THE LESSER EVIL

It doesn't take long to get used to something good and to begin to think that things will always be like that. After a long-drawn-out period of stability, any changes are perceived cautiously and negatively. This is not just the case with an individual, but with society as a whole. Thus, the devaluation of Azerbaijan's manat started last Monday. To begin with, the country's Central Bank released a statement on the transfer to the devaluation basket in order to shape the exchange rate for the national currency. Then there was a hullabaloo around the bureaux de change. This was followed by an assurance from the governor of the Central Bank board that the devaluation would only be a slight one, and finally the "cold shower" came with the manat's 34-per-cent drop in value. Some media have already managed to christen 20 February "black Saturday". Did this step by the Central Bank come as a surprise and what else is in store for us?

Calm, just calm!

The devaluation of the manat today was a step that was to be expected. All economy specialists are probably agreed on that. Since the beginning of this year alone the Central Bank of Azerbaijan has spent approximately 2bn dollars propping up the rate of exchange. This money was withdrawn from the Bank's foreign currency reserves, which essentially form part of Azerbaijan's gold and currency reserves. No risks can be taken with them, for they are a guarantee of the country's stability. A reduction in the reserves may affect the credit ratings, both of the country and of individual subjects in its economy, it's attractiveness as an investment target and so forth.

Until quite recently it was even advantageous to maintain the manat's exchange rate, considering that oil reserves had rapidly grown in price, Azerbaijan's currency had gained the reputation of being one of the most stable in the region and inflation has become a sufficiently predictable index. The swift drop in the price of oil on the world markets, provoked by the devaluation of the currencies of practically all Azerbaijan's neighbours has made it impossible to maintain the former stability on the currency market.

President Ilham Aliyev was the first to point out, in his speech on 27 January at a conference devoted to the results of the first year of implementing the state programme for socio-economic development of the regions in 2014-2018, that the manat exchange rate needed to be changed in the global situation that was taking shape. Then the head of state pointed out that the manat needed to be backed up with regard to the euro, which would have a negative effect on foreign trade operations with Europe, and he stressed that it would be expedient to put the manat on an even exchange rate with the euro, namely 1:1, whereas the euro was previously worth 0.89 manats. After this, in the dynamics of the manat-euro currency duo a gradual rise was observed in the value of the euro to 1.1 per cent.

The Central Bank went on to take the decision to go over to using a bi-currency (dollar and euro) basket in setting the manat exchange rate from 16 February 2015. The same thing had happened before, the Central Bank governor Elman Rustamov recalled a day later in a broadcast on state television: "In 2008-2011 during the world financial crisis, Azerbaijan's currency rate policy was pursued on the basis of a bi-currency basket including the dollar and the euro. This allowed for a more flexible currency policy to be pursued. But, in conditions of high oil prices and the high proficit of the balance of payments, there was pressure on the manat exchange rate. On the other hand, the euro increased in value vis-a-vis the dollar. These factors promoted a strengthening of the manat exchange rate, but, if we had not rejected the euro in the currency basket, today we would be faced with an even stronger manat," the Bank chief said.

Thus, the Central Bank's decision was the right one. But no precise explanations and forecasts were given to the public. As a result, people began to storm the exchange bureaux and the banks in the hope of exchanging manats for dollars as fast as possible and converting the savings that they had with them. It was not until the next day that the chairman of the Central Banks's board promised on the state channel of AzTV that the devaluation would be a slight one. "We have recommended that all the banks assist citizens who wish to convert their deposits into foreign currency. But today the amount of bank deposits in the republic exceeds 7bn manats, of which half is in manats and half in foreign currency," E. Rustamov reported.

"There are no fundamental reasons and grounds for the chronic and lengthy lessening of the manat's value. There is no need to worry. No dramatic devaluation of the manat is expected. Our foreign currency reserves amount to almost 70 per cent of GDP and are almost 2.5 times more than the volume of manats in circulation. Therefore there is no need to fear a situation like that happening in Azerbaijan, but we have to react to the processes taking place in the world," Elman Rustamov also said.

The hullabaloo that followed these words did not die down, but psychologically the population began to feel a bit calmer and got used to the idea there would be gradual changes on the currency market. The Central Bank moreover instructed the banks to operate over the weekend (21-22 February), so that anyone who wished could exchange their savings. This put some experts on their guard who had been foretelling that there would be a drastic change in the exchange rate from Saturday morning onwards. And these expectations turned out to be justified.

On the morning of 21 February there was a clap of thunder. The Central Bank informed the banks of a new exchange rate: 1 dollar to 1.05 manats and 1 euro to 1.195 manats. 

Inevitable inflation

So, what happened and what will be the result? The version put forward by most experts today, since there has only been one reaction from the Central Bank itself at the time of writing this article, was formulated in the following manner: the decision to lower the manat exchange rate in relation to the dollar was taken for the purpose of creating additional incentives to encourage diversification of the national economy, to make it more competitive and boost its export potential, taking into account the processes on the currency markets of Azerbaijan's main trade partners.

Thus, considering the anxiety caused by the step taken by the Central Bank, we are primarily examining the negative impacts of this decision.

Any currency devaluation inevitably leads to a rise in consumer prices, and this will most probably have a negative and tangible effect on this process. Literally since Saturday afternoon on 21 February almost half of the shops in Baku closed to take stock of their goods, although the Ministry of the Economy and Industry put out a press release on that day stating that the ministry staff would monitor the relatively unfounded rise in prices. In spite of that, prices went up, there were no economic grounds for that to happen moreover. In most cases, goods were sold from the stocks at the previous prices. If you look at neighbouring Russia, which is also suffering the devaluation shock, inflation did not begin to make itself felt there until a couple of months after the rouble collapsed, when the retailers had restocked their warehouses with goods. In other words, the sharp rise in the cost of consumer goods in Azerbaijan today is completely unfounded, and here one can trace the obvious desire of "the smart operators" to feather their nests from the fluctuations in the exchange rates.

Many experts doubt that businesses will a the price-lists in keeping with the changes in the exchange rate, when it declines, although the State Service for Antimonopoly Policy and Consumer Protection attached to the Ministry of the Economy and Industry, has stated that measures will be taken against these "smart operators" in compliance with the legislation. "The devaluation of the manat by the Central Bank will lead to an acceleration of inflation to two-digit figures," Vuqar Bayramov, the chairman of the Centre for Economic and Social Development, thinks. 

On the other hand, expert assessments have already appeared regarding the negative impact of manat devaluation on the banking, insurance, tourist and other businesses.

Thus, on 31 December 2014, the foreign commitments of Azerbaijan's commercial banks amounted to 6bn 342m dollars. Even if approximately 4,986bn manats were needed to pay off this debt, by maintaining a high exchange rate, this amount will only rise, which is naturally disadvantageous, since domestic loans are granted in manats.

At the same time, the head of the department of licensing, statements and complaints of the State Insurance Supervision Service attached to the Finance Ministry, Mahir Abdullayev, thinks that the devaluation of the manat may make insurance companies less profitable. "The companies' expenditure on compensating clients is bound to increase, so, for example, cars and their spare parts will become more expensive, owing to the fact that they are largely imported," he said. According to the head of the Insurers' Association of Azerbaijan, Orxan Bayramov, in the voluntary insurance sector, the cost of services are formed depending on the damage claim, a percentage is retained, therefore the increase in prices for cars, their repairs, for real estate and medicines, will lead to more expensive insurance services.  This is because the sector mainly covers compulsory insurance; fixed prices have been set, so when the insurers' expenditure increases, their profits go down in these types of insurance, he thinks. 

Today, the decline in profitability in these forms of insurance is assessed as 75 per cent. "The decision of Azerbaijan's Central Bank to drastically devalue the manat will deal a serious blow at travel companies and even lead to some of them going bankrupt," the chairman of the Azerbaijan Association of Tourism, Nahid Bagirov, has stated. According to him, the cost of tours on popular routes has gone up by 30-40 per cent on average. "The travel companies pay the air carriers and hoteliers exclusively in dollars and euros for tours that have already been sold. The sharp fall in the value of the national currency has meant that some travel companies will not be able to pay. Either they will be forced to give people their money back or they will have to demand extra payment from their customers," N. Bagirov said.

Circumstances dictate

However, on the other hand, it has to be acknowledged that if there were no devaluation, the state would be faced with serious problems in fulfilling its treasury commitments against the backdrop of low oil prices on the world markets, since oil is the country's main item of export and the incomes from it form 65 per cent of treasury receipts. The country is known to receive these incomes in dollars.

Rasim Huseynov, PhD (Economics) has told Regionplus that the new manat exchange rate will allow approximately 3.3bn dollars to be saved on transfers from the Oil Fund to the treasury. This is a fairly impressive figure.

In other words, the state will have the opportunity to meet in full its commitments relating to payment of wages, pensions and benefits to the population and financing priority investment programmes. In this connection, we remind you that Elman Mehtiyev, the chairman of the State Fund for Social Protection has already stated that "the pension system in conditions of a market economy has its own mechanism for protecting it from the effect of instruments of fiscal policy" and the current processes will not have any effect on the financing of pension payments. The Ministry of Labour and Social Protection has also made a statement that measures will be adopted so that the system of social care can adequately respond to the challenges of today, especially those affected by the change in the currency exchange rate and the inflation that is expected to ensure from that.

"We cannot ignore what has been happening on the currency markets in most countries since autumn last year. Cheap oil is strengthening the 

US dollar in relation to almost all national currencies. In countries that import oil, the currency has become weaker in order to protect the domestic market, as well as to stimulate exports (for example, the Turkish lire has suffered a 20-per-cent drop in value). For the oil-exporting countries the problem is twice as complicated. There, besides encouraging the development of non-oil exports, the treasury commitments still have to be met in conditions of low oil prices," R. Guseynov noted.

At the same time, according to him, this information has already outlined the contours of a forthcoming cardinal decision. But proceeding from instructions of President Ilham Aliyev on not allowing the manat to become too strong in relation to the euro and putting the manat on a par with the European currency,  a dollar rate of 0.89 - 90 manats to the dollar is expected. In this case the manat would not drop in value by 34 per cent, but by 15 per cent, witnesses to which we are now.  

 "Moreover, parity between the world's two main currencies is not far off. And Azerbaijan's currency policy, will be built, proceeding from these considerations," the expert concluded.

In either event, "interesting events on the currency market await us in the next few days. The only thing that we can recommend in these conditions, is to be patient and to try to adapt to the innovations, even if they are none too pleasant. As the Azerbaijani proverb says, "the bad times don't last long…"

P.S, The article was prepared for the press on 23 February.