Samir Aliyev: Dollarization of the Economy Should Find Its Solution

What is the current situation in the country’s financial and banking system and can it give impetus to the development of the economy?

We know the fall in oil prices mainly struck banks. In addition, the banking system faced two devaluations. On the one hand, the system of capitalization of banks deteriorated and they have suffered heavy losses. This is what we have seen on the example of Bank Standard. Other banks are also in a similar situation. At the same time the amount of US dollars in banks increased, as the population exchanged their deposits for dollars en masse. Currently, 90% of the deposits are kept in dollars. The dollar amount of loans is 60%. Most people take their deposits from banks. Thus, the lending by banks is also limited. As a result, banks' profits decline and their costs increase. Now the reduction of staff and structures has begun, which is associated with the desire to reduce the loss.

The International Monetary Fund mission that arrived in Azerbaijan issued a statement, which says Azerbaijan should first pay attention to the banking system. What should be done for the recovery of the banks?

The protection of banks is very important for the country’s financial stability. Incorrect credit policy, the implementation of "greenhouse banks" function and the use of cheap oil money has led to the fact that in the current situation, the level of stability of the banks is very low. The government should take measures to save the banks. The first is to find a solution to the issue of USD-denominated loans. After the devaluation the payment of loans by borrowers doubled. It affects both citizens and the banks themselves. Banks might not get back their loans and, as a consequence, might not fulfill their obligations to customers. First and foremost, compensations should be paid in this direction and it is also necessary to take measures for capital improvement. Many banks have increased the volume of assets. Third, it would be nice if the state acquired a stake in the banking capital. That is, the state can provide support to the bank, if it owns 5-10% of the share. In the future, the share can be sold and the money invested can be returned. If these measures are taken, and most importantly, if the Central Bank provides the AZN money supply, it will be significant support for banks.

Some entrepreneurs, on the one hand, cannot pay taxes, and on the other, cannot give back the USD-denominated loans taken from banks. The government does not create the proper conditions. Is anything being done in this regard?

In Azerbaijan, credit interest is very high, and there is no need to prove it. It was also very high in the period of the incredible oil revenues. Against the background of such oil revenues business was cost-effective over a long period. For this reason, high interest rates did not create problems for taking out loans from banks. Now the purchasing power of the population has decreased and, therefore, the profitability of business has also decreased dramatically. So the return of loans has become problematic. On the other hand, the government is trying to prevent a rise in prices, although this in itself is wrong, because it leads to decrease in imports, and entrepreneurs, trying to reach for cheaper goods, begin to bring more low-quality goods. In such circumstances the tax pressure should be relaxed, as businesses cannot develop in this situation.

Some experts believe it is necessary to eliminate the monopoly for the country's economic development. What, in your opinion, is the situation in this area?

Eliminating monopolies in the import is an important condition. It also means the import of goods into the country on a competitive basis. We have certain commodities distributed from a single source, so prices cannot be lowered here. After the devaluation this issue has become even more urgent. The government therefore has taken certain measures, and there is some relief in terms of registration of trade documents. However, talking about fundamental changes in this area is too early. Due to the fact that this work is not carried out systematically, positive measures may lead to negative results. Previously, certain commodities were imported into the country without duty. This resulted in negative consequences, and there was no integrated approach to the issues creating them.

What is the position of the manat? Many experts believe the country has a deficit of AZN.

After the devaluation the Central Bank (CBA) began to limit the AZN money supply. This was done because CBA released USD into the market, and instead bought manats. Unfortunately, the AZN seized did not return to the country's economy. And it had to be returned by banks, which preferred to lend in dollars. CBA has clutched manats in its hand and does not send them to the economy. If the Central Bank continues such a policy, it could trigger higher inflation. That is, the population will receive the money, and its purchasing power will increase, leading to inflation. At second, there is a matter of pressure on AZN. If you release AZN, it will lead to the fact that banks will direct these funds to purchase USD. As a result, the probability of devaluation of AZN will increase even more.

However, there are problems in budget expenditures. Costs are reduced, and jobs are reduced, too.

Public spending plays an important role in Azerbaijan’s economy. In terms of investment public investment always prevails. Decrease in investments, in the first place, is a blow to regions, because as a result of investment projects work was done, new jobs were opened, and the money spent returned to the treasury in the form of taxes. Now, however, the restriction of investment has led to reduction in the number of jobs. Thus, on the one hand, the Central Bank has literally squeezed the manat, and on the other hand, the budget does not invest in the economy, leading to a deficit of AZN.

And what is the solution?

Naturally, these issues require reforms. Structural reforms should be carried out. It is a strategic move. These measures are calculated for a medium term. As for the immediate future, the Central Bank has to saturate the economy with AZN. From the fiscal point of view, the monopoly should be eliminated, checking by the state should be discontinued, and a competitive environment should be created. Entrepreneurs need support, and they need cheap credits. If these measures are taken, positive results can occur.

Should there be some kind of coordination between state agencies for these measures taken?

Unfortunately, such coordination is not possible. To date, there is, at least, a misunderstanding between the monetary bodies - the Central Bank, the Ministry of Finance, the Financial Market Control House (FMCH) and the fiscal agencies of the Ministry of Taxes. The actions of these bodies often contradict each other. Especially it is manifested between the Central Bank and the Ministry of Finance. The Central Bank prefers stability of the currency and prevention of inflation, while the Finance Ministry prefers cheaper finance and execution of the budget. In this sense, there is a need to coordinate. Officials even offer to create the Financial Council of representatives of the Central Bank, the Ministry of Finance and FMCH. Unfortunately, this issue is not solved yet, and is still on the agenda.

What is the situation with the devaluation? Some experts promise a new wave of devaluation, and the Central Bank has promised it will not happen by this year's end. How do you assess the situation?

The Central Bank’s approach is incorrect. If AZN has been transferred to a floating exchange rate and the exchange rate is determined by the market, it is incorrect to speak about the rate in advance. As to the second aspect of the question, the dollarization level is high in Azerbaijan today. Banks have large amounts of dollars and the population has lots of them, too, while imports have declined - these are factors that reduce the pressure on AZN. On the other hand, the balance of payments is negative. If it is negative, it means that the national currency is still under pressure. Oil prices are around $ 50, whereas after the devaluation the price dropped to $ 40. And yet, a decision of the US Federal Reserve System (FRS) is expected on June 14. If FRS raises the USD discount rate, it will have an impact on the rise in price of USD and the fall in oil prices. In this case, AZN may also be affected, so on one side of the scales there is a factor deterring devaluation, and on the other side there is a factor accelerating it. I think in the near future AZN will "slide" in the range of 150-165. If FRS raises the discount rate, then, at least until the autumn, there will not be significant changes in the AZN exchange rate, and only miserable percentage changes could take place.

In such circumstances, the official Baku invites missions of the IMF, the World Bank and the EBRD. What will be the outcome of these negotiations? Could Azerbaijan get new loans?

Previously, Azerbaijan took loans both from the IMF and the World Bank. The amount of loans received from the World Bank is more than $ 3 billion. The main condition of these institutions is reform. When the position of the authorities was good, they refused these demands, favoring infrastructure projects. Now there is a need for money in connection with the construction of TAP and TANAP, so the negotiations are ongoing. I do not believe the decision on privatization was random, as it is a requirement arising from these negotiations. It is possible that certain steps will be taken. At least, the government intends to take measures in this regard. However, the future will show what steps will be taken.

Do you think it will be possible to take reformist actions with the current political team? Could it be just an imitation?

The authorities noted that they intend to take steps in the direction of reform. Since the beginning of the year, some steps have been taken. However, the rise in oil prices to $ 50 has again calmed down the authorities. If oil rises in price up to 60-70 dollars, then reforms will just drop out of the agenda. In any case, the authorities understand that it is necessary to undertake reforms. Otherwise, the country will face a crisis. However, no fundamental measures have been taken yet.—0--