Azernews.Az

By Amina Nazarli

After the devaluation of the national currency manat, population began massively convert means to the dollar, which subsequently led to the fact that banks have stopped selling the American currency or sold in small amounts.

The recent changes in the internal and external factors affecting inflation bring the need to take additional anti-inflationary measures, which are expected to stabilize the situation.

The agiotage, which was connected with the demand for the dollar can sharply fall in the country.

Starting September 14, the CBA has increased the interest rate from 9.5 percent to 15 percent. During 2016 this was the third increase in interest rates, as a result it has increased fivefold from three to 15 percent.

The upper limit of the interest rate corridor will increase from 15 percent to 18 percent, while the lower limit will rise from 4 percent to 12 percent.

During 2016, the national currency rate changed in accordance with supply and demand in the foreign currency market and trends in the balance of payments, according to the CBA.

The CBA report says that the Bank reduced its participation in the foreign currency market to the minimum and interventions were implemented only in order to regulate short-term sharp fluctuations of the manat exchange rate.

The Bank will continue measures to ensure macroeconomic and financial stability, including the measures to keep inflation at an acceptable level and enhance confidence in the national currency.

Experts claim that increase in interest rates would increase interest rates on manat deposits, which in turn is one of the effective ways to stop the dollarization in the banking sector.

Currently, the dollarization of bank liabilities exceeds 80 percent. Despite the fact that the interest rate on foreign currency deposits varies within three percent of the population prefers to keep their savings in dollar deposits.

According to some experts, banks can expand their customer base, if they increase rates on manat deposits, reducing their terms of storage. Thus, keeping savings in national currency will be more attractive for the population than converting it to dollars.

This is confirmed by international practice, but a number of leading banks in the country has already taken advantage of such an approach and were able to attract new investors.

In one word, increase in interest rate is the influence tool on the psychology of market participants, which is usually used to combat inflation.

During this period, the State Oil Fund of Azerbaijan (SOFAZ) was selling foreign currency through auctions of the Central Bank and will continue to sell foreign currency through auctions during this year.

SOFAZ sold $200 million to 22 banks through an auction held by the Central Bank of Azerbaijan (CBA) on September 8. The foreign currency is sold as part of SOFAZ’s transfers to the Azerbaijani state budget, which are envisaged to stand at 7.615 billion manats ($4,567) in 2016.

SOFAZ was established in 1999 with assets of $271 million. As of July 1, 2016, Fund’s assets increased by 4.6 percent and amounted to $35.1 billion as compared to $33.57 billion in early 2016.

Drop in oil prices and economic slowdowns have influenced the situation in the financial market of the country. The Central Bank of Azerbaijan (CBA) switched to a floating rate of the manat, on December 21, 2015 following intensified external economic shocks. The bank abandoned its dollar peg thus allowing the currency to tumble by almost a third. The exchange rate between the manat and US dollar changed from 1.0499 to 1.5500 after the shift.

Official exchange rate of the Azerbaijani manat against the dollar was set at 1.6375 manats for September 15. Thus, manat’s rate against the U.S. dollar increased by 0.1 percent compared to the rate on September 14.

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Amina Nazarli is AzerNews’ staff journalist, follow her on Twitter: @amina_nazarli

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