Strategic currency reserves on guard for stability of Azerbaijan

The strategic currency reserves of Azerbaijan have increased compared to the beginning of the year by $1 billion and amounted to $19.1 billion, said last week the Minister of Economic Development Shahin Mustafayev, speaking at the Cabinet of Ministers meeting on the results of socio-economic development in the first nine months of 2009, held under the chairmanship of President of Azerbaijan Ilham Aliyev.

Compared with the beginning of 2008, strategic currency reserves increased by more than two and a half times ($7.2 billion) even during the global financial and economic crisis. In addition, the Central Bank of Azerbaijan expects an increase of the strategic currency reserves of the country to 50 percent of GDP by the end of the year. (The expected level of GDP in 2009 amounts to approximately 30 billion manat (about $40 billion)). "Such a solid bag enables to ensure all sources of liquidity, monetary stability in the country, therefore, it is the main macro-economic factor, as well as allows Azerbaijan to reliably prepare for a global crisis and avoid its strong influence," the CBA thinks.

Strategic currency reserves of Azerbaijan are formed from three sources - the reserves of the State Oil Fund (SOFAR), the reserves of the Central Bank (CBA), as well as resources of the Ministry of Finance.

State Oil Fund

The assets of the State Oil Fund of Azerbaijan (SOFAZ) are expected to increase to $14 billion by late 2009, while in early 2008 the fund had only $2.5 billion, SOFAZ Executive Director Shahmar Movsumov said. "Such increase in the country's foreign exchange reserves during the global financial crisis, which is accompanied by lack of financial resources on the world markets, is proof of right economic policies pursued in Azerbaijan," Movsumov said.

According to experts, the global financial and economic crisis has not fully demonstrated itself. It still continues, Movsumov added. As a result, changes are being made in the system of financial management in the fiscal system of many countries. "SOFAZ was established 10 years ago to accumulate oil and gas revenues and to ensure effective management. It has passed through institutional development and turned into a full-fledged financial institution in a short period of time," Movsumov said.

According to Movsumov, the fund has three main objectives: to accumulate funds and deploy the fund's assets abroad to minimize the negative impact on the economy, to prevent to some extent the "Dutch syndrome", to ensure savings for future generations and maintain the current socio-economic processes in the country.

"With the support of SOFAZ, presently there is not refugee or IDP camp in the country. Thus the fund fulfilled the task set by the country's leadership," Movsumov said. "Education of the Azerbaijani youth abroad is an investment in the future."

SOFAZ accumulates income from oil contracts and, particularly, from the sale of the country's profitable oil, transit tariffs for the transportation of oil and gas across the country, from the lease of state property an etc.

The revenues of the State Oil Fund of Azerbaijan (SOFAZ) were 3.156 billion manat and expenditures - 2.685 billion manat in January-June, 2009.

Majority of the fund's revenues came from sale of profitable oil. The revenues from oil contracts totaled 2.989 billion manat, from sale of oil and gas - 2.907 billion manat, transit payments - 5 million manat, dividends from the Baku-Tbilisi-Ceyhan - 75.5 million manat, and foreign management of assets - 0.1 million manat. SOFAZ's income from management with the funds was 167 million manat.

The SOFAZ has allotted around 20.2 million manat in an effort to improve lives of refugees and IDPs. The fund transferred 2.530 million to public budget. SOFAZ financed reconstruction of the Samur-Absheron irrigation system at 61.9 million manat and construction of water pipeline from Oguz-Gabala region to Baku at 68.5 million manat. It also provided 1.1 million manat to finance Kars construction project in Georgia and 1.3 million manat to finance education of youth abroad.

The SOFAZ assets hit 9,557,700,000 manat ($11,886,400,000) as of July1 2009 which is by 6.35 percent more than the same period of 2008.

Central Bank of Azerbaijan

As of September 30, currency reserves in the CBA totaled $5.1 billion. Today, the country's currency reserves can cover the 24-month import, which is a high rate, especially in times of crisis. Today the proposal fully covers the demand on the currency market, and in the first quarter, the Central Bank made a big sale, totaling about $1 billion. At present, major changes did not happen in this amount, but in the coming months, this amount is expected to reduce. Everything depends on the price of oil on world markets, the level of payment balance, the total currency amount of currency market and the scale of banks to attract foreign loans.

Depending on the forecast on the balance of payments, the Central Bank has various scenarios of increasing manat intervention, and buying dollar from the currency market can reach 50 percent of its sales in the first quarter. In any case, large sales of foreign currency are not expected by the end of the year.

CBA explained the stability of Azerbaijan's banking system during the global financial crisis through two factors - the conservative politics during growth of bank indicators and the establishment of reserves for credit risks. As a result, the external debt of the banking system was very conservative, and as of the beginning of the financial crisis, the share of foreign loans amounted to only 20 percent of the liabilities of the banking system. In addition, sufficient reserves were created for all problematic loans, which now totals 70 percent of overdue loans.

According to CBA, by the end of 2009 the banks are expected to attract additional resources. As a result, the amount of external debts of the banking sector in the country will remain at the level like in beginning of the year - $2 billion.

Funds of Ministry of Finances

The key sources of currency reserves are the incomes of the Public budget. Azerbaijan is one of the first countries which provided anti-crisis measures in the 2009 Public budget, said the chairman of the Accounting Chamber of Azerbaijan, Heydar Asadov. "Anti-crisis measures were determined in the budget package, so even despite the calculation of predictive indicators on an oil price of $ 70 per barrel, there will be no problems with financing of the cost of protected items under the price drop in world oil markets," Asadov said.

According to him, problems with financing the costs of the Public budget were not observed in Azerbaijan during the global financial crisis due to savings and extension of the execution of certain projects.

"As a result of reduction of Public expenditure on implementation of some investment projects and the creation of reserves in the budget through savings, there were no problems despite the price of oil on world markets was just over $50," said Asadov.

In January-August 2009, the Public budget income comprised 6.539 billion manat, or 31.7 percent of GDP. It decreased 2.2 percent from the last year. Public budget expenses rose 0.6 percent and made up 5.861 billion manat (33.2 percent of the GDP). The surpluses of the budget totaled 677.7 million (3.3 percent of GDP).

Some 34.7 percent (2.270 billion manat) of revenues falls to the Taxes Ministry's and 12.2 percent (794.6 million manats) - to the customs duties and taxes with a 106.7 percent fulfillment of the forecast.

The public budget expense for social security and provision of people comprised 728.8 million manats (12.4 percent). 716.5 million manat (12.2 percent) was spent on education, 223.7 million (3.8 percent) - health, 371.9 million (6.3 percent) - maintenance of prosecutor bodies, security and law-enforcement and court bodies, 2.516 billion (42.9 percent)- investment allocations, 110.8 million (1.9 percent) - housing and communal services, 187.5 million (3.2 percent) - agriculture, fishing, 43.2 million (0.7 percent) - transport and communications, and 1.854 billion (31.6 percent) of Public expenses were spent on the payment of salaries, pension and allowances.

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