CBA Calls Financial Stability Main Priority for 2016

On January 30 the Central Bank of Azerbaijan (CBA) held the Board of Directors’ meeting with the heads of the structural and regional divisions. It was devoted to the results of 2015.

Regarding the assessment of the current crisis, CBA Chairman Elman Rustamov justified it with external factors and the deep integration of Azerbaijan into the world economy. However, according to Rustamov, through appropriate changes in macroeconomic policies it became possible to ensure the stability of the national economy.

According to the CBA, GDP growth was 1.1% and the share of non-oil sector in GDP was 69.3%. Economic growth was achieved due to the growth in domestic demand and investment. The average annual inflation stood at 4%, and rising food prices – at 6.1%.

According to Rustamov, the nominal effective exchange rate and inflation expectations reduced the impact of high inflation in prices of trading partners, money supply and falling world commodity prices.

The surplus of the trade balance fell for the first 9 months of 2015 by $ 241 million compared to the year 2014 under the influence of the economic situation in the world commodity market - the decline in oil prices and the deteriorating situation in the partner countries affected by economic processes.

In this situation CBA used the tools of monetary policy to stabilize the macroeconomic and financial stability. To improve the investment activity in the non-oil sector and reduce interest rates the Central Bank narrowed the parameters of the interest rate corridor.

The sharp drop in oil prices in 2015, the devaluation of the currencies of the major economic partners increased pressure on the domestic market and the manat exchange rate. To counteract this process devaluation of the manat was conducted in February. This allowed stabilizing the situation somewhat, but the further fall in oil prices increased the pressure on the currency market. Given the long-term protection of the balance of payments from external shocks and the country's foreign exchange reserves in order to protect the competitiveness of the national economy, the manat was floated. The transition to the new regime of the exchange rate as a tactical maneuver was aimed at maintaining macroeconomic stability and supporting the diversification strategy of the national economy, said the head of the CBA.

In order to preserve financial stability and reduce risks in the banking sector, the Central Bank began the process of restructuring the banking sector, strengthening the financial sustainability of the sector and increasing the risk management measures.

For debt relief for borrowers and to minimize the impact of the correction of the exchange rate, as well as to improve the quality of the loan portfolio of the banking sector, a set of measures was adopted. The Central Bank softened prudential requirements for banks and to facilitate the restructuring of loans and assets. At the same time in order to protect the financial stability, the capital requirements increased in the banking sector and its optimization was arranged to support lending.

To meet the needs of the real sector for the national currency the CBA applied a new mechanism to regulate bank liquidity of the manat and weakened the effect of changes in the currency structure of banks' liabilities, and raised the ability of the banking sector to meet the public demand for currency conversion.

The counter-cyclical approach used by the CBA allowed it to adequately manage the risks in the banking sector. The banks showed resilience in the face of the shocking situation due to the generated capital and the institutional buffer, said Rustamov.

According to him, the banking sector continues to drive economic growth in the country. The bank assets amounted to 35 billion manats, and the volume of credit investments in the economy amounted to 21 billion AZN, of which 75% are business loans.

To ensure stable and safe operation, the development of payment systems was one of the important activities of the Central Bank. In the National Payment System (NPS), the number of payments in 2015 increased by more than 13% and the number of payments in GDP - by 2.4 times.

In 2016, the Central Bank will pursue a policy of increasing the flexibility of monetary policy, financial stability of the national economy and international competitiveness. The monetary policy will be based on prevention of sharp fluctuations in the exchange rate in accordance with the requirements of the new floating regime, as Rustamov announced the Central Bank’s strategy.

Preserving financial stability in the banking sector will remain an important objective. In order to ensure the safety of deposits in banks, financial stability of the banking sector, capital and liquidity, strengthening comprehensive measures to improve the system of deposit insurance will be continued. Due to the priority goal of development of the financial infrastructure, the cashless electronic payment systems will be expanded.

He further noted that in 2016 the Central Bank will step up its efforts to improve the stability of banks from risks and to enhance the role of the banking and financial sector in supporting economic growth.

"For the successful implementation of these goals, human capital and analytical resources, which play an important role in the modernization and development, will be involved," the CBA head said.

The meeting heard reports of the heads of departments and the Financial Monitoring Service, and defined more detailed tasks for 2016, the CBA press service reported.    -0--