Impact of customs duties on price increases in Azerbaijan and opportunities

Agora Analytic Collective, a new think tank dealing with the analysis of social and economic policy, has published an analysis article on the impact of customs duties on price increases in Azerbaijan and opportunities. The article notes that the most serious problem related to the global economy is the escalation of price increases. The process, which began with the disruption of the supply chain due to the coronavirus pandemic, is still ongoing, along with the problems posed by rising energy prices, the Russia-Ukraine war, and climate change. Currently, both developed and developing countries are experiencing the highest inflation rates in recent decades.

Currently, the level of price increases is high in Azerbaijan. According to the State Statistical Committee, prices increased by 13.4 percent in January-September 2022 compared to the same period of 2021. Currently, the inflation indicators recorded in the country are higher even compared to the period after 2015, when devaluation was experienced twice during the year and the national currency lost its value twice. Due to the increase in budget expenditures in Azerbaijan at the end of the year, inflation is usually faster in the country in the last months of the year and the first months of the next year. In this regard, it can be assumed that the inflation rate will approach 15 percent by the end of the year. This is several times higher than the inflation target of the Central Bank (4±2%, i.e. between 2-6%).

The price increase recorded in food products, which make up the main part of the population's expenses, is even higher. According to official figures, at the end of September of this year, food products became more expensive by 22.5 percent compared to a year ago. It should be taken into account that according to official indicators, more than half of the population's expenses in Azerbaijan are spent on food products. In this regard, a 22.5 percent price increase in one direction, which constitutes half of the population's expenses, causes a decrease in the social welfare of the population. It should be taken into account that the 22.5 percent inflation rate is the average of about 130 food products. The price increase is higher for individual food products that occupy more space in the population's diet.

Agora Analytical Collective believes that the high level of price increases requires governments to review their economic policies in this direction. In this regard, governments have the ability to influence price increases through tax and customs rates, in addition to traditional monetary policy tools in terms of influencing price levels. Reduction of value-added tax (VAT), reduction of customs duties, etc. are the first steps that come to mind in this direction. However, it seems that these types of steps are implemented in a very limited framework in Azerbaijan.

Customs duties in the countries of the region

It is known from the World Tariff Profiles 2022 report published by the World Trade Organization (WTO) that the level of customs duties in Azerbaijan is higher than in the countries of the region. The report states that in 2021, Azerbaijan's "simple average most favorable nation" customs tariff was equal to 8.5 percent. For comparison, among other South Caucasus countries, this indicator is equal to only 1.4 percent in Georgia. That is, 6 times lower than in Azerbaijan. In Armenia, the corresponding indicator is 26 percent less than in Azerbaijan - equal to 6.3 percent. At the same time, only 33.7 percent of products in Azerbaijan are exempt from customs duties. The same indicator is equal to 87 percent in Georgia. That is, the absolute majority of products imported into the country are generally exempt from customs duties.

Customs duties applied to agricultural products play a more important role in influencing the formation of the price of food products. If we consider the average indicators for these products, it becomes clear that the customs duties applied to agricultural products in Azerbaijan are higher. According to the World Tariff Profiles 2022 report, the "simple average most favorable nation" customs tariff applied to agricultural products in Azerbaijan in 2021 was equal to 13.9 percent. The same figure is 6 percent in Georgia, and 8.1 percent in Armenia. Looking at the price increase of food products in all three countries in the last 1 year, it is known that the indicators recorded in Azerbaijan are higher. So, if at the end of September 2022, the prices of food products in Azerbaijan increased by 22.5 percent compared to the same month last year, the price increase of food products in Georgia was equal to 17.6 percent, and in Armenia - 13.7 percent.

How to change the situation?

It is clear from the presented figures that the average customs duties applied in Azerbaijan are higher than in many neighboring countries. In this regard, Agora Analytical Collective believes that the government can use the reduction of customs duties as a tool to influence the level of price increases. It should also be taken into account that the customs payments collected in recent periods in Azerbaijan are ahead of the forecast indicators. The reason for collecting more customs duties than expected is precisely the increase in prices. From this point of view, even in case of a reduction of customs duties, it is possible to follow the forecast indicators related to customs collections.

In 2021, the average price increase in products imported to Azerbaijan was equal to 21.1 percent. According to the investigation of the Chamber of Accounts, 89 percent of the funds collected by the customs authorities were formed due to the payments collected from the areas where price increases were recorded. According to the Chamber's opinion, 15 percent of the funds collected by the Customs Committee are due to inflation. If we take into account that the volume of total customs collections collected by the Customs Committee last year was 4 billion 343 million manats, this means that 651 million manats of these funds were formed only due to price increases. If we take into account that customs collections exceeded the forecast by 443 million manats last year, we can say that the collection of customs collections more than the forecast happened due to the increase in prices and therefore the parallel increase of customs collections.

However, it should also be taken into account that in the present case, even the reduction of customs duties may not have a serious effect on the level of price increases. Because this type of mechanism applied by the governments becomes effective if there is a competitive environment in the market and the participants are forced to adapt to such steps of the government. There are serious problems related to the level of the competitive environment in many fields in Azerbaijan. Therefore, reducing customs duties without developing a competitive environment in the economy of Azerbaijan can only lead to a reduction in the costs of those limited number of companies. It should be noted that the main purpose of taking such steps is not to enable companies to reduce their costs and earn more income. With an effective customs policy, the government has the opportunity to influence the rising costs of consumers.

For this reason, factors such as the liberalization of economic activity in the country and the creation of equal opportunities for everyone to enter the market are also very important in order to prevent the high inflation currently prevailing in Azerbaijan. In order to create the economic environment we have mentioned, especially, it is very important to take steps to create an effective legislative framework in the country (the adoption of the competition code, ensuring the functioning of the mechanism for filing income declarations by officials, etc.), ensure the functioning of these laws, eliminate the existing challenges related to property rights and the judicial system, and improve access of small and medium enterprises to financial resources.

In a situation where this competitive environment is formed, the creation of more favorable conditions for customs duties may cause the cost price of products imported to the country to become cheaper. Taking all these steps is very important for the development of the country's economy, as well as for solving the problems caused by price increases, which are currently worsening the social condition of the population.