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In the thick of a crisis: Azerbaijan’s manat set “float freely”

Azerbaijan’s diminishing forex reserves and the sliding oil prices of the last two years suggest that the country is in the thiсk of an economic crisis. Forex reserves that exceeded $15 billion yet in the middle of 2014 have decreased to $5.1 billion by 2016. All this was a serious testing for the national currency of Azerbaijan.

Nevertheless, the authorities are optimistic and assure that the situation in the foreign exchange market will normalize shortly. At least, Elman Rustamov, Chairperson of the Central Bank Board thinks so. “We are preparing an action plan and will present it shortly,” Rustamov said. In his words, shifting to a floating exchange rate regime requires serious preparatory activity, a very close macroeconomic coordination and settlement of a range of structural problems. “To that end, we once received technical support from IMF. We work in keeping with that plan. We coordinate our activity with all the organizations that are part of the Financial Stability Council,” Rustamov said.

According to him, the major goal is to achieve macroeconomic stability. “Since the beginning of 2016 we have been working in the managed float regime. In February, CBA stopped selling foreign exchange in the market. Today, we can see certain disproportion between demand and supply in the market, specifically, demand exceeds supply,” Azerbaijan’s CBA Board chairperson said.

Under strategic road map of the national economy and major economic sectors that was published last week, Azerbaijan seeks to shift to floating rate regime in 2017. As it was reported earlier, Azerbaijan’s Central Bank has refused from the fixed exchange rate regime and shifted to the managed floating rate on December 21 2015. The Financial Stability Council was set up by President Ilham Aliyev earlier in July. Prime Minister Artur Rasizade was appointed as the Council Chairperson. Besides the chairperson of the Central Bank Board, the Council comprises president’s advisor for economic reform, finance minister, economy minister, head of the financial market supervisory chamber, executive officers of State Oil Fund of Azerbaijan (SOFAZ). However, the floating rate Rustamov was speaking about does not guarantee a sustainable rate for manat and inflation. This helps maintaining the national currency rate, but inflation is not that manageable.

Prices of goods and services are soaring and the Central Bank’s plans will not help. On the other hands, SOFAZ has been recently selling more foreign exchange to banks, but many commercial banks receive foreign exchange but not always resell it to the people. For lack of foreign exchange, businesspersons still fail to carry out commercial operations at full. For instance, this extremely impedes import of goods. Therefore, a new threat of devaluation will not disappear unless they manage to control the high inflation. Central Bank will need more than just optimism to stabilize the manat rate.

Besides, the World Bank forecasts no serious economic growth in Azerbaijan within the coming 3 years. In particular, Hans Timmer, WB Chief Economist for Europe and Central Asia, recommends to stop focusing on the national currency exchange rate stability. He said exchange rate stability does not mean a successful economic policy. That index should respond adequately to economic processes and shocks.

WB says the gradual restoration of oil price and operation of Shahdeniz-2 gas field in 2018 is likely to support economic growth and the account balance of current operations. And the consolidated budget deficit will increase dramatically to 8% of GDP in 2016 due to non-budget transfers from SOFAZ for construction of pipelines of the South Gas Corridor. The budget deficit will be funded through reserves of SOFAZ and the state treasury. As for the fiscal policy, it will be improved in 2017-2018 when oil prices will start stabilizing gradually, construction of the export gas pipeline will be completed and increased non-oil incomes will bring first fruits. However, the government’s major problem for 2016-2018 will be the poverty rate. High dependence on oil amid low price and falling recovery of oil will lead to increase in poverty. The growing inflation too may speed up poverty affecting pensioners, people with disabilities and the families receiving survivor pensions, first. Pension provision may be reduced with the state budget cuts.

Samir Aliyev from the Center for Support of Economic Initiatives says 2017 will be a hard year for Azerbaijan’s economy. “Even an increase in the oil price will not change the situation. For lack of financial resources, the real sector is ‘suffocating’, enterprises are closing down, and job cuts are everywhere. Therefore, serious reform is needed in all sectors of economy,” he says. In his words, after two devaluations, the country’s banks have appeared in a very heavy situation when borrowers failed to repay for debts and their pledge security is depreciating and proves insufficient to cover the loans provided. On the other hand, borrowers take back their money, as the trust in banks has been undermined. Since the beginning of the year, the population deposits have decreased by 20%,” he says.

However, Aliyev says, achieving financial stability will not settle the country’s economic problems. It may have a short-term effect. In the meantime, Aliyev is sure that structural and institutional reforms, reform of housing and public utilities, and competitive environment are needed, Budget money should be distributed transparently and used rationally, Aliyev told EADaily.

The economist says the government should define the major crisis-induced problems and then develop an anti-crisis program, consolidate and unload the budget. Besides, he thinks it necessary to reform the household and public utilities sector and attract a private company to reduce the government subsidies to the given sector. Aliyev calls for institutional reform and unification of duplicate government departments, as well as financing for small and mid-sized enterprises for a period of 3-5 years. To receive results in a short period of time, it is necessary to stop price hikes by economic methods and take measures to liberalize economy.

Oktay Hakhverdiyev, the former deputy minister of economy of Azerbaijan, says the exchange rate is not set basing on demand and supply like it is done in civilized countries, where the rates are set by stock exchanges. “Here, Central Bank regulates the rates stemming from specific situation to settle the tasks set to it,” Hakhverdiyev says. In his words, while manat is depreciating, the sliding oil prices have revealed problems that were not settled in time.

Now, it is impossible to settle these problems for lack of foreign exchange. “In this light, manat will keep devaluating but more smoothly, achieving its real rate within three-four years,” he told SPUTNIK. Hakhverdiyev forecasts the exchange rate for the year-end at 1.85-1.9 manat per 1 dollar. Although the draft budget submitted to the parliament envisages certain economic growth, these are just wishes. “It will be possible to speak about reality only after the first quarter. Now, it is hard to forecast anything, as uncertainty has reached a very high level. Anyway, we will be experiencing the heaviest two years,” the expert says.

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