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By Aygul Salmanova

The Central Bank of Azerbaijan (CBA) expects a current account surplus of the country’s balance of payments for 2017 at five percent of GDP, Elman Rustamov, chairman of the CBA, said at a press conference in Baku on February 12.

He said that such positive trend will continue in 2018. The head of the CBA noted that the macroeconomic reforms held since late 2014 aimed at diversifying the economy, as well as increase in oil prices, have ensured improvement of Azerbaijan’s balance of payments.

“Last year, surplus of the foreign trade balance amounted to $5 billion, which is 10 times more than in 2016,” said Rustamov. “Exports grew 52 percent and non-oil exports grew 23 percent. Improvement is also observed in the balances of primary and secondary revenues, as well as in the balance of services. The deficit of the balance of services has significantly decreased, and the surplus has been achieved regarding tourism services.”

He added that as a result of improving Azerbaijan’s balance of payments, strategic foreign exchange reserves grew by 11 percent in 2017.

Rustamov said that the CBA has reduced the refinancing rate from 15 to 13 percent.

Interest rate limit on insured deposits may be reduced

The Bank also decided to down the lower limit of the interest rate corridor from 10 to 8 percent, and the upper limit - from 18 to 16 percent, he noted.

Average annual one-digit inflation, forecasts on further decrease of the inflation rate and improvement of the balance of payments conditioned reduction of the interest rate parameters, he added.

Depending on the continuation of these positive trends, the CBA considers it possible to further decrease the refinancing rate, he noted.

He said that lowering the refinancing rate means easing monetary policy.

“I would like to note that if no external shocks and risks emerge during the year, the inflation rate will be even lower than the forecast figure of 6-8 percent,” he noted.

Rustamov stressed that when making a decision to down the parameters of the interest rate corridor, the CBA board took into account a number of external and internal processes.

“The CBA will continue to monitor the processes taking place in the economy and financial markets, and will try to ensure stability of prices by using available tools,” Rustamov said.

He added that the parameters of the interest rate corridor will be discussed next time in April.

Rustamov also noted that Azerbaijan Deposit Insurance Fund (ADIF) may reduce the upper limit of the interest rate on insured deposits of individuals.

He said that the upper limit of the interest rate on insured deposits usually depends on the refinancing rate, and its decrease may lead to reduction of the upper limit of the interest rate on insured deposits.

“Given the reduction in the refinancing rate from 15 to 13 percent, ADIF may also reduce the upper limit of the interest rate on insured deposits,” Rustamov said.

In turn, a source in the ADIF told Trend that this issue hasn’t yet been discussed in the fund.

“The ADIF Board of Trustees can make decision to change the upper limit of the interest rate on insured deposits,” the source noted.

Azerbaijani population should be vigilant when dealing with cryptocurrencies, said Rustamov: “Cryptocurrencies are a very volatile tool and this volatility will continue in the future.”

Earlier, Rustamov said that the position of CBA with regard to cryptocurrencies remains conservative.

“We think that cryptocurrencies continue to be a dangerous instrument for investing,” he added.

Reasons of inflation rate

He also noted that anti-inflationary monetary policy, optimal management of the money supply and stabilization of the Azerbaijani manat rate since mid-2017 played an important role in keeping inflation at a one-digit level.

"The change in the supply-demand ratio, world food prices and inflation expectations also affected the price dynamics in the country," he said. “According to our estimates, the inflation rate will continue to decrease and will reach the planned level by the end of 2018."

He said that surveys conducted among individuals and in the business sector, stabilization of the exchange rate of manat and dynamics of decline in actual inflation rate make it possible to forecast lower inflation expectations.

"The further keeping of inflation rate at a one-digit level will also depend on a decrease in inflation expectations and their sensitivity to the changes in the economic situation," Rustamov said.

In January 2018, the average annual inflation rate in Azerbaijan was 5.5 percent, according to the country’s State Statistical Committee.

The Azerbaijani government expects the average annual inflation rate at 6.8 percent by the end of 2018.

Floating exchange rate

Touching upon transition to the floating exchange rate regime of the Azerbaijani national currency (manat), Rustamov said that the process should be carried out in stages.

“The fact that the exchange rate of the Azerbaijani manat against the US dollar has stabilized at 1.7001 AZN/USD doesn’t mean that the CBA refused to fully switch to a floating exchange rate regime of the manat,” he said.

Rustamov noted that the CBA doesn’t pursue policy of active intervention in the processes in the currency market.

“We don’t buy or sell currency at auctions,” he said. “At the same time, we don’t want to allow sharp weakening or strengthening of the manat. As I already said during my speech in the Azerbaijani Parliament late last year, this may lead to a number of undesirable macroeconomic and microeconomic risks. So, presently, we pursue an “interim regime” policy, which is an integral part of the full transition to the floating exchange rate regime of the national currency.”

“There goals are set before us - a stable exchange rate with low volatility, cheap currency and low inflation,” said Rustamov. “All these goals are equally important. Regarding the growth of currency reserves of the CBA, this is related to the return of debts by commercial banks.”

The Azerbaijani government switched to the floating exchange rate regime of the manat on Dec. 21, 2015. The exchange rate of Azerbaijan’s national currency, the manat, against the US dollar has strengthened by 9-12 percent since early February 2017.

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