Expert discloses main causes of external inflation risks in Azerbaijan

Trend:

The inflation rate will not exceed five percent in Azerbaijan till the end of 2019, Elshad Mammadov, professor at the Azerbaijan State University of Economics (UNEC), told Trend.

Mammadov was commenting on possible external risks associated with inflationary processes in neighboring countries of the region as a result of devaluation of national currencies.

“If the devaluation of national currencies continues in neighboring countries, which are the foreign trade partners of Azerbaijan, then the manat rate will have to be balanced in the future,” he added. “This can lead to a slight increase in inflation rate in Azerbaijan in the future.”

"At the same time, the prices for imported goods may decrease in the short term as a result of the devaluation of currencies in neighboring countries – partner-countries of Azerbaijan (for example, Russia, Georgia),” Mammadov said.

“I think that the inflation rate in our country will not exceed the figures projected by the government and the Central Bank till the end of the year,” he said. “The further process will depend on the Azerbaijani monetary policy.”

“In my opinion, it should be mitigated and at the same time, investments in the real sector should be increased to intensify production and implement import substitution,” Mammadov said. “In this case, external risks will not affect the Azerbaijani economy negatively in the future."

“There is no real threat of devaluation of the manat in the near future unless the Central Bank decides to change the exchange rate of the national currency,” he said.

“The fact that the current exchange rate in the country has not been indicated as “floating”, but it has been regulated by the Central Bank, testifies that today there is no essential need to strengthen the manat,” Mammadov said. “We have a fairly good foreign trade balance, even at current, relatively low oil prices. The export operations are much higher than import operations.”

“Taking into account the devaluation of national currencies in neighboring countries, an excessively strengthened manat rate may hamper the development of the real sector of the Azerbaijani economy,” he said. “This step can have a negative impact on the real sector of the economy due to the lack of the effective policy of import substitution. Accordingly, we must actively develop the real sector for the country's economy to be slightly dependent on import. The negative factors do not threaten the stability of the national currency in the near future.”

“In the long term, the national economy may be negatively affected by the policy of reducing the money supply,” Mammadov said. “Therefore, while controlling this process, it is important to increase the volumes of money supply for it to enter the real sector of the economy rather than to remain on the foreign exchange market. At the same time, it is necessary to increase the production of goods and increase the amount of investments in the economy to effectively combat inflation.”

“Starting from the time of gaining the state independence, Azerbaijan experienced inflation of costs and there was not demand-pull inflation, which was associated with high prices for credit resources and a high level of monopolization, which led to a shortage of money supply in the national economy,” he said.

“I think that social spending should be increased,” Mammadov said. “This step will not lead to an increase in inflation rate. It is important to take into account other risks that may arise if some unfair entrepreneurs raise prices for their products by using their own monopoly status in terms of weak competition in the market.”

"In this case, the corresponding state services must prevent the artificial increase in prices,” he added. “Therefore, inflation rate may increase because of the monopolization of the market, rather than due to excessive money supply."

The expert stressed that the country's foreign exchange reserves serve as an airbag for the economy and stability of the national currency.

"Azerbaijan’s foreign exchange reserves in excessively big volumes are stored in foreign assets,” Mammadov said. “I think that today there is a need to invest part of these funds in the real sector of the economy."