Devaluation of Azerbaijani manat was expected

Professor Wilfred Furman, Potsdam. Exclusively for Vestnik Kavkaza

On February 21st the Central Bank of Azerbaijan devaluated the manat against the USD by 34% and against the euro by 33.8%: 1.05 AZN/$ and 1.195 AZN/€. The devaluation of the Azerbaijani manat was expected for various reasons.

The manat is a so-called commodity currency, i.e. its price is determined by oil and gas revenues, as 95% of all export revenues are gained in the energy sphere. The drastic fall in world oil prices and reduction in oil revenues has led not only to significantly decreased export revenues to Azerbaijan, but also to an increased budget deficit of the country. Increasing tax revenues from consumer goods in early January were caused by this fact; at the same time, it was an indicator of the need to correct the exchange rate, despite the large reserves of the State Oil Fund, which would enable the exchange rate to be protected for a long time. Spending all thd accumulated reserves would be senseless, as nobody expects a growth in oil prices in the near future.

Decreasing oil prices are a consequence of underdeveloped economic growth and a conjuncture aimed at the self-sufficiency policy of the USA and Canada (shale oil production) and Germany (a shift to alternative energy sources) and other Western countries. All the economies which are oriented toward oil exports are suffering from low oil prices (Russia, Kazakhstan, Turkmenistan, Venezuela, and so on). The currencies of all these countries have been devaluated. Azerbaijan is no exception.

Considering the international trends, a drop in the manat's exchange rate could certainly have been expected; and this was grounds for speculation against the manat on the capital market. Those who were quick to exchange manats for dollars could profit from the falling exchange rate and benefit. However, the majority of the population lost.

However, if the manat hadn’t been devaluated, all the success in building a diversified economy, i.e. strengthening of the non-oil sector (agriculture, tourism, services and industry) would have been in vain. Azerbaijan is surrounded by countries which have devaluated their currencies; and these sectors would have lost their competitiveness, their export capacities would have been restricted. A growth in unemployment would put the Azerbaijani economy back for years.

The deep devaluation of the manat led to the fact that it turned out to be understated. And this is an important political goal, as an understated evaluation of the currency is a widespread economic and political instrument for countries with transformational problems that need diversified economies. An understated exchange rate encourages exports and strengthens the burden on imports, reducing them. Such a development strategy requires orientation toward exports (export diversification) under import substitution. For instance, for a long time the Chinese currency exchange rate has been understated; it is one of the key factors in the economic boom in China. The deutschmark was understated after the war to rebuild the country.

Thus, the devaluation of the manat is a kind of industrial policy. Its drawback is a decrease in real purchasing power, i.e. living standards are decreasing as well. Such a step will damage the population with medium-sized and low incomes without relevant social measures, and this could lead to social tensions.

The devaluation of national currencies against the USD is being registered all over the world. Usually, national banks decrease interest rates, as has been done in Mexico, India, Australia and many other countries. In Japan, China, Singapore, Denmark and other countries, it has been done in different ways. At the moment, we are watching world-wide races where more and more countries try to preserve their revenues through devaluation of national currencies.

One of the reasons for devaluation is the policy of Western states. On the one hand, there are the sanctions against Russia, which have led to shifts in world trade relations. On the other hand, these are financial crises (starting with the USA) and banking, state crises in the euro zone (Greece), which are explained by failed political steps. Moreover, this is a “struggle” against them by means of radical steps on providing liquidity of the US Federal Reserve System or by the European Central Bank. So-called quantitative easing leads to the devaluation of the euro and strengthens the international competitiveness of Greece and other euro zone countries, like Germany.

However, it is a heavy burden for all countries which are not members of the euro zone (including Azerbaijan), which can protect themselves only by devaluating their national currencies. At the same time, countries are afraid of devaluation and try to postpone it for as long as possible. The devaluation of a national currency leads to an investment gap, which slows down economic growth.

The effect is not significant in the countries which permanently export capital (for instance, Germany), or which have great economic potential (the USA, the EU), they are thought to be “Safe Harbors” for investors. The EU is able to provide any policy in its interest, including an irresponsible policy toward other countries.

Azerbaijan has faced a dilemma, and has had no other choice than a devaluation of the manat.