What to expect from the monetary policy of the Central Bank of Azerbaijan?

What to expect from the monetary policy of the Central Bank of Azerbaijan?

The Central Bank of the Republic of Azerbaijan has announced that, a tight monetary policy is to be carried on. That is to say, the Central Bank will try to decrease the demand for USD by limiting monetary base. Although the implementation of the contractionary monetary policy since the oil price slump failed to stabilize the exchange rate of manat, the Central Bank does not seem inclined to undertake alternative measures. The Central Bank should have made corrections to the exchange rate policy in 2014 in accordance with the challenges of the post-oil period.

The comparative analysis of the current situation of the oil-exporting CIS countries reveals that, the activities undertaken by the Central Bank of Azerbaijan in order to optimize the exchange rate of national currency has not proved successful. That is to say, according to the Bloomberg data, while Russian Federation and Kazakhstan have achieved their targets on the stabilization of national currency, the Central Bank of the Republic of Azerbaijan seems to be far from its targets.

While in the beginning of January 2016, the USD/RUB exchange rate was equal to 75, this rate is 61 as of January, 2017. As a result, during 2016, the Russian ruble has appreciated by 22% against dollar. Thus, the national currency of our Northern neighbour was among three most appreciated currencies in the world in 2016. Taking into consideration that, in June, 2014, USD/RUB rate was 34, the national currency of Russia has lost its value by 1.79 (based on international methodology-45%) against dollar since the oil price slump.

The situation in Kazakhstan is similar to Russia. While by the mid-January 2016, 1 dollar was equal to 385 tenge, as for January, 2017 the USD/KZT exchange rate is equal to 333. This means, similar to the Russian case, national currency of Kazakhstan appreciated by 15% during the previous year. Taking into consideration that, in June, 2014, USD/KZT=183, the national currency of Kazakhstan has lost its value by 1.81 (based on international methodology-45%) against dollar since the oil price slump.

While the official exchange rate of manat was 1.55 in January, 2016, it has decreased to 1.80 as of the January, 2017. Comparisons are based on the Bloomberg data, therefore the “black market” exchange rate is not taken into consideration. Currently, 1 dollar has exceeded 1.9 manat in the black market. In other words, our national currency has lost its value by 15% during the previous year. Taking into consideration that, in June, 2014, USD/AZN was 0.78, the national currency of Azerbaijan has lost its value by 2.3 (57%) against dollar since the oil price slump.

As can be observed, while the national currencies of Russia and Kazakhstan appreciated by two-digit percentage, our national currency recorded a depreciation in the previous year. At the same time, following the oil price slump, manat has depreciated relatively more than ruble and tenge. In mid-2014, while the oil price commenced to decline, the economic situation of these three countries were similar. The share of energy resources in exports exceeded 90% in Azerbaijan and were above 70% in the other two. In terms of the share of foreign debt in GDP, Azerbaijan demonstrated a comparatively better situation. On the other hand, unlike Russia and Kazakhstan, the Central Bank of Azerbaijan was unable to implement flexible monetary and credit policies. That is why, the market exchange rate of manat has not been achieved. The uncertainty around the exchange rate of manat persists. As a result, after losing 75% of its currency reserves, Central Bank is now facing the psychological threshold of 4 billion USD. As mentioned previously, the Central Bank should start de-dollarization process by meeting current demand and liberalisation of exchange rate policy via communication method. The de-dollarization process is very important in terms of directing investments into the real sector. Unfortunately, low confidence in national currency is expected to persist due to the announced tight monetary policy.

The statement is retrieved from the Facebook status of Vugar Bayramov, Chairman of the CESD.

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