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Pros and cons of Azerbaijani manat's depreciation

Business Materials 17 February 2015 17:39 (UTC +04:00)
Azerbaijan has refused from manat peg to the US dollar since February 16. This decision is quite logical as the country passes to the export-oriented economy
Pros and cons of Azerbaijani manat's depreciation

Baku, Azerbaijan, Feb. 17

By Azad Hasanli - Trend:

Azerbaijan has refused from manat peg to the US dollar since February 16. This decision is quite logical as the country passes to the export-oriented economy. In this regard, a very strong manat may reduce the competitiveness of goods produced in the country.

This decision was made on the basis of the order given by Azerbaijani President Ilham Aliyev to the relevant structures, the government, the Central Bank on January 27. The order was made during a conference dedicated to the outcome of the first year of the "State program of socio-economic development of districts in 2014-2018". The president ordered to pay attention to this issue to prevent the excessive manat price rise.

Afterwards, the gradual appreciation of the European currency by 1.1 percent was observed in the dynamics of the AZN/EUR exchange rate. At present, the official rate of manat versus euro is 0.892 euro.

The rate of Azerbaijani manat to the US dollar remained stable at the level of 0.7844 manats, however after the yesterday's decision of Azerbaijan's Central Bank to change the exchange rate policy, it started to cheapen.

And today, the dollar reached 0.7853 manat - an index registered 2.5 years ago.

First of all, let's examine how the rate remained stable throughout this period?

Here it is enough to consider one fact. As the chairman of Azerbaijan's Central Bank, Elman Rustamov told the Financial Times, the Central Bank has spent about $1 billion of its reserves since early 2015 to defend the manat, he added, as nervous depositors converted their savings into dollars.

Moreover, this situation has been observed since late 2014.

As a result of the falling rate of the Russian ruble, the population exchanged manats for dollars for deliveries of equipment, vehicles and other goods from Russia, and to buy property there.

It is beneficial for the outside buyers, since the prices in the Russian market are increasing in rubles.

The increase of demand for US dollar in the currency market led to decrease of CBA's currency reserve. In order to maintain the stability of the exchange rate, CBA had to buy excessive manat stock from the market, while before that the bank had to buy US dollars from the market.

Nevertheless, Russia's experience became a lesson for us once again.

Definitely, Azerbaijan doesn't intend to allow excessive reduction in the exchange rate of manat to US dollar. CBA head Elman Rustamov confirmed this in his interview with a foreign media outlet.

"Any weakening of the currency would be gradual rather than sudden, saying that the Central Bank would take into account the interests of the population."

CBA hasn't yet revealed the maximum possible appreciation level of US dollar, however, manat dropped by 0.11 percent in two months. Definitely, sharp fluctuations of the exchange rate of manat will not be observed, since CBA doesn't intend to absolutely restrict its presence in the country's currency market and is ready to buy excessive volume of currency from the market.

Meanwhile, the country's chief banker announced his expectations of 5-7 percent increase of prices on the consumer market of Azerbaijan. For comparison, inflation on the results of 2014 amounted to 1.4 percent.

Today, about 95 percent of the country's export falls on oil and oil products, and it already means that this part of the export operations is carried out only in the US currency, regardless of the energy trade markets. And the drop in oil prices on world markets almost by 50 percent starting from mid-2014, already means a significant decrease in foreign exchange earnings of the country.

In this regard, Azerbaijan is preparing to move to a new model of economic growth and reduce the dependence on energy resources. Excessive consolidation of the national currency hurts the domestic market. Foreign companies receive additional benefit from this, which allows them to reduce the prices for their products. In its turn, this makes products made in Azerbaijan uncompetitive.

Azad Hasanli is Trend Agency's staff journalist, follow him on Twitter: @AzadHasanli

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