CBA Still Manages to Regulate Monetary Policy

 In a statement on June 19, the Central Bank of Azerbaijan (CBA) recognized the negative impact of the coronavirus pandemic on domestic economic activity in Azerbaijan and decided to slightly stimulate it by lowering the discount rate to 7.25% from 7.25% (held since January 31, 2020).

At the same time, the lower threshold of the interest rate band was reduced from 6.75% to 6.5% and the upper - from 8% to 7.5%.

The discount rate actually determines the value of money for business and the public.

It is noteworthy that despite the unprecedented situation in the world due to COVID-19, the CBA does not change the schedule for considering discount rate parameters approved at the end of 2019 (8 times a year), however, due to the difficult economic situation, it takes more caution, preferring not to rush with decisions on its changes.

In 2019, the Central Bank 8 times considered the parameters of the discount rate and each time reduced it by 25 basis points. Thus, by the end of 2019, the discount rate was reduced from 9.75% to 7.5%, the lower threshold was set at 5.75%, and the upper threshold at 9.25%.

In 2020, the CBA did not change this indicator for almost 5 months (at the level of 7.25%), made a change on June 19 and plans to return to this issue on July 30 (according to the schedule). In the absence of force majeure, this year the regulator will report decisions at the discount rate on September 18, October 30 and December 18.

According to analysts of the Russian Gazprombank, caution in the CBA actions is the actual recognition of the factors of the slowdown in the Azerbaijani economy, in which inflationary processes also slowed down.

Following the results of 5 months of 2020, Azerbaijan’s GDP fell by 1.7% compared to 2.2% growth for the same period last year amid falling hydrocarbon prices and the introduction of restrictive measures in connection with the pandemic.

At the same time, the decline in non-oil GDP, the most sensitive to the availability of credit resources, depending on the discount rate, amounted to 2.1%, while over the same period last year it grew by 2.4%.

The CBA itself reported that, for example, in May “there was an index of business confidence in the development of the non-oil industry (construction, trade and services) in the negative zone,” which in fact meant that banks, whose activities were virtually frozen due to the pandemic and a market crisis, nullified lending to these areas of activity.

The Central Bank sees the easing of the situation in the implementation of measures taken to support the public and businesses, including the provision of loans for restructuring loans, subsidizing interest rates and expanding guarantee support.

But the pandemic is affecting the decline in all components of aggregate demand.

“In January-May 2020, retail trade turnover decreased by 1.7% compared to the same period last year, services to the population decreased by 14.9%. Investments in the non-oil sector in the reporting period decreased by 16.7%,” the report says.

The decline in business activity led to deflationary processes, which is “on hand” for the government and the Central Bank, and allows analysts of both the bank and experts of international financial institutions to say that inflation in Azerbaijan in 2020 will be 3.0-3.5 %, as predicted (in 2019 was 2.6%).

Deflation in May amounted to 0.5%, and inflation for 5 months - 2.9%.

In May, there was a normalization of consumer demand for essential goods after the excitement in April in the context of the introduction of restrictive measures.

If we make a comparison to the indicator at the end of May 2019, then for this annual period inflation for food products amounted to 5.7%, for non-food products - 1.4%, in the service sector - 0.4%.

“Against the backdrop of the uncertainty caused by the pandemic, declining demand and consumption, as well as investment spending, are the main drivers of deflation. A decrease in food inflation is also influenced by a seasonal drop in agricultural prices and a continued decline in world food prices (a 10.5% decline in 5 months of 2020),” the CBA notes.

According to analysts of Gazprombank, inflation in Azerbaijan slowed down due to the maintenance of a stable exchange rate of manat against the US dollar.

External factors

“Low risks of rising prices for imports are provided by a stable USD / AZN rate, which the CBA considers as an anchor of macroeconomic stability and maintains at the level of 1.7 AZN / USD,” foreign analysts say.

“The population’s demand for foreign currency has returned to pre-crisis levels, and currency sales at CBA auctions are showing lows,” experts say.

The CBA itself believes that importers had a demand for foreign currency, but currently import trade is declining, which is reflected in foreign exchange auctions.

However, in this comment there is enough guile, because there are a lot of cases when banks refuse to sell dollars to the population in requested quantities.

The Azerbaijani manat can also be supported by the restoration of oil prices, as well as CBA instruments regulating liquidity in the national currency.

Azerbaijan’s high sufficiency of foreign exchange reserves (about $ 47 billion) creates opportunities to support manat in conditions of external shocks.

The increase in world oil prices - the country's main export product - is also reflected in the balance of payments.

In this regard, the CBA does not exclude the current account surplus of the balance of payments for the first half of 2020.

Recall that the current account surplus of the balance of payments of Azerbaijan for the 1st quarter of 2020 amounted to $ 643.6 million, which is 2.5 times less than the same period last year. The average oil price in January-March 2020 was $ 57.6 per barrel against $ 61.9 a year earlier.

“Against the background of a new OPEC + deal, oil prices began to recover. Since the beginning of June, the average price of Brent oil totaled $ 40 per barrel, which is 23% higher than the average price in May ($ 32.5 per barrel) and 48% higher than the price in April ($ 27.1) per barrel, ”the Central Bank of Azerbaijan reports. .

It is likely that the Central Bank believes that despite the largest decline in oil production (fulfillment of obligations to OPEC +) by Azerbaijan in June and July, it will be possible to compensate for the income from the export of “black gold” precisely with higher prices amid a decrease in pumping volumes.

So far, according to data for 5 months of 2020, the total export of Azerbaijan has decreased by 19% compared to the same period last year. In export, about 77% is oil and over 10% is gas.

Analysts consider it important that the situation in the currency markets of the main trading partners of Azerbaijan (Russia, Turkey) has stabilized, which positively affects the nominal and real effective exchange rates of manat.

However, this stabilization is largely due not to market conditions, but to political steps that in any way suppress the discontent of the population and attempts at civil disobedience.

“Due to the uncertainty in foreign markets, the CBA maintains a cautious policy, which, in principle, is justified,” according to Gazprombank of the Russian Federation.

According to ASTNA, precisely the results of June-July will be the most indicative with respect to the real situation both in Azerbaijan and its neighbors, and the key here will be the situation on the world oil market and political stability.