Azerbaijan introduces freely floating rate for its manat

21 December 2015 12:02 (UTC+04:00)

By Nigar Orujova

The value of Azerbaijan’s national currency, manat, dropped on December 21, following the Central Bank of Azerbaijan (CBA) decision to allow a freely floating exchange rate.

The exchange rate between manat and US dollar changed from 1.0499 to 1.5500 after the policy shift. The official exchange rate of euro to Azerbaijani manat was set at 1.6850 manats.

The CBA reported that the decision was made taking into account 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.

The decision means that the rate of manat will be formed in accordance with the fundamental factors determining correlation of supply and demand in the foreign exchange market.

The Central Bank will participate in the foreign exchange market in accordance with this regime.

“Difficult processes in the global economy, recent decisions of leading banks in the world, rise of demand on the energy market, weakening economic growth in major countries that are the main oil producers, as well as global factors have led to over threefold decline in oil prices since June 2014,” said the CBA.

“All these processes affected Azerbaijan as well, which is closely integrated with the global economy processes. As a result, the foreign trade surplus and currency receipts to the country have decreased sharply.”

Given that of all these processes have a significant pressure on the exchange rate of manat and currency market of the country, devaluation has been carried out this year, and the economy, foreign exchange market and the exchange rate of manat have been adapted to an oil price of $50-55.

However, a sharp decline in oil prices in July has again increased pressure on the rate of manat and currency markets, the CBA noted. Also, the continuing devaluation in neighboring countries have had a negative impact on the competitiveness of the national economy in the international arena.

In connection with the emerging conditions, the Central Bank observed a need to bring the foreign exchange market and the exchange rate of manat in line with oil prices. Thus, U.S. dollar and euro in Azerbaijan rose by almost 50 percent as of December 21.

However, the regulator will take complex measures to ensure the security of the population’s deposits and other deposits, improve the deposit insurance system, enhance the financial sustainability, liquidity position and capital of banks.

Experts believe the rising dollar and cheapening manat will allow the budget of the country to increase its profits in manat.

Azerbaijan’s switching to the floating rate of manat is a coercive measure that is explained with the ongoing processes on the world currency market, believes Ogtay Haqverdiyev, doctor of economic science.

“What we see now, is the real price of manat,” said the expert, describing this measure of the CBA as forced.

The current step of the Central Bank can be regarded as the beginning of the irrevocable movement towards the real value of the manat, he noted.

“I think the process of the dollar’s rise in price will gradually continue throughout 2016,” Haqverdiyev said, adding that the real value of the dollar could reach three to five manats.”

The expert noted that the restoration of the reserves of the CBA is not the main purpose of the transition to a floating rate.

“Reserves are made to ensure the way out of such force majeure situations. However, in terms of economics, any national currency should be released. Its real value is to define the principle of supply and demand in the foreign exchange market. In such a situation, the economy is developing compatible,” said the expert.

Haqverdiyev notes developing of the non-oil sector is a primary task facing Azerbaijan now. “More than 93 percent of our exports are oil and oil products. It is necessary to develop modern science intensive spheres of production, to develop nanotechnology. It is necessary to choose and produce such a product that will find its place in the global market and will be competitive,” he stressed.

Meanwhile, the banks operating in Azerbaijan suspended money transfers in connection with the devaluation of the national currency. Remittances are scheduled to be resumed in the afternoon.

This also affected the other banking transactions involving foreign exchange, including currency exchange.