Central Bank of Azerbaijan switches to floating rate of manat

Azerbaijan has introduced a floating exchange rate of the manat today, the Central Bank of Azerbaijan said.

According to the Central Bank, the decision was made taking into account the strengthening of long-term shocks in the foreign economy in order to equilibrate the balance of payments, keep the foreign exchange reserves in the country at critical level and ensure the competitiveness of the national economy in the international arena.

The official rates of the dollar and euro against the Azerbaijani manat on December 21st were set at 1.5500 and 1.6850 manats respectively, while on December 18 the rates were set at 1.0499 and 1.1394 AZN, Trend reports.

"The exchange rate of the manat will be formed in accordance with the fundamental factors determining the supply and demand situation on the currency market. The Central Bank of Azerbaijan will participate on the currency market according to this regime," Gazeta.ru cited the statement as saying.

As a result of volatility in recent months, the national currencies of several partner countries have been devalued by over 100% since the beginning of 2014. The current situation forces the currency market and manat rate to adapt to the new oil prices. The trade surplus of the country and other sources of foreign exchange receipts have sharply declined," the Central Bank of Azerbaijan stated.

The ex-deputy minister for the economy of Azerbaijan, economic expert Oktay Akhverdiyev, said in an interview with a correspondent of Vestnik Kavkaza that the Central Bank has decided not to maintain the exchange rate of the manat due to falling in oil prices and a reduction in oil export revenues. "Only in the next two or three months will we be able to understand what it means. There will be a certain increase in prices due to the increase in the money supply. Of course, the devaluation will not cover everything because the budget was established based on a price of $50 for a barrel of oil, while the actual price of a barrel of oil is now $38 per barrel," the expert said, adding that the real exchange rate of the manat should be determined on the foreign exchange market "according to the principle of supply and demand, as Russia and Kazakhstan did."

At the same time, he said that there are several factors that will stop the manat from further declining. "We have several programs related to the development of the non-oil sector, and we are successfully implementing them. We will reduce this dependence dramatically in 5-6 years. Let me remind you that about five years ago the oil sector amounted to 70% of GDP, and today it is only 38%, that is, the non-petroleum share of GDP is dominating and this will help to maintain the manat rate," Oktay Akhverdiyev expects.

The president of the Baku Interbank Currency Exchange, Farhad Amirbayov, noted that the transition to a floating rate is premature. "It increases the risks for the financial system, instead of reducing them. The transition to a floating exchange rate, in my view, should be implemented when the economy is on a steady upward trend. And now we are in a different paradigm, especially since the foreign exchange earnings from exports are declining. If they grow, then it would be possible to introduce a floating rate. Nevertheless, we will try to find a new equilibrium path," the economist believes.