To Cut or Not to Cut?

To Cut or Not to Cut?


İs that the Question for Central Bank in Azerbaijan?

The Central Bank has lowered its discount rate from 5.25% to 5% starting this week. According to the Central Bank, taking into account the optimal level of inflation, this step will lead to a decrease in inflation rates and thereby support economic growth in non-oil sectors.  The bank said that the targeted inflation rate would maintain currency stability and increase the money supply appropriately. Inflation remains at single-digit levels; the average annual inflation rate (1.3%) was lower than in partner countries. In these conditions, decreasing of average percentage of interest rate on loans will not be observed.

The Chairman of the Center for Economic and Social Development (CESD) Vugar Bayramov commented that lowering the discount rate by 0.25% percent isn’t going to cause any serious change: “Initially, although the Central Bank relates this step to the adjustment in monetary policy, in reality, substantial changes have not been noticed in 2012. There is no diversification in the sources of financing for banks, suggested credit percentages remain high, and interest payments on deposits remain low. Second, lowering the discount rate can’t cause serious changes in providing banks with inexpensive resources because centralized credit resources make up only 5 % of total income. Third, as only a limited number of banks benefit from centralized credits, this decision does not cover the whole banking sector. The share of centralized credits is very little or doesn’t exist at all in some leading banks of Azerbaijan. Fourth, the Central Bank disperses these credits as revitalizing credits based on unknown selection criteria. Fifth, in spite of a low discount rate, hard conditions of credits (its duration, conditions, etc.) discourage banks to benefit from it. Finally, because requests to the centralized credits are not processed with an open window system, usage of centralized credits by commercial banks is highly limited.”

Mr. Bayramov said that the Central Bank’s decision to lower the discount rate would neither decrease percentage rate of credits nor support the diversification of non-oil sectors. First, as centralized credits are too small a share of banks’ credit portfolios to cause an overall decrease.    Therefore, no decrease in credit percentage has been forecasted in next few months. Second, because this decision isn’t going to cause a decrease in the percentage of credits, attracting cheap credits to non-oil sectors will remain challenging. Thus, this step is unlikely to have any positive measurable effect on the non-oil sector.

The economist said that because significant changes have not occurred to attract additional rescourses in 2012, changes in credit market have also not taken place. The percentage rate of credits still remain high, and it seems that the Central Bank has put in little effort to ease it. On the contrary, there is a major gap between attracted deposits and suggested interest rates.  Banks with average 8 % annual savings of citizens share credits with 25 %, which is a three-fold differential.  In other words, a bank that receives a deposit from an ordinary citizen at 8% lends it to another citizen at a 25% interest rate.  Even if we take into consideration that such deposits are not the only financial sources for banks, it can’t be considered a good practice.

Furthermore, Mr. Bayramov said that only a limited number of banks benefit from lowering the discount rate to centralized credits. Unfortunately, in reality, not all banks can receive these resources. This shows that the decision of the Central Bank isn’t going to cover all banks.

According to Mr. Bayramov, the Central Bank’s decision to lower the discount rate seems more aiming to create an effect of flexibly responding on the current process.  Because decreasing the discount rate by 0.25 % will not cause significant changes, the reasons for this decision are difficult to explain by economic factors. Zero point discounts of the European Central Bank on the discount rate cannot be a model for the Central Bank of the Republic of Azerbaijan. Currently, having a 0.75% discount rate, even decreasing it by 0.05 % can have serious consequences on the banking system in Europe.

According to Mr. Bayramov, taking into consideration the real situation in banking sector, it is hard to explain the Central Bank’s decisions on discount rate.  When discount rate rose to  5, 25 %, the Central Bank used the same arguments.

The economist said that it would be more appropriate for the Central Bank to take particular steps towards revitalizing the banking sector, towards liberalization of the sector as well as towards elimination of unfair competition. Today, Azerbaijan has one of the most expensive credit policies in commercial banking systems among CIS countries.  Besides, based on the share of problematic credits in banking assets, our country has the worst situation in the region. Therefore, fundamental reforms in Azerbaijan’s banking system are critical.


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