Azerbaijan
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
19 Dec 1995
ISBN:
9781451802504
Language:
English
Keywords:
ISCR; CR; exchange rate; broad money; terms of trade; enterprise arrears; money multiplier; foreign trade; second quarter; rising prices; bank credit
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This paper reviews economic developments in Azerbaijan during the 1990s. In 1992, approximately 70–80 percent of producer and consumer prices were liberalized, and enterprises were allowed greater latitude in their price and wage setting. However, price controls were applied on energy and bread prices, price markups remained controlled, and the price liberalization process was constrained by state procurement of major production items. Although the coverage of the state order system was gradually reduced, it still accounted for most of the production of “strategic goods” at end-1994.

Abstract

This paper reviews economic developments in Azerbaijan during the 1990s. In 1992, approximately 70–80 percent of producer and consumer prices were liberalized, and enterprises were allowed greater latitude in their price and wage setting. However, price controls were applied on energy and bread prices, price markups remained controlled, and the price liberalization process was constrained by state procurement of major production items. Although the coverage of the state order system was gradually reduced, it still accounted for most of the production of “strategic goods” at end-1994.

I. Overview

Since the late 1980s, the Azerbaijan economy experienced severe external shocks resulting in an economic decline which has been among the most severe in the transition economies. First, the military conflict over the Nagorno-Karabakh region, which started in 1988 and ended with a ceasefire in May 1994, resulted in a loss of 20 percent of national territory and a large number of refugees in the country. Second, associated with the breakup of the U.S.S.R., serious disruptions in trade and financial links with Russia and other CIS countries aggravated economic problems since Azerbaijan was more dependent than many others on these markets. Third, Azerbaijan suffered from a deterioration of its terms of trade in 1994 and 1995; first as Turkmenistan moved to world market prices in its natural gas exports to Azerbaijan; and then as its transportation costs rose sharply with the disruptions of trade routes through Georgia and Chechnya. As a result, the cumulative decline in Azerbaijan’s real GDP amounted to 61 percent in 1990-94, about one third steeper than in other CIS countries on average.

In response to fundamental changes in the economic environment, the Government began to gradually implement systemic reforms. In 1992, approximately 70-80 percent of producer and consumer prices were liberalized, and enterprises were allowed greater latitude in their price and wage setting. However, price controls were applied on energy and bread prices, price markups remained controlled, and the price liberalization process was constrained by state procurement of major production items. While the coverage of the state order system was gradually reduced, it still accounted for most of the production of “strategic goods” at end-1994. Export quotas and licensing requirements remained in effect and domestic trade was largely subject to direct and indirect intervention by branch ministries and government agencies, in particular in agriculture and the energy sector.

Reforms were initiated in the financial sector by adopting a two-tier banking system in 1992. However, an annual credit plan, subject to approval by Parliament, continued to govern credit allocation. In addition, the central bank did not have control over foreign exchange reserves, which were largely allocated through the foreign exchange budget to governmental needs, including security and defense. Differentiated foreign exchange surrender requirements at below market rates resulted in multiple currency practices. Only in January 1994, did the manat, Azerbaijan’s national currency, become the sole legal tender providing a degree of autonomy for the monetary authorities. In the enterprise sector, privatization plans were drafted, but not implemented, and by end-1994, only the taxi fleet and a small part of the government owned housing stock had been privatized.

In an economic environment of systemic changes and external shocks, the financial policies pursued were largely inconsistent with achieving economic stability (Chart 1). The general government fiscal position deteriorated sharply as the revenue base shrank with declining output and an increasing shift to informal economic activities. Meanwhile, expenditures remained high. The general government fiscal balance, which was in surplus in 1992, turned into a deficit of more than 10 percent of GDP in 1993 and 1994. The absence of successful fiscal consolidation combined with accommodating central bank financing of the budget deficit led to excessive monetary expansion and high inflation, which undermined the value of the manat. In late 1994, inflation rose to more than 50 percent per month. The result was a rapid dollarization of the economy.

Chart 1
Chart 1

AZERBAIJAN Selected Economic Indicators

Citation: IMF Staff Country Reports 1995, 119; 10.5089/9781451802504.002.A001

Sources: State Committee of Statistics; Ministry of Finance; Azerbaijan National Bank; and IMF staff estimates.1/ Estimate.2/ Dollarization is the ratio of foreign currency deposits to broad money.

In the beginning of 1995, amid severe economic imbalances and rapidly falling living standards, economic policies were radically revised. Monetary stability was set as the primary goal of financial policies and the expansion of credit and money was brought under control. A precondition for this was fiscal consolidation, which was achieved by improving the efficiency of revenue collection, and, in particular, by a sharp compression of expenditures. As a result, central bank financing of the government budget deficit declined from 11 percent of GDP in 1994 to 1 1/2 percent of GDP in the first nine months of 1995. The growth of domestic broad money declined from a monthly average of 18 percent in the latter part of 1994 to 8 percent in January-September 1995 with average monthly inflation falling to 1 1/2 percent during the last six months through October 1995. The nominal exchange rate remained stable throughout 1995.

Monetary stabilization and a drastic reduction of central bank financing of the budget was greatly helped by the availability of substantial external financing for the budget. In 1995, US$91 million of the signature bonus that Azerbaijan had received for concluding an oil contract with international oil companies, was allocated to the budget. Indeed, although sterilization of the monetary effects of these foreign exchange inflows was not complete, they have provided an important source for budget financing without undermining monetary stabilization.

On the external sector, Azerbaijan’s overall balance of payments has strengthened with the disbursements of the oil signature bonus and strong inflows of foreign direct investment associated with the operations of the international oil consortium. Gross official reserves of the central bank rose from less than US$2 million at end-1994 to US$115 million by end-September 1995, equivalent to 1.6 months of imports not related to the operations of the oil consortium.

Progress on structural reforms, however, has been slower than in macrostabilization. Nevertheless, important steps have been taken. Budget subsidies have been largely eliminated, and domestic oil prices have been raised to world market levels. The exchange and payments systems were liberalized through unification of the exchange rate and discontinuation of the system of differentiated surrender requirements at below market rates in March 1995. Both domestic and foreign trade regimes have been substantially liberalized with the abolition of the state order system, export and import quotas, as well as licensing requirements. However, while the functioning of the market has improved with these measures, privatization, enterprise restructuring, and banking reform have not yet taken hold.

II. Real Sector Developments in 1994-95 1/

1. Output

Based on rich reserves of oil and natural gas, Azerbaijan was one of the first petroleum-producing regions of the world. In addition, the country has a well developed agricultural base (with cotton as the main cash crop), a large industrial sector, and an extensive transportation network. The economic downturn during the past five years affected all these sectors, with the highest declines occurring in industry. After falling by over 20 percent in both 1992 and 1993, officially recorded real gross domestic product (GDP) fell by another 21 percent in 1994 (Chart 2). Preliminary data suggest that output continued to decline during the first half of 1995, although at a somewhat lower rate.

Chart 2
Chart 2

AZERBAIJAN GDP, Inflation, and Wages

Citation: IMF Staff Country Reports 1995, 119; 10.5089/9781451802504.002.A001

Sources: Azerbaijan State Committee of Statistics; and IMF staff estimates.1/ Projection.2/ Nominal wage deflated by monthly CPI.

In recent years, the decline of real GDP was most pronounced in state owned enterprises, notably industry and construction, which were disproportionately affected by the disruption of trade routes through Georgia and--in late 1994--Chechnya. In 1994, industry and construction recorded a real decline of about 23 and 53 percent, respectively (Table 1). Agricultural output has recently been falling slower than that of industry, mainly because of two successful cotton harvests in 1994 and 1995. There are indications that economic activity has been increasingly shifting to the emerging informal sector, particularly retail trade and services which, however, remain largely unrecorded.

Table 1.

Azerbaijan: Gross Domestic Product by Sector of Origin

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Sources: Azerbaijan State Committee of Statistics; OECD; and IMF staff estimates.

GDP figures for 1990-92 are only available in rubles.

Factor earnings of the business sector were buoyant in 1993 and 1994, reflecting a continued decline of real wages and high inflation. The terms-of-trade shock in 1994 and early 1995 (see Section V.2) and the decline of inflation in 1995 led to a marked fall of recorded business sector profits during 1995. Meanwhile, mixed household incomes increased, as private households were supplementing official wages and salaries with incomes from other sources such as in-kind pay, income from self-employment, and private farm income. Reportedly these incomes accounted for up to two thirds of total household incomes. Hence, in 1995 the real disposable income of households is estimated to have declined by about 10 percent compared with a fall of 20 percent in real wages.

On the expenditure side, the decline of GDP in the early 1990s was mainly driven by falling household consumption and a collapse of domestic investment activity (Table 2). In 1994, public consumption also started to contract, due to cuts in military expenditures after the ceasefire in the Nagorno-Karabakh conflict and, in early 1995, the pursuit of restrictive public expenditure policies. Retail turnover data suggest that real private consumption declined broadly in line with real GDP during 1994, but by less than real GDP in the first half of 1995, reflecting the above mentioned shift of real factor incomes from the business to the household sector. A lower rate of decline in private consumption may also be attributed to the sharp reduction of the inflation tax burden on households during 1995 (see Appendix I).

Table 2.

Azerbaijan: Gross Domestic Product by Final Use

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Sources: Azerbaijan State Committee of Statistics; OECD; and IMF staff estimates.

GDP figures for 1990-92 are only available in rubles.

As in many transition economies, the official data tend to overstate the decline in economic activity also in Azerbaijan. Poor coverage of official statistics, low response ratios to statistical questionnaires, and systematic underreporting by households and enterprises to avoid taxation are common. As can be seen in Chart 3, electricity production, often used as a proxy indicator for total output, has declined much less than officially recorded GDP. Indeed, while real GDP has fallen by about 60 percent since 1989, electricity production declined only by 25 percent.

Chart 3
Chart 3

AZERBAIJAN Electricity Production and Real GDP (1989=100)

Citation: IMF Staff Country Reports 1995, 119; 10.5089/9781451802504.002.A001

Sources: Azerbaijan State Committee of Statistics; and IMF staff estimates.

a. Agriculture

Agriculture continues to be organized in collective and state farms. Although these organizations have proved to be slow in adapting to the new economic environment, privatization and land reform lag far behind their initial schedules. The distinction between private and public property in agriculture is becoming increasingly blurred, however. Farm workers are using collective resources to produce and sell agricultural products on their own account. Such small-scale production appears to be widespread–57 percent of fruits and vegetables and 80 percent of domestic meat and milk supplies are reportedly produced in the private and quasi-private sectors.

At present, Azerbaijan’s main cash crops are cotton, fruits and vegetables, tobacco, and wine grapes. Wheat, meat and dairy products are mainly produced for domestic use. In these products, the country is traditionally less than self-sufficient; in particular, a large part of dairy products, wheat and flour are imported from Russia, Turkey, and the European Union (EU), the latter under the humanitarian grant and loan programs.

Output of virtually all agricultural commodities has been falling since 1990 (Table 3). Although Azerbaijan lost about 20 percent of its high quality grazing land in the conflict over the Nagorno-Karabakh region, agriculture remains a key sector in the economy, generating about 30 percent of GDP. In 1994, recorded agricultural output dropped by 13 percent in real terms, and preliminary information indicates a similar decline in 1995. The main reasons for the continued poor performance of the agricultural sector were (i) distortions in the relative price structure as producer prices of agricultural products remained low relative to other sectors in the economy; (ii) an underdeveloped rural credit market; and (iii) the dislocation of trade links with other CIS republics, which cut the country off from its traditional suppliers of fertilizer and equipment as well as from its traditional export markets.

Table 3.

Azerbaijan: Agricultural Production by Major Crops

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Sources: Azerbaijan State Committee of Statistics; and Ministry of Economy.

There are indications, however, that the decline of agricultural output may be coming to a halt as crop yields for several key products (grain, cotton, potatoes) started to pick up in 1994 (Table 4). Cotton did better than most other commodities, maintaining the same output level as in 1993. Partly this reflected the importance of cotton as a “strategic” commodity with trading organizations having well-established trade links in particular with the United Kingdom. Supply has also responded to recent, relatively rapid increases in state procurement prices (Table 5) and improvements of the irrigation system. Tea and wine grapes, on the other hand, reported further declines in 1994 after falling by more than 30 percent in 1993. These commodities, which are to a large extent produced in the enclave of Nakhichevan, were particularly hard hit by the military conflict and the related transportation difficulties. Similarly, livestock has suffered from the loss of pasture land in the aftermath of the war, and meat production declined cumulatively by 55 percent over 1990-94 (Table 6).

Table 4.

Azerbaijan: Yields of Major Agricultural Commodities

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Sources: Azerbaijan State Committee of Statistics; and Ministry of Economy.
Table 5.

Azerbaijan: State Procurement Prices

(In manats per metric ton, annual average)

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Sources: Azerbaijan State Committee of Statistics; and Ministry of Economy.
Table 6.

Azerbaijan: Main Aggregates of Animal Husbandry

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Source: Azerbaijan State Committee of Statistics.

b. Industry

The industrial sector in Azerbaijan has been characterized by a strong dichotomy between energy and nonenergy related activities, largely associated with a distorted price structure which has favored energy products. While the officially recorded output in all industrial branches has declined steeply in recent years, it appears that nonenergy related industries experienced steeper production declines than energy related industries. A comparison of Tables 7 and 8 suggest that the production of crude oil and oil products has declined much less than the production of metal, chemical, construction equipment, and consumer goods industries. 1/ The rupture of trade linkages with CIS countries hit the nonenergy related subsector particularly hard, as these industries depended heavily on raw materials and intermediate inputs imported from other CIS countries. Also, costs of these supplies have been rising steadily, as many trading partners adjusted their producer prices toward world market levels. Due to the lack of investment and know-how, Azeri suppliers have also lost ground in domestic markets as they have not been able to match the quality standards of imported goods. This has been particularly true for consumer durables (e.g., air conditioners and refrigerators), but also for industrial intermediates (e.g., pipes and construction glass). Moreover, the capital stock in these industries has become largely obsolete, not only because investment has dwindled to almost nothing, but possibly also because of asset stripping.

Table 7.

Azerbaijan: Selected Industrial Production

(In thousands of metric tons, unless otherwise specified)

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Sources: Azerbaijan State Committee of Statistics; and Ministry of Economy.
Table 8.

Azerbaijan: Crude Oil Production

(In thousands of metric tons)

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Sources: Azerbaijan State Committee of Statistics; State Oil Company; and the World Bank.

After falling by about 20 percent in 1993, recorded output in the nonenergy related sector plummeted by 50 percent in 1994, and in the first half of 1995 it was down by another 50 percent compared with the corresponding period in 1994. Meanwhile, inventory accumulation has increased, as many enterprises continued production by accumulating interenterprise arrears despite the lack of markets for their products. In general, enterprises have not adjusted their labor force to falling output, which has led to sharp declines in productivity. The deterioration of economic activity in the nonenergy related industrial sector was even more pronounced, if one abstracts from the food industry, which–being closely linked to agriculture–declined by only 7 percent in 1994.

The energy-related industrial sector, which mainly consists of power stations, refineries and petrochemical industry, has been performing better than most of the economy throughout the early 1990s. The output of refined oil dropped by only 7 percent in 1994 and 4 percent in the first half of 1995, despite the urgent need for modernization of Baku’s two refineries, Bakinsky and Novobakinsky. In part this was due to the increasing usage of fuel oil in power stations to replace natural gas previously imported from Turkmenistan but it also appears that gasoline consumption has picked up as private car ownership has increased.

In 1994, electricity production was 17.3 billion kwh, some 8 percent less than in 1993. During the first seven months of 1995 there was a further decline by 4 percent compared with the same period in the previous year. One reason why the decline of electricity production was not more in line with the drop of recorded real GDP was the fact that informal sector activities remained largely underreported in the official National Accounts. Also, high production losses in Azerbaijan’s energy plants may help explain this discrepancy. Moreover, customers have little incentive to save electricity with low user price since the State Electricity Company (Azernergo) supplies power even if consumers do not pay–indeed, collection rates of these fees have remained below 40 percent.

c. Petroleum sector

The petroleum sector in Azerbaijan is highly concentrated. Crude oil and gas production are under the responsibility of the State Oil Company of the Azerbaijan Republic (SOCAR). SOCAR also holds shares in the international oil consortium which was formed to exploit deep-water oil fields in the Caspian Sea. In addition, SOCAR oversees the operations of Azerbaijan’s oil refineries. Prices for crude oil, oil products, and natural gas are fully controlled by the Government.

Azerbaijan has a long history of producing oil and natural gas, and much of its economy (about 15 percent of GDP in 1994 1/) relies on this sector either directly or indirectly. With the exception of some hydro-energy, petroleum products are almost the only source of domestic energy. The relative abundance of cheap oil and gas has caused the industrial sector to become relatively energy-intensive, but also wasteful. During the Soviet era, Azerbaijan used to import crude oil from other republics (Russia, Kazakhstan) for processing and re-exportation, resulting in large refining facilities. As these imports have declined in recent years, the measured rate of capacity utilization in refineries has reportedly declined to around 30 percent.

Proven unexploited oil and natural gas resources are officially estimated at about 900 million metric tons, with substantial potentials below the Caspian Sea. Traditionally, oil and gas exploitation have been concentrated on onshore fields or shallow offshore areas. As productivity of these fields declined, oil exploration and production have moved increasingly to the deeper waters of the Caspian Sea (Chart 4).

Chart 4
Chart 4

AZERBAIJAN Crude Oil Production 1980-95

(In thousands of metric tons)

Citation: IMF Staff Country Reports 1995, 119; 10.5089/9781451802504.002.A001

Sources: Azerbaijan State Committee of Statistics; State Oil Company; and the World Bank.
(i) Crude oil

Crude oil production in Azerbaijan has declined from 11.7 million tons in 1991 to 9.6 million tons in 1994, reflecting the increasing depletion of the more mature fields (Table 8). However, in 1995 the output decline has slowed down. Many wells have been operating with technology from the 1940s; their productivity is low and environmental damage serious due to oil spills. Moreover, these facilities are characterized by overstaffing and poor management. Some of the remaining reserves in these fields could be recovered using state-of-the-art technology, but the focus of oil exploitation is clearly shifting offshore.

The “new” offshore fields have a substantial exploitation potential. Of the four deep sea fields only one, Guneshli, is currently operating and accounts for about 60 percent of domestic production. In the last two years the production infrastructure in Guneshli has been experiencing increasing difficulties, however, which partly explains the decline in crude oil output by 7 to 8 percent in 1993 and 1994.

(ii) Natural gas

Based on Azerbaijan’s extensive domestic reserves, natural gas was developed as the key fuel for domestic use. About 80 percent of all households and a large portion of industry are supplied through a vast gas distribution network which is controlled by the State Gas Company (Azerigas). As output from the large Bakhar gas condensate field began declining in the 1980s, Azerbaijan started importing gas, primarily from Turkmenistan. In 1994, some 2.5 billion cubic meters, about 30 percent of domestic consumption were supplied by Turkmenistan.

Since 1991, domestic production of natural gas has been declining at a rate of 10 percent a year. This has reflected the absence of incentives to recover gas, as producer prices were kept artificially low and imported gas was readily available. In 1993 and 1994 prices for gas imported from Turkmenistan increased sharply. Azerbaijan has been responding by curtailing domestic demand with the contraction of industrial usage and by replacing natural gas by domestically produced fuel oil as input for power stations.

In 1995, Azerbaijan’s domestic gas production is likely to increase temporarily. A new gas compressor station at the Guneshli field came into operation in late 1994 and aims at capturing 1.4 billion cubic meters of gas otherwise lost into the atmosphere. With completion of this compressor station, which was constructed and fully financed by the American oil company Pennzoil, gas production picked up slightly in the first half of 1995. Recovering gas output at Guneshli alone, however, is not sufficient to reverse the declining trend of gas production in coming years.

d. Services

Services may well be the most dynamic sector in the Azeri economy today although much of this activity is not captured in the official statistics. Services were hardly accounted for under the old concept of Net Material Product, and even in the national accounts following the SNA method coverage remains weak. 1/ An analysis of this sector is therefore extremely difficult, as one can only rely on scattered statistical information and anecdotal evidence.

Official data suggest that the value added in the service sector declined in 1994 in line with real GDP, leaving its share in GDP unchanged at about 40 percent. Recorded retail trade, transportation and public services fell by 20 to 25 percent in real terms. However, it seems that this decline was at least partly offset by increased services provided by the informal sector, especially in retail trade and catering. Preliminary data from household surveys suggest that the share of paid services in household expenditures increased from about 5 percent in 1993 to over 10 percent in 1994.

The upward trend in the value added of services appears to have continued in 1995, as inflation abated and consumer confidence strengthened. This is consistent with the observable increase of new private shops, cafeterias, restaurants, etc. in Baku. Even the official data, which mostly capture only the state-controlled sector, indicate a lower real decline of services than of real GDP. In the first half of 1995, retail trade turnover declined by 10 percent and cargo transport by 8 percent compared with the same period in 1994. Value added in the banking sector is apparently up, as both salaries and employment have risen rapidly.

2. Labor force and employment

Most of Azerbaijan’s labor force continues to be formally employed in their old jobs, which indicates that the transition from a rigid system of constitutional employment toward a market-determined process of matching labor demand and supply still lies ahead.

In 1994, Azerbaijan’s working age population (ages 16 through 59) remained almost constant at about 4 million of the total population of approximately 7.5 million (Table 9). The total labor force declined, however, due to the displacement of refugees from Nagorno-Karabakh and the emigration of many ethnic Russians, Armenians and Jews. Total employment was estimated at 2.6 million, only 4 percent less than in 1993. The strongest decline was recorded in agriculture, as employees from kolchozes and sovchozes in the Nagorno-Karabakh area lost their jobs. Industrial employment only dropped by 4 percent, despite the drastic decline of industrial output. Enterprises are not yet responding to falling output by shedding labor; instead, they retain employees without or with only nominal pay. Also, in many cases these individuals work on a part-time basis and/or have side-jobs in the informal sector. To a large extent, the adjustment of wage costs to declining output has taken place through falling real wages instead of employment reductions. This practice has also been in the employee’s interest, as they remain eligible for in-kind benefits such as housing and other social services, which they would lose if their contracts were formally terminated.

Table 9.

Azerbaijan: Labor Market

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Sources: Azerbaijan State Committee of Statistics; Ministry of Labor; and IMF staff estimates.

Correct accounting for unemployment is particularly difficult under these circumstances. The official number of registered jobseekers (22,000 persons or 0.6 percent of the labor force in 1994) underestimates the true extent of unemployment. Only few layoffs are registered in labor exchanges because of the social stigma associated with unemployment, tight and confusing eligibility rules, and low benefit levels. On the other hand, deriving the number of unemployed from the official data as the difference between labor force and employment (811,000 persons or 23.9 percent in 1994) may also be misleading, because many jobseekers are being accommodated by the emerging informal sector. Some of the authorities’ estimates put the number of truly unemployed in Azerbaijan at 400,000-450,000, or 12-14 percent of the labor force.

3. Prices and wages

a. Price developments and inflation dynamics

In 1992-93, prices in Azerbaijan rose rapidly with the price liberalization. However, by 1994 the inflation dynamics had changed its nature and price development showed many characteristics of hyperinflation. The consumer price index (CPI) increased by 1,664 percent, year-on-year. With the exception of a seasonal downturn in the summer, monthly inflation rates remained consistently high, with peaks in May (43 percent) and in November and December (over 52 and 55 percent, respectively, (Table 10 and Chart 2)). Another phenomenon, typical for a situation close to hyperinflation, was a rapid increase in the dollarization of the economy. Foreign currency holdings increased sharply during 1994 with a strong depreciation of the nominal exchange rate. The resulting price increases of imports immediately affected the CPI, because imported foodstuff and other goods have a high weight in the consumer basket.

Table 10.

Azerbaijan: Consumer Price Index

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Source: Azerbaijan State Committee of Statistics.

The high inflation in 1994 was primarily triggered by an excessive growth of monetary aggregates accommodating the Government’s need to finance its fiscal deficit. With a short time lag, the pattern of inflation mirrored the pattern of monetary expansion. Meanwhile, the rapid increase in the money velocity reflected rising inflation expectations and demonetization of the economy in an environment of high political and economic instability.

Inflation was exacerbated also by a deterioration of the terms of trade. Import prices rose as CIS suppliers moved toward world market prices and these prices spilled over to Azerbaijan’s domestic inflation. In addition, a sharp increase in transportation costs due to the closure of northern trade routes reduced the border price of exports and raised that of imports with adverse effects to the domestic price level.

In spring 1995, however, the Government’s stabilization program began to take hold. Monthly inflation declined to low single digits in line with the earlier reduction of broad money growth despite several increases in administered energy prices. The pressure on import prices was alleviated as the nominal exchange rate stabilized vis-à-vis the U.S. dollar and appreciated vis-à-vis the Russian ruble. Seasonal factors, such as lower food prices due to the new harvest, helped to subdue inflation further and resulted in virtual price stability during the summer (Table 11).

Table 11.

Azerbaijan: Commodity Breakdown of the Consumer Price Index

(Monthly percentage changes)

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Source: Azerbaijan State Committee of Statistics.

Weights according to the 1993 household survey.

b. Wage developments

Recorded average wages in Azerbaijan have remained low by CIS standards as real wages have declined for several years. This trend continued in 1994, as nominal wage increases lagged behind inflation and real wages fell on average by almost 60 percent (see Chart 2). In dollar terms, monthly average wages dropped from about US$17 (1993 average) to US$8 in January 1995, before recovering to about US$14 in the summer of 1995.

A number of factors help explain this drastic decline in real wages. First, the tight cash flow position of many enterprises coupled with their full employment policies did not allow for significant wage increases. In fact, low average wages were “buying” low unemployment, as enterprises were dividing the available wage bill among a given number of employees, rather than releasing workers. Second, recorded wages only represent a fraction of actual pay, because many workers receive additional bonuses and in-kind payments, such as housing and social services. Third, the official employment survey probably underreports the average economy-wide wage, because it fails to adequately capture the earnings from full-time or part-time employment in the emerging informal sector.

The wage structure in Azerbaijan has remained rigid, as all wages (and social payments) in the public sector are still linked to the minimum wage by fixed coefficients. Besides directly affecting employees in budgetary institutions (which comprise about one quarter of the labor force), minimum wage increases also have strong signal function in the rest of the economy. The effect of the minimum wage hikes in June 1994 (to 2000 manats), October 1994 (to 4000 manats) and February 1995 (to 5500 manats) can be seen in Table 12, which compares nominal monthly wages in government agencies to those in the economy as a whole. On the sectoral level, however, substantial differences in average wages prevailed and even increased. The lowest salaries were paid in agriculture and social services, with average wages only slightly higher than the minimum wage (Table 13), i.e., some US$7 per month. At the other end of the spectrum were banks, insurance and the oil sector (SOCAR, Azernergo) 1/, where reported wages were 5-6 times higher than the economy-wide average.

Table 12.

Azerbaijan: Average Monthly Wages

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Sources: Azerbaijan State Committee of Statistics; and IMF staff estimates.

Average monthly wage deflated by monthly change of the consumer price index.

Table 13.

Azerbaijan: Average Monthly Wages by Sector

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Source: Azerbaijan State Committee of Statistics.

Annual data may differ from the average for the year calculated on the basis of monthly wage data.

III. Public Finances

1. Institutional setting

The central government budget, also referred to as the republican budget, is consolidated with the local government budgets to form the state budget (Table 14). Expenditures and revenues denominated in foreign currencies and managed through the Unified Foreign Exchange Fund (UFEF) were also included into the state budget, albeit only as single line items, until the UFEF was dissolved in March 1995. The consolidation of the extra-budgetary funds, most importantly the Social Protection Fund (Table 15) and the Employment Fund into the state budget yields a measure of general government operations (Table 16). Other smaller extra-budgetary funds, including the Road Fund, have not been reporting regularly to the Ministry of Finance.

Table 14.

State Budget in 1992–1994.

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Sources: Ministry of Finance and State Tax Inspectorate; and IMF staff projections.

Projection.