, vegetable oils, dairy products and meat. The country imported 82.8% of its rice, 74.5% of vegetable oils and 52.7% of milk consumed. Despite the decline in world prices for dairy products and meat, prices have been rising in Azerbaijan, which has raised questions about the effectiveness of import channels and domestic production capacities.

While the FAO global indices indicate a decrease in sugar prices, an increase was observed in Azerbaijan, which is explained by a decrease in local sugar beet production. A country heavily dependent on sugar imports faces challenges in maintaining self-sufficiency, highlighting the vulnerability of the domestic supply chain.

In conclusion, Azerbaijan's decision to extend tax breaks on key food products reflects strategic efforts to mitigate the impact of global market fluctuations on domestic prices. However, challenges remain, especially in bringing local dynamics in line with international trends and solving the complexities of food production, import logistics and market distribution.