Azerbaijan - Economic Reform

Privatization

From the earliest days of Azerbaijan's independence, the country had a vigorous, small-scale private economy whose most urgent need was unambiguous legislation that would legitimize its operations and allow expansion. A privatization law passed in January 1993 was not implemented fully in the year following. Privatization plans envisioned sales, auctions, and joint stock enterprises. Small retail establishments would be privatized by auction, and medium-sized and large enterprises would be privatized by a combination of auctions and joint stock programs. Retail establishments were supposed to be privatized fully by the end of 1993, but this goal was not met. Housing was also to be privatized by transferring ownership to the present tenants. At the end of 1993, land redistribution was stalled by disagreement over the choice between private ownership and long-term leaseholding; over optimum terms for either of those arrangements; and over the distribution of agricultural equipment.

Banking

Under the Soviet system, Azerbaijani banks were subordinate to central banks in Moscow and elsewhere in Russia. Bank funds were distributed according to a single state plan, and republic banks had little input into the raising or allocation of funds. In early 1992, former Soviet banks were incorporated into the National Bank of Azerbaijan (NBA). The 1992 Law on Banks and Banking Activity and the Law on the National Bank established the NBA as the top level of the new system and commercial banks (state- and privately owned) on the second level. However, in 1993 the system was undermined by poor technology, large unresolved debts among state-owned enterprises, irregular participation by enterprises, and bank delays in transferring funds. The main bank for the exchange of funds among private and state enterprises is the Industrial Investment Joint Stock Commercial Bank.

Economic reform

Azerbaijan's prospects for movement toward a market economy are enhanced by a fairly well-developed infrastructure, an educated labor force, diversity in both agricultural and industrial production, and yet-untapped oil reserves. Obstacles to reform include the rigidity of remaining Soviet economic structures, the Nagorno-Karabakh conflict, continued trade dependence on the other former Soviet republics, insufficient economic expertise to guide the transition, and capital stock that is inefficient and environmentally hazardous.

Price Liberalization

In January 1992, about 70 to 80 percent of producer and consumer prices were decontrolled, although prices for commodities such as gasoline were artificially increased. Further rounds of price liberalization took place in April, September, and December 1992. Because most industries are still monopolies, price-setting is supervised by the Antimonopoly Committee, which approves requests for price increases and reportedly grants most such requests. Because the state still procures much of Azerbaijan's agricultural production, prices are set by negotiations between the state and producers.

Retail price inflation surged after the first round of price liberalization in January 1992. Thereafter, the monthly rate eased somewhat, averaging about 24 percent during most of 1992. According to official figures, in 1993 average living expenses exceeded income by about 50 percent. The ratio of expenses to income was about the same in Kazakhstan and worse in Armenia and Turkmenistan. Although prices for items such as bread and fuel remained controlled during 1993, in November 1993 the government announced price rises because commodities were being smuggled out of Azerbaijan to be sold elsewhere where prices were higher. By the end of 1993, it was reported that the minimum weekly wage would not even buy one loaf of bread and that hundreds of thousands of refugees in Azerbaijan "simply face starvation," a situation that heightened social and political instability.

The Budget

To lessen the budgetary impact of losing subsidies from the Soviet Union, beginning in 1992 a value-added tax and excise taxes were introduced to replace sales and turnover taxes. The new taxes enabled Azerbaijan to maintain only a small state budgetary deficit for 1992. The deficit came mainly from increases in wages and from defense and refugee expenses related to the conflict in Nagorno-Karabakh. State-owned enterprises continued to survive on liberal bank credits and interenterprise borrowing, which caused the accumulation of sizable debts. Substantial increases in defense expenditures (from 1.3 percent of GDP in 1991 to 7.6 percent in 1992) drastically reduced expenditures for consumer subsidies in bread and fuels, as well as government investment and other support for enterprises. Increased salaries for civil servants also increased the 1992 deficit.

In mid-1992 Azerbaijan was not receiving enough printed rubles from Moscow to meet wage payments, so it introduced its own currency, the manat at that time. Because domestic financial transactions still involved Russian banks and many rubles remained in circulation, the ruble remained in circulation as an alternate currency. After ruble notes became more plentiful in late 1992, the manat remained a small fraction of circulating currency. In September 1993, Azerbaijan planned to make the manat the sole national currency, but the weakness of the Azerbaijani monetary and financial systems forced postponement of that move. The manat finally became the sole currency in January 1994.

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