Central Bank of Azerbaijan stands ready for new challenges of global economy

Business Materials 24 September 2011 14:20

Azerbaijan, Baku, Sept. 23 /Trend, I.Khalilova/
Over recent years, the dynamics of economic development in Azerbaijan, rapid growth of the financial system and strengthening global economic environment set new challenges before the country's Central Bank. In this regard, the Central Bank has identified new priorities for strategic action to increase support for economic and human capital development, bringing the institutional management into conformity with the temporary practice, maintaining macroeconomic stability and stability of the banking system in order to respond effectively to these challenges.
The strategic plan of the Central Bank for 2011-2014 was published in July. In an interview with Trend, the Deputy Chairman of the Central Bank of Azerbaijan Khagani Abdullayev spoke about tasks, of which implementation over the next three years will contribute to CBA's transformation to an important public institution, which supporting macroeconomic stability and sustainable development in the country.
CBA revised planning model
The Central Bank has a decade of experience in strategic planning, and this process began for the first time in 2000. The difference is that then the planning process was carried out based on "bottom-up" principle. As a result, each structural unit developed strategic and tactical goals that were discussed and accepted by the CBA management. Usually, strategic goals envisaged plans for the next three years, for the achievement of which, tactical objectives were annually determined.
Such form of planning has worked successfully until recently. However, in light of advanced international practices over last years, CBA decided to revise its planning model.
To ensure the close involvement of senior management in planning, as well as to meet the demands of the time, since last year, the CBA has started to apply a new concept of strategic planning. The new approach is based on a philosophy of change management and was built based on the following principles:
- planning upon a "bottom-up" principle, which enables management to identify strategies to address the urgent problems;
- dividing strategic planning covering the fundamental changes, and operational planning aimed at improving existing business processes;
- transforming all strategic goals and objectives into the plans of relevant departments of the bank and employees.
The Central Bank believes that the new planning model will enable to more successfully and efficiently carry out its mission as a mega-regulator of the economy and financial system.
Central Bank is ready for new challenges
Structural reforms undertaken by the Central Bank over recent years made its institutional structure closer to the structures of leading central banks around the world. The main purpose of these structural changes was to create an adequate institutional framework for efficient and rational management of new business processes.
Today, the Central Bank is carrying out about 200 business processes, as well as a relevant structural base has been formed to ensure the sustainability of these processes. At the same time, recent tendencies in the global economy and financial crisis revealed the need to bring regulatory frameworks in the banking system into conformity with international management standards, to maintain financial stability, neutralize the negative impact of foreign shocks.
To become prepared for such challenges, in 2011 the Central Bank has optimized its institutional framework by establishing a new structural unit - Department of Risk Management and Department of Prudential Policy and Methodology
New banking concept
According to CBA's strategic plan for 2011-2014, formation of a new framework of prudential risk-oriented supervision has been defined as a strategic objective of banking supervision.
Firstly a relevant concept will be prepared in the banking sector for large-scale application of risk-based supervisory framework. There are plans to improve legal base, form a new methodological vision to assess main risk categories, risk management and internal supervision systems.
Also there are plans to deeply study the issue of introduction of new supervision tools, proposed by Bazel III Capital Accord, which is very urgent at the global level today. In this regard, the application of the "levereg" coefficient has already begun. The application of Bazel III at the international level will begin in 2013.
Real sector monitoring
The Central Bank plans to establish a comprehensive monitoring system of the real sector. The goals of the monitoring system of the real sector, established in the Azerbaijani Central Bank, is to measure the business environment in the real sector, to collect data on inflation projections, employment, sales, production and services in the corporate sector. This activity is carried out by central banks in many countries. Several years are required for the complete monitoring system.
Banks' reaction to the global processes

The CBA plans to improve the plan of accounts for the banking system. Moreover, the new plan of accounts will allow enriching the banking statistics, carrying out more detailed statistical classification of transactions, as well as improving the quality of the various analyses carried out in the CBA.
Course via modeling
While determining the exchange rate policy, the Central Bank bases on the results of the models, along with economic factors. Modeling is widely used in economics to reveal and to predict the cause-effect relations.
As known, the course, as an operating goal of the monetary policy, affects the economy through three channels: inflation processes, competitiveness and financial stability. The impact of the exchange rate on inflation and competitiveness of the economy (both in competition with imports and export-oriented sectors) is directly measured by the models.
The stress testing is used to determine the impact of the course on the financial stability. So, the current and strategic directions of exchange rate policy are determined through all three channels.
The CBA created and uses models of inflation, money demand, "real estate bubble", a balanced exchange rate, imports and exports, economic growth, and others.
Moreover, the Central Bank plans to establish an empirical research base. The empirical results of the models play the role of "lamp" when making decisions on monetary policy.
New architecture of financial regulation system
The uncertainty has recently increased in global economic environment, international commodity and financial markets. A number of global risks still remain. At present, there is fragility in the dynamics of world economic growth, the high volatility of major currencies. At present, the main task of the Central Bank is to maintain macroeconomic stability in a volatile situation in the global economy and the openness of the Azerbaijani economy for the world economy.
At present, there is research and analysis for improvement, in accordance with new challenges, the design of monetary policy and financial stability, adequate assessment of macroeconomic risks and mechanisms for rapid response.

In this regard, the Central Bank will take new standards formed in a global scale as a basis to develop new mechanisms for ensuring financial stability. The new features will be considered in the process of implementing these standards.
CBA costs estimation

The cost-accounting system is planned to be introduced within the CBA strategic plan. This system is a financial management system, based on the determination of the cost of activity (rendered services) carried out in accordance with the mission of the Central Bank, on the basis of actual costs.
The main purpose of this system is to specify the operations and determine their costs, to increase the efficiency of the operations, to determine and to assess the activity and organizational abilities of the CBA structural unit, to create the objective information base to assess the employees, as well as to make optimal and actual budgets.
Thus, the implementation of this project will create conditions to improve the quality and effectiveness of the CBA activity, to use resources optimally, as well as to make more accurate budget forecasting.
Control over cash increases
The CBA plans include the establishment of the Cash Center. It is envisaged within the strategy of forming the most modern standards of cash management. The strategy envisages the use of innovations and new technologies existing in the world, as well as the introduction of the Cash Menecment information system, fully integrated with cash management.
The Cash Center will create the conditions to form the fully automated treasury infrastructure on the basis of modern technologies, as well as for safe and efficient management of business processes related to cash flow, to minimize risk and to gain control mechanisms.
Regarding the Cash Management information system, it envisages the creation of a centralized information network covering cash transactions of the Central Bank and the banking sector with the Central Bank in real-time. The use of this system will contribute to strengthening the mechanisms to control the storage, transportation, processing, delivery, removal and destruction of banknotes, as well as adaptive management of potential risks.
Fight against counterfeiters strengthens

One of the priorities of the Central Bank is to develop the money protection system, as well as to introduce the latest technological innovations and systems to identify counterfeit money. Thus, the use of modern systems while examining the banknotes will allow the central bank to analyze the national currency and counterfeit banknotes.

The Central Bank thinks that one of the main reasons for the success of counterfeiters is associated with the inability of the population to fully identify the protective elements in the banknotes. The CBA will expand cooperation with relevant state bodies and prepare an appropriate program to inform and educate the public.

At the same time, the establishment of the expertise institution will give an impetus to form the CBA potential to continuously monitor the changes in the design and protective elements of banknotes, to use innovations in this area and to eliminate dependence on foreign partners.