LESS IS BETTER, DEFINITELY BETTER

Last year will go down in the history of the financial sector in Azerbaijan for the number and variety of its reforms, one of which was improvement of the banking infrastructure. The entry into force of regulations on the organisation of bureaux de change and foreign cash transactions in Azerbaijan brought serious changes. The introduction of international standards promises to make a tangible difference.

It has to be said that people have lost some of the convenience, for example, the large number of bureaux de change across the capital, but it has become much safer to use their services. And Bakuvians are having to get used to queues at bureaux de change which is normal even in the most developed countries. The requirements on bureaux de change have become much tougher and bureaux have to be more closely integrated into a bank's structure. Until recently all that was needed to set up a bureau de change were premises of 6 sq.m, a licence from the National Bank of Azerbaijan, a till, a lease and an agreement with a security service or a burglar alarm. Now, the location of bureaux de change, their provision with special technical equipment and direct coordination with a bank to which they belong are all important. If all this is not in place, then the National Bank will take tough steps, even going so far as to close down the bureau de change. More than 100 bureaux de change belonging to banks have already met this fate.

Consequences of speculation

The National Bank stepped up supervision of the work of bureaux de change after the exchange rate of the US dollar to the manat fell sharply in practically all bureaux on 17-18 September 2005. The National Bank of Azerbaijan thought this was unusual and speculative, bearing in mind the prevailing macroeconomic stability in the country over the past few years. During these two days the dollar practically lost 8-10 per cent in value while the National Bank's official exchange rate retained its level of 4,577 Azerbaijani manats (0.91 new manats) to the dollar. This went against the real situation on the market - the National Bank had sufficient reserves at its disposal to allow it to defend the national currency on the official currency market. The banks are direct participants in the cashless currency market: they buy currency abroad at commission of 0.02 per cent and sell it to the local population. And there were not even any special changes on this market, which means that there should not have been any effect on the cash market.

Audits by the National Bank led to the preliminary removal of licences for currency operations from 27 bureaux de change belonging to around 10 banks, which had been "spontaneously" drawn into the process. In addition, the banks themselves closed 75 of their bureaux de change - before this around 600 had been operating in the country. After this, their number gradually fell and by 1 January 2007 there were no bureaux de change operating under the old regulations. 

The new regulations envisage a change of terminology from "bureau de change" to "bank's exchange department". The departments will have to operate in designated places. Moreover, the regulations make the right technical equipment obligatory. The departments will buy, sell and exchange not only foreign currency in cash, but also foreign currency cheques. The regulations also say that a department's working hours will be set in accordance with the working hours of the bank to which it belongs. The regulations also envisage reinforcing the mechanism to integrate bureaux de change into the banks' operating systems and reinforcing the technical and security requirements, and also set the standards for professional training for bureaux staff.

It has to be said that the new departments are not yet meeting all the regulations exactly. For example, the customer deals with the bureau employee through an open door, or at the most an open window. Certain security standards are observed abroad and contact with a customer is exclusively through a "glass" panel.

The banks should also maintain the relationship with the official rate, i.e. the difference cannot be more than 2 per cent. Bureaux de change used to be able to raise or lower their exchange rate within a margin of 3 per cent of the official rate.

Taking into account the steps taken by the National Bank, banks are unlikely to engage in similar speculative operations in future, as they could lose not only their currency licences but also their general banking licence.

Quality not quantity?

The chairman of the board of the National Bank, Elman Rustamov, describes the current work of bureaux de change as "fine". He said that the National Bank does not now receive any complaints about them, as the infrastructure of exchange points has been completely renewed across the country.

More than 70 exchange departments are now operating in Azerbaijan. The operating term of the licences of the last 20 bureaux de change in the capital that worked according to the old regulations expired in October 2006. There were around 70 bureaux outside Baku which should have stopped working by the end of last year.

Although the new regulations were confirmed after long discussions by the NBA board in July 2006, they did not come into force until September that year. One of the reasons for the delay confirming these regulations concerned the redenomination of the national currency: the attitude towards the American currency was expected to change with the introduction into circulation of 50- and 100-manat banknotes in the second quarter of last year. And in fact the population did begin to prefer the manat as their savings vehicle, reducing the need for a large number of bureaux de change.

Against this background the level of dollarization of the country's economy has fallen noticeably, which can be confirmed by the NBA. The proportion of investments and deposits in foreign currency in the overall structure of the deposit portfolio last year fell by 19.5 per cent and in the M3 money supply by 18.8 per cent. These processes were marked by the strengthening of the manat rate to hard currency and increased popular trust in the national currency following redenomination. As of 1 January 2007 the rate of growth in investments and deposits in foreign currency was 24.8 per cent of last year's. The growth rate in investments by individuals in manats also exceeded the growth rate of investments in foreign currency. Over the past 12 months the population's manat investments increased by 450 per cent and foreign currency investments by 29.7 per cent. As of 1 January 2007 individuals held 69.5 per cent of their deposits in foreign currency, as opposed to 88.7 per cent on 1 January 2006. Short-term foreign investments grew by 39.1 per cent and long-term by 22 per cent in comparison with the start of last year. Then the growth in short-term manat investments was 170 per cent and long-term 690 per cent.

Going back to bureaux de change, when the new regulations were just beginning to take effect, the population was most concerned at the possibility of the introduction of commission charges for currency exchange, as is customary abroad. The charges are made up of expenses on maintaining the bureau, wages, cash delivery charges, electricity, rent, paper. "But it must not be forgotten that here bureaux de change operate only as part of banks, while they exist independently abroad. Azerbaijan has a 'narrow corridor' and these services could become uncompetitive if additional commission were introduced," the deputy chairman of the NBA board, Rufat Aslanli, said. In countries such as, for example, Kazakhstan the population are accustomed to such payments both legally and economically, as historically they have always had to pay tax when changing currency, Hasanli said. The new regulations in Azerbaijan do cover the possibility of charging a further payment for currency exchange services but in practice this has not yet been applied.