Will Azerbaijan seize on idea of de-dollarization?

Business Materials 23 March 2015 15:11 (UTC +04:00)
The idea of creating a single financial and banking space in CIS countries gains relevance in the light of increasing risks in the global economy.
Will Azerbaijan seize on idea of de-dollarization?

Baku, Azerbaijan, Mar. 23

By Ilaha Mammadli - Trend:

The idea of creating a single financial and banking space in CIS countries gains relevance in the light of increasing risks in the global economy.

Earlier, presidents of Russia, Belarus and Kazakhstan talked about the possibility of creating a monetary union as a first step.

"By working shoulder to shoulder, it is easier to respond to the external financial and economic threats, protect our joint market," said Russian President Vladimir Putin. He has already instructed the Central Bank and the government to study this issue and come up with a solution by September 1, 2015.

Apparently, at present, the main issue is to work out a unified monetary policy and to start using regional currencies - Russian ruble, Kazakh tenge and Belarusian ruble - in mutual payments.

The next step can be the creation of a single currency, however, the states haven't reached an agreement on this issue yet. Nevertheless, previously, there were ideas about introducing a new currency called the euras or using the ruble as a single currency.

The economic feasibility of this initiative is in doubt as all national currencies in the region, including the Russian ruble are quite weak. The share of ruble in the world economy is very low, while dollar and euro have considerable shares in the Russian economy.

Nevertheless, starting the use of national currencies in mutual payments is real and will depend on the level of economic relations between the countries.

There has been talk about the necessity of expanding the use of national currencies in the payments among the countries of CIS and Caspian Sea region from the beginning of the global financial and economic crisis.

If before the crisis, the payments with national currencies in CIS countries were within 5 percent and other transactions were carried out with dollar or euro, the situation has changed now.

Today, over 20 percent of the payments are carried out with national currencies and given the ongoing instability in the world economy, continuation of West sanctions against Russia, this figure will increase.

Meanwhile, the "currency war" has already reached the British pound, which dropped to $1.4635 on March 18, its lowest level since June 2010.

Much lower exchange rates were recorded only in June 2009 - $1.4347 per pound. This allowed the euro, the exchange rate of which to dollar has been dropping in recent times, to rise slightly.

The dollar started rising as a result of the decrease in oil prices starting from mid-2014. This increased the pressure on the national currencies. Therefore, some countries started to think about reducing the dependence of their national economies on the US dollar.

Dollar or manat

Azerbaijan, which has been keeping its currency stable for a long time, succeeded to prevent the dollarization of 70 percent of manat money supply with the sharp correction of the exchange rate of manat on February 21, 2015.

The agiotage related to the purchase of the dollar in the foreign exchange market of Azerbaijan, began in late 2014 and increased after the transition to a bi-currency basket when the Central Bank of Azerbaijan abandoned manat's beg to the US dollar as of Feb.16, which gave a certain impetus to the exchange rate of the national currency.

Today the dollar plays an important and quite objective role in foreign trade transactions of Azerbaijan, given that 92 percent of the country's export accounts for the oil and gas sector.

In addition, in February 2015, for the first time in the history, the United States became a major trading partner of Azerbaijan with a total turnover of $665.42 million (imports from Azerbaijan stood at $199.36 million, export - $466.05 million). Thus, it also became the main supplier of goods to the country.

The Top 5 of the country's leading foreign trade partners included the United States, Italy, Germany, Russia and Turkey as of the first two months of 2015.

The circulation of the dollar, except for the payments in the sphere of trade and payment for services is free within the country. This means the population is free to make a choice while storing their savings in banks or attracting loans.

The loans in foreign currency amounted to 27 percent of the total volume of credit investments of Azerbaijan's banking sector, while nearly 52 percent of the deposit base consists of savings in foreign currency. This is while 48.7 percent of deposits were in foreign currency a year ago.

If the Central Bank didn't change the exchange rate of manat by 34 percent at one gulp, we could expect total dollarization of not only bank deposits, but also the population's savings outside the banks.

On the other hand, given the devaluation of national currencies in neighboring countries, maintaining the exchange rate of manat unchanged would undermine the competitiveness of Azerbaijani goods in foreign markets and the situation would deteriorate for the local businesses that provide the domestic market with their products.

Even in the current situation [rise of the dollarization level], Azerbaijan does not intend to use the experience of some countries in Latin America, where governments of Bolivia and Peru tried to forbid the population and businesses to convert deposits into foreign currency. As a result of this policy, funds from banks were taken to foreign countries and entered the shadow economy.

The Azerbaijani government increases confidence in manat with stimulating methods, by increasing the guarantees on deposits, which in turn leads to an increase in interest rates on manat deposits.

There are also plans on expanding the volume of mortgage lending, which is also carried out in the national currency. Increase is observed in the volume of concessional lending to business entities in manats.

Private pension funds can also serve as drivers of the domestic source of funding. It should be noted that it is planned to speed up the creation of private pension funds in the country.

Expanding the use of the national currency not only domestically but also in the relations with foreign partners, will also allow increased confidence in the manat. Given the government's measures to develop non-oil sector of the economy and increase the production of goods for export, it is quite feasible.

At the same time, banks can also serve as institutions stimulating the use of national currencies through the system of financial support and lending as part of the development of trade, economic and investment ties with countries with which Azerbaijan closely cooperates.

But this does not mean that Azerbaijan intends to abandon the dollar, in which the component part of the country's strategic currency reserve is concentrated.

It is also impossible due to the fact that today, Azerbaijan is the initiator and participant of large-scale projects in the region, both in the sphere of energy and transport and the implementation of these projects will allow to strengthen the country's role in the world economy.

Azerbaijan will play a central role, both as a gas supplier and as a transit country. Moreover, the country intends to be recognized as a supplier of non-oil products in the future as opportunities for the export of non-oil products will expand with Azerbaijan's accession to WTO.

Edited by CN

Ilaha Mammadli is Trend Agency's deputy editor-in-chief for economic issues, follow her on Twitter: @IlahaMammadli