How long will the dollar continue to appreciate against the manat?

How long will the dollar continue to appreciate against the manat?

Recently, the frequently asked questions are mostly related to the causes of the depreciation of the manat and at what level and how long the dollar may appreciate. If 149 manat was needed in order to purchase 100 dollars on 25th of May, more than 152 manat is paid per 100 dollars on 20th of June 2016. This implies that the national currency has depreciated by more than 3 manats officially and, by 5 manats per 100 dollars in black market.

According to the CESD Monetary Research Group’s assessments, the causes of the manat depreciation against dollar are the following:

1. Foreign currency payments of businesses, banks, as well as of the government to international financial organizations. The foreign debt liabilities of businesses and banks have substantially increased in the recent years. According to the Law on 2016 State Budget of the Republic of Azerbaijan, 1,775 billion manat of budget resources will be allocated for the government debt and liabilities in current year which amounts to 1,150 billion dollars. Considering the substantial share of foreign debt liabilities in the resources raised by the commercial banks, the increase of the dollar demand in recent weeks is not surprising.

2. Increase of import volume. The recession in imports observed after the second devaluation is disappearing and the volume of imports exhibits growth. In addition to being the outflow of the foreign currency, imports also increase the demand for the dollar. It is to be noted that, according to the data of State Customs Committee, the foreign trade volume of Azerbaijan amounted to 3,607 billion dollars in first quarter of 2016. 1,781 billion dollars or 49,4% is constituted by exports, while 1,826 billion dollars (50,6%) is attributed to import products; hence, 45,3 million dollars trade deficit occurred as the imports exceeded the exports. In comparison with the same period of 2015, the foreign trade volume has decreased by 23,9%, including exports by 23,0% and imports by 25,1% in relative prices. Thus, imports exceed exports. This leads to the increase of the dollar demand via imports.

3. The increase observed in the volume of the manat collateral, as well as in the volume of centralized credit resources. The increase in volume of national currency entered into turnover by the Central Bank shapes the demand for the dollar. Banks try to meet their foreign currency liabilities by converting some part of such resources.

4. The increase in demand for the dollar among the population. Starting from the end of May, the demand of population for dollar has increased due to psychological, as well as economic reasons, thus, affecting the exchange rate. 81% share of foreign currency accounts in total bank savings implies a high level of dollarization in the country. This, in turn, implies the increased demand of population for the dollar.

The changes in exchange rate of the manat in following periods will be directly related to the measures adopted by the Central Bank. Alongside, the substantial appreciation of the manat is not expected in near future, whereas the appreciation of the dollar is more likely. For now, the policy of Central Bank targets to maintain the currency corridor. The Central Bank intervenes the market with exchange rate margin and currency reserves and does not possess many tools to affect the demand for the dollar. The latter shows that, although the current currency policy will not be altered, the continuing increase in demand for dollar will cause the depreciation of the manat. That is, the dollar still preserves the privilege.

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