“Fitch Ratings” international rating agency predicted that inflation will decrease in Azerbaijan this year. It was reported that inflation will decrease to 4.5 percent in 2024. Will the single-digit forecasts come true this year amid double-digit inflation for a long time?
Economist expert Elman Sadigov said in his statement to “Kaspi” newspaper that high inflation is harmful for the economy: “Inflation eats people’s money and makes it necessary to increase budget revenues and expenses. Each country has optimal inflation thresholds for its economy. Inflation around 4-6 percent is normal for the economy of Azerbaijan. But inflation of 10 percent and above is a serious threat to the economy, budget, incomes and well-being of the population.”
In what case can inflation subside?
According to E. Sadigov, the reduction of inflation depends on many factors: “The 4.5 percent forecast confirms the forecast given by the Central Bank. The reduction of inflation can be realized under the conditions that the government will not increase the necessary costs regulated by the Tariff Board, because they are the influencing factors. Another reason is import inflation. Currently, prices have fallen all over the world. Many commodity prices have even returned to pre-Russia-Ukraine war levels. In other words, inflation is being curbed all over the world. But import inflation is still relevant for Azerbaijan. Tariffs and customs duties play a role in eliminating this. If the current conditions continue, if there are no crises, pandemics, serious wars or tensions, if the prices of goods do not increase in the world market, and if there are no price increases in products regulated by the Tariff Council within the country, this forecast is realistic.”
Rising wages do not pose an inflationary risk
According to our interviewee, rising salaries against the background of money circulation in the country do not pose a serious inflation risk. Because there is no saturated money supply in the country: “The competitive environment should be further improved in order for the forecasts to be confirmed and the inflation figures to decrease. The Competition Code has already been adopted. This also gives some hope. On the other hand, the increase in production and processing is very important. “The more competition there is, the better quality products we will buy at a lower price.”
E. Sadigov stated that import increases every year in January and February. Accordingly, the demand for the dollar is also high: “The increase in the demand for the dollar creates a serious psychological situation. There is a need for proper education among the population. If people expect inflation, prices start to rise faster. Because people tend to consume more. In fact, devaluation is not going away. Because currently oil prices, the situation in the balance of payments, etc. does not create a certain basis for devaluation. But for a “floating exchange rate” it is important to fulfill certain economic conditions and conditions. I think it is too early for now.”
According to economist Elchin Rashidov, a member of the Center for Economic and Social Development, people have recently been converting their manats into more dollars: “People buying and saving more dollars creates a shortage of dollars and a surplus of manats in the economy, which devalues the manat. I believe that the Central Bank’s lowering of the discount rate is related to this. Previously, the Central Bank considered influencing inflation by taking the manat as an independent currency and increasing and decreasing the interest rate. Now it should try to reduce inflation by increasing the interest rate. Because the surplus of manat also creates the risk of devaluation. Another factor that creates the risk of devaluation is the decrease in budget obligations and oil revenues. Devaluation is possible to meet increased new budget obligations. Devaluation will also be accompanied by higher than expected inflation. Due to this risk, people give up manats and switch to dollars.”
Actions backfire
E. Rashidov noted that if the strict policy applied to banks continues this year, there will be no reduction in inflation: “If there is a devaluation, we will not be able to achieve the targeted inflation of around four percent. Even if devaluation does not happen, it seems unlikely that the Central Bank will achieve its inflation targets. It is the current policy that creates inflation.”
Our national currency is not independent
According to the expert, the main factor determining manat inflation is the price of the dollar on the world market: “When inflation is high, manat depreciates more than foreign currencies. The exchange rate of manat has been stable for the last 7-8 years. But against this background, the manat loses a few percent of its value compared to the dollar. Thus, the inflation in Azerbaijan is several percent higher than the inflation in the United States every year. This means that the foreign sector is more competitive than in Azerbaijan. Our national currency is not independent, its price is determined by the dollar. Against such a background, it is wrong to target inflation. This requires policies that grow the economy and create more employment. “Employment itself contributes to economic growth.” (“Kaspi” newspaper)
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