By Nigar Orujova
The Central Bank of Azerbaijan will not allow a significant change in the rate of the national currency, CBA Chairman Elman Rustamov said.
The value of the manat has dropped on December 21, following the CBA decision to allow a freely floating exchange rate. As a result, US dollar and euro rose by nearly 50 percent in value in Azerbaijan, making the manat the world’s worst-performing currency this year.
The CBA described this decision with the strengthening of the long-term shocks in the foreign economy to equilibrate the balance of payments, save foreign exchange reserves in the country at a critical level and secure competitiveness of the national economy in the international arena.
“This floating rate is called a managed floating rate. This means we will not allow a significant change in the manat’s rate and that we will control it,” Rustamov said talking to the state television channel AzTV on December 21.
He further noted that a significant deviation from the current rate can lead to serious confusion on the market.
Rustamov believes that the manat’s rate will strongly depend on the prices formed on the interbank market during the sale and purchase process.
He also revealed plans to take measures to strengthen the banking sector stability.
The situation in the banking sector of Azerbaijan is stable, despite the decision to move to a floating exchange rate of the manat, as evidenced by the rate of capital adequacy, said Rustamov.
According to international standards, this figure is 8 percent, while the capital adequacy of the banking sector of Azerbaijan reaches 17 percent with the norm of the Central Bank at 12 percent. The liquidity of the banks is more than twice the regulatory requirement of the Central Bank.
"Today, banks are carrying out all the settlement payments. The banking system is stable,” he noted. “According to the stress-testing of banks under the current exchange rate policy, which was one of the possible options, the sector demonstrates stability and there is no danger for investors.”
He went on to add that despite all this, in order to ensure a greater stability of the banking sector, the Central Bank is preparing an action plan to be carried out in two directions – to mitigate the regulatory framework that contributes to additional capitalization of banks, improve liquidity, creation of additional reserves for improving the quality of assets.
“Currently, about 80 percent of deposits are invested in foreign currency, which means that the deposits are well hedged against exchange rate of national currency. Along with this, we are completing the work on the improvement of the deposit insurance system,” he said.
Rustamov noted that in general, favorable conditions will be created to ensure the safety of deposits in banks of the country, so there are no serious grounds for concern of investors.
Import duties maybe increased
Rustamov said the new rate of the manat and its dynamics can help reduce tensions in the country’s currency balance, and in the best case scenario - to significantly reduce the volume of imports.
“The situation with the currency balance was very tense, due to the import as well, decline of which is slower than we would like. We believe that the step [the transition to the floating rate] as a whole would lead to a significant reduction in the volume of import operations, the growth of exports and enhance import substitution,” he said.
To reduce the stress on the foreign exchange balance it is necessary to begin funding of the own share in the international currency markets, he noted.
He also believes the transition to the floating rate of the manat will reduce imports and this is an optimistic scenario.
“We need to tighten fees policy on the import of luxury goods, jewelry, etc. We must protect the market and to limit imports by economic means,” he said. “Of course, if someone wants to import and sell such goods, he just has to pay a fee that would be paid into the state budget. We have significant opportunities in this direction,” he said.
Noting the need to carry out additional measures to stimulate exports, the head of the Central Bank added that the government plans to provide exporters with cheap loans and other benefits.
IMF hails CBA’s decision
The International Monetary Fund welcomes the decision of the CBA on the transition to a floating exchange rate of the manat, Mohammed El Qorchi, the IMF’s mission chief for Azerbaijan, told Trend on December 22.
El Qorchi noted the importance of the Azerbaijani authorities’ support the move to a floating exchange rate regime by speeding up efforts to build confidence.
He said it is necessary to enhance the effectiveness of monetary policy, strengthen supervision over the banking sector and apply macroprudential policy measures to stabilize the financial sector.
In addition, due to the recent changes the country’s public should be clearly and consistently informed, the head of the mission noted.
He belives it will strengthen the expectations, as all further steps will be taken within the framework of monetary policy.
El Qorchi noted that the IMF stands ready to provide technical assistance to help the government of Azerbaijan in the management of the new system.
Floating rate to assist fiscal adjustments
Fitch Ratings, a global ratings agency, believes, Azerbaijan’s move to a floating exchange rate regime for the manat will assist the sovereign’s fiscal and external adjustments to lower oil prices and protect buffers.
“But exchange rate adjustments are not risk free,” the agency noted in a message issued on December 21. “The manat's fall will hurt the already fragile banking sector, which could crystallize contingent liabilities for the sovereign.”
“The sharp exchange rate adjustment eases the oil shock’s fiscal impact by boosting the local-currency value of oil revenues and a floating currency should help stabilize reserves,” believe the agency’s experts.
Fitch also said gross reserves fell around 18 percent in the first nine months of the year, partly through defending the currency following an earlier devaluation in February.