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