Azerbaijan's recent decision to raise domestic energy prices underscores the country's uneasy relationship with international financial institutions, including the International Monetary Fund (IMF). Government officials walk a fine line in trying to satisfy international bankers without raising domestic discontent to unsettling levels.

President Heidar Aliyev's administration at first resisted IMF demands for an energy price hike, but eventually relented, due to Azerbaijan's reliance on international financing for domestic programs. The IMF had recommended that Azebaijan double crude oil prices over a 12 month period, from about $45 to $80-100. Minister of Economic Development Farhad Aliyev confirmed November 1 that the state oil company, SOCAR, would raise wholesale prices on crude oil to generate more state revenue.

While Minister Aliyev promised to preserve existing subsidies on home electricity supplies, the increase came as a surprise to many. In the past, Azerbaijani officials, aware of the low purchasing power of most citizens, have stated that they would seek to keep energy prices low. Government leaders cited the IMF recommendation as a key factor in the price hike. Nevertheless, the move stirred discontent.

"People already have trouble with paying their utility bills. And what will happen now?" asked Leyla Bashirova, a housewife and a mother of two preschool-age kids. "Let them raise our salaries first and then raise the prices," she added angrily.

This is not the first time the IMF has been the object of popular ire. In 2001, at the recommendation of the IMF, Azerbaijan cut welfare benefits to pensioners, handicapped and other vulnerable citizens by a total of $200 million a year. This step, like a hike in fuel prices, aims to balance the state budget and decrease annual budget deficits over the long term. Azerbaijan has established a $600 million oil fund that is designed to support social initiatives. [For additional information, see Caspian Revenue Watch]. It is unclear, though, how the oil fund will be utilized to support specific programs.

In October, a news service reported that 47 percent of Azerbaijani citizens earn less than $25 a month. The government presented a three-year poverty reduction program on October 28 that, according to Farhad Aliyev, aimed at increasing income, taming corruption, improving infrastructure and developing education and healthcare. The program, with a price tag of $3 billion, relies on financing from international agencies, including the IMF. These agencies often establish strict criteria for the disbursement of assistance.

In July 2001, the IMF approved a $100 million poverty reduction and growth facility (PRGF) in conjunction with Azerbaijan's three-year economic program. According to Peter G. Laurens, an economist who has studied Azerbaijan, the IMF program requires the country to "reduce the effective subsidies on utilities and to gradually bring domestic oil and gas prices in line with export prices." It is hard to raise prices and preserve subsidies for the poor, though, which worries Azerbaijani politicians.

Prime Minister Artur Rasizade called attention to the political risks of this strategy. "I have to look at [the IMF's recommendation to raise prices] and see how it will benefit Azerbaijan," he told ANS television recently. "Raising prices just to please IMF is not acceptable for me."

Despite Rasizade's resistance, the price hikes took effect. While state officials insist that raising energy prices will not affect the consumer prices, some admit that it might dampen the economy in general. "It will mostly affect only big enterprises," said SOCAR chief Natig Aliyev at a press conference. "But they are barely managing to pay their energy bills. Raising energy prices will not make these enterprises profitable. And they must be profitable. Each factory has a kindergarten or an orphanage at its care. They have to make profits to be able to maintain these institutions."

While raising energy prices and liberalizing the utility sector from state subsidies may help the Azeri economy in the long run, it is not clear how much suffering citizens must endure before these benefits take hold. Still, President Heidar Aliyev, who approved the price increases, knows he has little leverage in the matter. IMF principles can be binding for a poor country like Azerbaijan, no matter how much potential wealth it can claim in its oil and gas fields.

Until projects like the Baku-Tbilisi-Ceyhan oil pipeline begin to produce revenues [for background see the EurasiaNet Business and Economics archive], Azerbaijan remains dependent on foreign aid and international debt. With Azerbaijan bracing for presidential elections in 2003, President Aliyev appears alert to the political risks. During a recent trip to northwestern town of Sheki, he promised to significantly raise the salaries of state paid employees, such as doctors and teachers. The move might be a strategic step aimed at placating citizens who worry about rising fuel prices. Yet it is clear that, for at least the near future, Azerbaijan will have to make some decisions that satisfy the IMF and dissatisfy citizens.