RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES -

UNCLAS BAKU 000413

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EEB/TPP/ABT/ATP JANET SPECK

E.O. 12958: N/A
TAGS: ECON EAGR EAID ETRD PREL AJ PGOV
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES -
AZERBAIJAN

REF: SECSTATE 39410

SENSITIVE BUT UNCLASSIFIED


1. (SBU) The global increase in commodity and agricultural
prices has had an inflationary effect on consumer prices in
Azerbaijan, according to both the International Monetary Fund
and the Government of Azerbaijan. Since late 2007, some of
the most important food and agricultural commodities consumed
in Azerbaijan, such as bread, butter, vegetable oil, flour,
fruits, and vegetables, have increased significantly in
prices, including in some instances by 40 to 50 percent.
According to USAID-sponsored research, over past year prices
increased by 28.96 percent in Baku and the rural regions.
Azerbaijan has benefited from high oil prices, potentially
cushioning any negative effects from global price increases.
It has amassed more than USD 3 billion in its Oil Fund and
stands to receive more than USD 12 billion in 2008. The
Government of Azerbaijan is aware of the growing price
pressures and is reviewing its options to ensure that the
local population is not negatively affected. Azerbaijan is
not highly competitive in grain production. In 2007, the
Government of Azerbaijan provided approximately USD 50
million in fuel related subsidies for agriculture imports and
VAT coverage, and allocated approximately USD 50 million in
cash payments to grain producers to encourage additional
production. The government regulates the prices of many key
consumer items, including bread, utilities, and gasoline.


2. (SBU) Once Azerbaijan's strongest sector, agricultural
production has decreased steadily over the past decade. The
lack of basic infrastructure hampers agricultural production
and Azerbaijan has become a net importer of agricultural and
commodity goods. According to official statistics, only 60
percent of domestic consumption is satisfied by domestic
production. While the increase in prices has affected all
socio-economic groups, the overall impact has not led to
public unrest and the Government of Azerbaijan appears to be
managing the issue easily. Within the domestic economy there
are numerous structural impediments that are contributing to
higher prices. In addition, the government's expansionary
fiscal policy has also contributed significantly to the
increase in consumer prices. Azerbaijan's growing inflation
affects U.S. government programs by increasing overall
operating expenses and requiring continual adjustments to
budgets. For the government, restraining fiscal spending,
improving agricultural infrastructure and decreasing trade
restrictions would help alleviate increases in global food
and agricultural commodity prices.
DERSE