BON VOYAGE

The Central Bank of Azerbaijan (CBA) has announced plans to let the manat float freely. However, according to the country's chief banker Elman Rustamov, it is not going to happen soon and immediately, but in the near future we can talk about transition to a managed floating exchange rate of the national currency. According to this model, the rate of the manat will be formed depending on basic macroeconomic indicators, the price of oil, the ratio of the dollar and euro, the exchange dynamics in the countries that are our main trading partners, as well as correction by the CBA.

Not floating beyond the buoys

As you know, a floating or flexible exchange rate implies conditions when neither the state nor the Central Bank take any action to maintain its stability. Until recently, the rate of the manat against foreign currencies in Azerbaijan was controlled rather rigidly by the CBA, i.e. it was controlled completely. In some periods, millions of dollars were spent from CBA reserves to support it, but with the fall of oil prices on the world market the situation changed dramatically. In January 2015 alone, the CBA spent 1.077bn dollars to maintain the rate of the manat, and as a result, its reserves fell to the lowest level since spring 2013. Currently, foreign exchange reserves, according to Rustamov, amount to 10bn dollars.

After the devaluation in February, starting to use a double-currency basket that will include not only the US dollar, but also the euro, the CBA announced its intention to conduct a more flexible exchange policy. In fact, this is a controlled floating rate. However, even with this, it is too early to talk about the imminent and complete abolition of CBA control over the manat. And here's why.

According to foreign experts, transition to a floating exchange rate is impossible during economic instability as the floating rate will only increase the risk of instability. Moreover, international experience shows that the floating rate may be effective only in countries with developed industry, where the main export item is production. According to media reports, only 65 countries in the world have established a free floating exchange rate. Among the oil-producing countries, this list includes only Mexico - even in the structure of its economy the exports of fuel and raw materials accounts for 15.9 per cent, while the share of industry is 74.9 per cent - and Norway.

In short, based on all the above parameters, it would be unreasonable for Azerbaijan to take the risk of a floating manat today. The same opinion is shared by the head of the Central Bank, who stressed that in order to fully release the national currency, there should be a lot of players on the market who receive and sell currency. Today in Azerbaijan currency is sold only by the State Oil Fund (SOFAR), the CBA and SOCAR. "If we look at countries with similar economies, such as Kazakhstan, there are more players, and they sell gold, iron, etc. Today we are preparing for transition to a floating exchange rate, and in the near future, we must ensure it. With a floating exchange rate, the manat will find its value without serious state intervention. But if we are not on the market today, the rate of the manat will change in any form - it may increase by 20-30 per cent and may fall by 20-30 per cent. Allowing such volatility means creating greater nervousness in the economy," Rustamov said.

According to local experts, the process of transition to a floating exchange rate of the national currency could take at least five years. For example, the expert of the public association Assistance to Economic Initiatives, Samir Aliyev, is sure that if we stop managing the rate of the manat immediately, the manat will collapse. "This cannot be seen even on the horizon, and at least in the next 5 years this will not happen," Aliyev said, adding that even Russia with its stronger economy has still not let the rouble float freely.

Without shock devaluation

However, to ensure that the rate of the manat reaches its market value, some economists such as MP Vahid Ahmadov consider it advisable to carry out soft devaluation until early next year.

In response, Elman Rustamov promised in conversation with journalists that there will be no more shock devaluation in Azerbaijan, but at least the current parameter of oil prices is requires for this. "According to estimates of major financial institutions, oil prices will vary in the range of 50-55 dollars per barrel, and our calculations also indicate that," Rustamov said, adding that Azerbaijan's state budget for 2016 could be prepared on the basis of oil prices of 50 dollars per barrel.

Of course, he also touched on the February decision of the CBA on devaluation, noting that the move was aimed at protecting the domestic market and stimulating export. "If someone is only working to take popular decisions, then they are making a big mistake. The most important thing is not popular decisions. Decisions are taken to protect the country's statehood and the interests of the population," Rustamov says.

The chief banker admitted that after this decision, the tendency of dollarization in the economy significantly increased. For example, since the devaluation of the manat on 21 February, the CBA has sold over one billion dollars in currency, and this process will also continue in April and May at a slower pace. "We are conducting an analysis of where the currency is going. Today the ratio is that about half goes towards dollarization," Rustamov said.

The fact is that many bank customers now prefer keeping money in dollars, and since February there has been mass conversion of manat deposits to dollars. The country's chief banker says that the CBA has sufficient reserves to ensure that the population could convert their money into dollars without any problems.

At the same time, Rustamov found it difficult to make a short-term forecast about the volume of CBA reserves. "It's hard to predict, since the State Oil Fund of Azerbaijan, which was absent from the foreign exchange market for a while, will soon return. SOFAR is an organization that meets the basic demand of the market. Transfers to the budget will continue, and it stabilizes the reserves of the CBA," Rustamov said.

Meanwhile, if the CBA is able to meet the demand of the population and economy for the dollar, in the regulation of disputes concerning the return of debts on dollar loans, the Central Bank can act as an advisor. According to Rustamov, in order to reduce the loan burden on the population the CBA offered banks to extend the maturity of loans and reduce interest rates on them. "If banks do not restructure loans, the volume of bad loans may increase," Rustamov said, noting that it is precisely the banks that should be interested in restructuring such loans. "If you have given a loan for two years, extend it for 3-5 years and let the population gradually repay it. If you have given a loan at a rate of 15-20 per cent, slightly cut it down to prevent damage to the people," he recommends.

The only thing with which the CBA can help borrowers is to punish banks if they change the loan agreement without the consent of the client. This is a very serious violation of the law, since a loan taken from the bank must be returned in the currency in which it was received. The regulator is adamant about violations of the law, which is quite clear from sanctions against currency exchange points that became involved in speculative transactions in the first days after the devaluation.

In short, the Central Bank once again warns that, despite some easing in the exchange rate policy, it stands firmly at the helm of the currency and banking market and is ready to resist storms and tempests.