Azerbaijani Central Bank’s reserves knock “the read-line”: Next devaluation is at the door

Azerbaijani Central Bank’s reserves knock “the read-line”: Next devaluation is at the door

The Central Bank of Azerbaijan (CBA) lost $ 127.0 million US of its foreign currency reserves in October 2016 due to high demand for foreign currencies. CBA’s foreign currency reserves declined to $ 4,005 billion US in November 1st, 2016 from $ 4,132 billion US in October 1st, 2016.

Due to law oil price in the world market, high demand for foreign currency and high intervention in the currency market, CBA has lost its reserves by 74.0 % since July 2014. CBA’s currency reserves was recorded as $ 15,193 billion US when oil price in the world started declining in the summer of 2014.

Meanwhile, CBA administratively decreases volume of national currency in the currency market. CESD’s monitoring show that many currency exchange offices faces lack of the manat volume in last couple weeks. Although demand for the national currency is not increased, but volume of the manat is administratively controlled by CBA. Central Bank targets using such administrative methods to decrease a demand for foreign currencies.

Meanwhile, the State Oil Fund of Azerbaijan converted $ 371 million through currency auctions in October 2016. So, in October, an increase in demand for dollars created extra cost to the Fund, as well as to the Central Bank. The Central Bank has been continuing its policy to reduce manat’s liquidity (amount of national currency in the market). Thus, if the monetary base was 11.7 billion manat in 2014, at the beginning of this month, the figure dropped to 7.45 billion manat. As a result, because of last gradual depreciation of the manat, the Central Bank’s “few manats – less demand for dollar” recipe in reality, is not a panacea to cure. Recently, more than 650 million compensation paid by the Deposit Insurance Fund to depositors of the bankrupt banks and more than half the funds was paid to the depositors of the Bank Standard last month.

Consequently, the circulation of the “compensation money with” increased demand for the dollar. Both the official exchange rate of the manat against the dollar, but also the national currency’s market value has lost.

At the same time, the exchange rate of the Azerbaijani Manat for the future will mainly depend on oil price, which is an external factor. Any significant increase is not predicted in oil prices for 2016 and 2017, unless there are any force majeure cases; the latter strengthens the conviction that medium-term increases will take place for USD/ Manat couple. On the other hand, CESD experts reckon there is a high probability that the government will decide upon the shift to floating exchange rate regime which can result in a 35% depreciation of the national currency once again.

Dollar demand is expected to rise sharply by the end of the year because of an increase in import. Banks, government agencies will need dollars to repay their foreign debt. If there is no high intervention by the CBA, the manat is expected to depreciate against to the dollar by 1.95 in the market by the end of 2016.

© CESD, 2016

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