Azerbaijan, Baku, Dec. 30/ Trend , N. Ismayilova/ The ANB decision to avoid a basket-induced depreciation of the dollar/manat exchange rate at a time of high uncertainty was, on balance, well grounded, according to the report of the IMF mission who visited Azerbaijan from Dec. 10 to 17.
"On the one hand, this decision implied that that the use of the two-currency basket regime, which had been successfully implemented by market participants since late March, was temporarily suspended. On the other hand, the major volatility in the exchange rate between the two currencies in the basket peg of the manat (the dollar and the euro) would have implied a notable depreciation of the manat against the dollar, with the potential of triggering panic and re-dollarization."
The mission recommends that as soon as excess volatility in the bilateral exchange rate of the basket currencies subsides, the NBA return to the full implementation of the two currency basket exchange rate regime.
"This system has served the country well by introducing the idea of two-sided exchange rate risk to market participants. More exchange rate flexibility will be essential if the ANB still plans to move to inflation targeting in the future," the report said.
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