“Development of Alternative Inflation Economic Research Methodology in ” Project Center

CPI for the First Quarter in 2007, in the Republic of Azerbaijan

The Last version of the report (In Azeri, Russian and English) is also available in the ERC web-site

BAKU- 2007

1 “Development of Alternative Inflation Economic Research Methodology in Azerbaijan” Project Center

CONTENTS

Introduction

Calculation of Alternative Inflation Methodology in Azerbaijan

CPI in

CPI in the Regions of Azerbaijan

CPI for the First Quarter in 2007-04-19

2 “Development of Alternative Inflation Economic Research Methodology in Azerbaijan” Project Center

Introduction

Consumer price indices (CPI) are seen as one of the key indicators of price changes and are often used as the measure of inflation in each country. In recent years, countries have started to place more emphasis on presenting a variety of price measures that are available and explaining how they can be used for different purposes. First alternative approach for developing inflation methodology was done in early 2000 by local research center working in Poland; in order to maintain the macroeconomic equilibrium. This is important not only for having the credible rate of inflation in the society, but also for adjusting the social and economic policy of the government. This research firstly started by the Polish Center for Social and Economic Research in Central and Eastern Europe was continued with studies held by Ukrainian experts of Association for Economic Education and Research. Finally, this issue was raised in Azerbaijan by the Economic Research Center with funding support from USAID. The justification of the actuality and importance of the project was not that hard for the experts of the Economic Research Center when the project took a start. The views of various experts concerning about the inadequacy of the official inflation rate in Azerbaijan were found their basis in the analyses by various economists and were publicized via the mass media. The importance of inflation in Azerbaijan was justified due to the physiological effects driven from the expected adjustments to the Tax Code and menace driven from the last decision of Tariff Council. Local experts have recently started to emphasize and discuss the problems related not only with inflation, but also its social and economic impacts on living standards of the population. Hence, an accurate measure of inflation in the country requires an adequate estimation of living standards and real trends in the economic development. On the other hand, the role of the inflation on forecasting is crucial. Moreover, we should not forget about the correlation between current economic performance which is based on processing of natural resources and subsequent development of the economy. The effect of huge oil revenues on inflation must be under consideration too.

3 “Development of Alternative Inflation Economic Research Methodology in Azerbaijan” Project Center It is important to take into account all inflationary issues in order to estimate and analyze the living standards of households. It is obvious that the population with lower level of living standards requires the implementation of expensive economic reforms. If this is the case, defining accurate policy needs wide, deeper and adequate analysis. Likewise, these analyses must not be implemented by single state agency and study. In order to contribute to the solution of raised problems and clarify the debates concerning about the real inflation rate, the Economic Research Center has started to conduct quite a new project on “Alternative inflation methodology development in Azerbaijan” which is financed by USAID. Under the project, it is envisaged (i) to get a deeper insight into the Consumer Price Index estimation methodology used in Azerbaijan and identify the shortages with it, (ii) to learn the world’s most progressive practices of CPI calculation methodology and assess the applicability potential of these practices in Azerbaijan and finally (iii) put into practice an alternative price observation in the Republic of Azerbaijan via the alternative methodology and then take actions to calculate the alternative CPI for the country. The research team formed within the framework of the project identified the following objectives which they considered pivotal: • Work out an alternative way for changing the inflation level in Azerbaijan into a comparative indicator; • Increase the reality of the anti-inflation policy of the Government and propose the corrections to the existent policy; • Assess more accurately the monetary aspects of oil revenues by establishing real inflation rate; • Establish the real underpinnings for developing preventive actions so as to prevent macroeconomic, financial and social threats with possible inflation implications in advance; A number of experts and representatives of international agencies repeatedly emphasized that the inflation calculation by State Statistical Committee comes in compliance with international standards. Of course, we also maintain that like in almost all countries of the world, Consumer Prices Index characterizing the inflation level is calculated, in our country, by means of Lasperyes method and the project intend to use

4 “Development of Alternative Inflation Economic Research Methodology in Azerbaijan” Project Center that method calculating the data obtained by statistical observation of the prices, since the extensive world practice shows that Lasperyes formula appears to be the most progressive method for inflation estimation. Therefore, in Azerbaijan, like in many countries, the inflation rate calculation based on the same methodology is estimated by dividing current period (month, quarter and year) prices of the same consumption basket to the consumption basket prices of the previous period of time.

In order to answer the logically validated question “if the same formula is to be applied, then where can we see that alternative nature?”, we want you to focus on the below mentioned ideas. First, do not forget that Lasperyes method is very generalized and final formula of inflation calculation. Rather, depending on the methodologies used prior to and after this calculation, the results characterizing the inflation level can drastically differ from each other. Second, the goal is not only to search for the alternative method to Lasperyes, but also find an alternative to the current the methodology in our country. So our stance is strengthened via quotation by a well-known economist Scott Roger which says that “while calculating the inflation, the challenge is not which methodology to apply, but how to apply it”, because the root of most problems is concerned with its application. Ultimately, such an integrated approach may lead to obtaining inflation indicators not similar to each other. The issue that we should focus on is the similarity of the methodology applied not only in the developed, but also in developing countries. However, not in all countries, the inflation level is accepted unambiguously. For instance, there are still doubts over this issue in Bulgaria, which used Western countries’ methodology, though in recent years, the government has started to intensify its calls for cooperation with independent experts in order to eradicate these suspicions. So the research team decided to investigate the methodology and its application issues used in Azerbaijan in an integrated way. The issue of applying the current methodology is one of the main directions of the research conducted within the project.

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The Alternative Inflation Calculation Method in Azerbaijan

Alternative CPI is calculated based on 2 main sources:

1. Data collected by Economic Research Center in consumption market; 2. The methodology applied by State Statistic Committee to calculate CPI in Azerbaijan;

Within the our studies following common approaches applied in CPI Calculation have been listed;

1. Consumption Based – Consumer Price Indices (CPIs) measure the average changes in the prices of consumer goods and services purchased by households. In most instances, CPIs are compiled in accordance with international statistical guidelines and recommendations. However, national practices may depart from these guidelines, and these departures may impact on international comparability between countries. Calculated CPI shows changes in the goods and services purchased by households. Services for fix capital are included in the index when CPI is calculated based on this conception. The COICOP (Classification Of Individual Consumption by Purpose) has important implications at the time of analyzing the behaviour of the consumer within each elementary aggregate, because of a high possibility of substitution between products (Canada, Finland, Island, Sweden) 2. Item Covered Based. CPI is calculated based on changes in the prices of goods and services households have, no matter whether value of goods and services are totally covered or not (Australia, New Zealand). 3. Payment Based. CPI is calculated based on price changes in the goods and services which households get by doing payments (Ireland, )

CPI Calculation Methodology in Azerbaijan has been examined under the alternative methodology development. The price observation was done for 585 goods and services in 22 districts within the scope of the project. The research team has been developing alternative methodology of inflation calculation. Project Research Team used the same methodology applied by State Statistic Committee, however, instead of number of population, turnover was used to weight regions (table 1.). Quarterly inflation rate was 16,98 % which food was 15,33 %, non-food was 11,83 and service was 27,91 %”.

Following factors impact CPI quality in Azerbaijan;

6 “Development of Alternative Inflation Economic Research Methodology in Azerbaijan” Project Center ™ Methodology to verify special weights of goods and services : rich people does not take part in the survey and in the result goods which have high price increasing have low weights (for instance, cars, fridges, TV sets)

™ Number of representatives goods and services in the consumption basket : last listing 165 goods from 585 has low than 1 % weight in the basket.

™ Special weights of districts.

Table 1. Regional Weights used by State Statistic Committee

weight fraction Economic Average Turnover Services of the regions zones (regions) weight fraction used by SSC Absheron 53.44 68.69 56.22 26.99 Genje-Gazah 10.53 7.14 9.91 13.47 Sheki-Zagatala 4.54 2.89 4.24 6.52 Lenkoran 6.36 4.3 5.99 9.34 Guba- 3.88 2.5 3.63 5.58 Khachmaz Aran 14.11 9.69 13.31 30.44 Daglig-Shirvan 2.03 1.29 1.90 3.19 Nakhchivan 3.2 2.74 3.12 4.47 Yukhari 1.91 0.82 1.71 0.00 Garabagh

Quarterly CPI in Baku City

Quarterly CPI in 2007 for the capital city of Azerbaijan Republic was 17,53 %. Quarterly CPI was 15,58 %, non-food was 12,04 % and service was 26,99 % (table 1.)

Table 1. Quarterly CPI in 2007 for the capital city of Azerbaijan Republic

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17,52 CPI

29,66 Services

12,04 Non-foodstuff

15,58 Foodstuff

0 5 10 15 20 25 30

Within the scope of the project the survey was conducted among owners and sellers of super-markets in Baku on order to analysis qualitative characteristics of CPI and shadow inflation for first quarter in 2007.

Here it can be added that quality for the 5 best selling goods were almost not changed, however, some sellers indicated that quality has been increased since others did not share this opinion (Table 2).

Table 2. Sellers’ responds on quality of goods

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cannot say increased 8% 6%

quality of some products did not change increased of the 34% others decreased 40%

decreased 12%

According to the table, sellers among respondents who thought that quality of goods increased about 2 times less than who had opposite thinking (Table 3.)

Şəkil 3. Quality Changed Goods

9 “Development of Alternative Inflation Economic Research Methodology in Azerbaijan” Project Center

24,44 cannot say

20 both

31,11 non-foodstuff

24,44 foodstuff

0 5 10 15 20 25 30 35

77 % of responds thought that prices were changed and changes were mostly occured in non-food goods.

Table 4. Price Changed Goods

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21,05 cannot say

10,53 both

39,47 non-foodstuff

28,95 foodstuff

0 5 10 15 20 25 30 35 40

The survey confirms that majority of responds indicated price increasing. More that half of respondents, 58,54 % thought that price for the 5 best selling goods increased more than 10 %. Even some respondents indicated 25-30 % increasing for above indicated goods.

CPI in Azerbaijan Regions

Quarterly CPI for 2007, in Azerbaijan regions was 16, 29 % and services’ price was increased 25,98 in the same period. Increasing in food prices was 15,02 % and in non- food prices 11,56% (table 5.)

Table 5. Quarterly CPI for 2007, in Azerbaijan regions

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16,29 CPI

25,68 Services

11,56 Non-foodstuff

15,02 Foodstuff

0 5 10 15 20 25 30

It should be here stated that although price increasing for some goods were higher in Baku, total CPI of the capital city with regions was almost the same.

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Quarterly CPI in Azerbaijan, 2007

Quarterly CPI for 2007 in Azerbaijan was 16,98 including 27,91 % in services, 15,33 % for food and 11,83 % for non-food (Table 6).

Table 6. Quarterly CPI for 2007 in Azerbaijan

16,98 CPI

27,91 Services

11,83 Non-foodstuff

15,33 Foodstuff

0 5 10 15 20 25 30

Şəkil 7. CPI for January, February and March in 2007

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30

25,27

25

20

15 12,03

9,07 10 7,8

5 3,51 3,2 2,6 2,75 2,2 2,17 0,89 1,07

0 January February March

Foodstuff Non-foodstuff Services Total CPI

According to the table CPI was higher in service sector in January and foods follow them. It mostly connected with increasing in regulated prices done by Chamber of Tariffs in January, 06, 2007. Regarding to food, it is the result of refreshment of food market. Price for non-foods was increased more than other categories in February, 2007. Increasing in prices of foods in March, 2007 was connected with Novruz Bayrami, National Holiday.

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