Devaluation of National Currency of Azerbaijan in 2015 Called into Question

The future of the Azerbaijani national currency is a hot topic in the current agenda. Although the Central Bank of Azerbaijan (CBA) announced on April 2 that no abrupt changes in monetary policy are expected, as oil prices are likely to remain at $ 50-55 per barrel until the end of the year: "It is unlikely that the national currency of Azerbaijan manat until the autumn of this year will change the course since this process is linked to oil prices in the world market." However, the Central Bank warns of another devaluation of the currency:"The Central Bank does not rule out the possibility of further devaluation of the manat, which may occur in the event of sharp fluctuations in the global energy market."

As for the situation in the financial market due to the devaluation of the national currency, the Central Bank announced that the process of dollarization in the country is now active and will slow down in April-May 2015: "The transition to a floating exchange rate of the manat is not possible at the moment, because, if the intervention is stopped, there may be abrupt jumps of the manat. In a day the rate of the national currency may vary by 20% or more, which would have a negative impact on economic relations in the country. With the devaluation, the dollarization costs amounted to 1 billion USD," concluded the Central Bank.

Experts of the Center for Economic and Social Development (CESD) noted that due to the reduction of its foreign exchange reserves the Central Bank still considers the possibility of another devaluation of the manat as one of the possible options: "Due to the drop in oil prices in the world market, the costs of intervention by the Central Bank increased from August 2014 in Azerbaijan. Because of the costs for the intervention, only in January the foreign exchange reserves fell by 8.0% to $ 11.766 billion on February 1, 2015. In February, the Central Bank provided further intervention by $ 1.676 billion and the US currency reserves of the Central Bank fell by another 13.2%. The intervention of the Central Bank continued in March and the Central Bank lost another $ 1.0 billion in March. Because of the drop in oil prices the currency reserves of the Central Bank declined by about $ 6.0 billion. Low prices of oil will push to reduce the rate of the national currency in the coming months.

Yet, the question is if devaluation of the manat will be reiterated in light of the loss of foreign exchange reserves of the country.

According to experts of CESD, it is necessary to consider different scenarios. The optimistic scenario is associated with the rise in oil prices in the world market. If the price of oil in the world market rises, strengthening the national currency will be observed in the second half of 2015. Of course, the strengthening of the national currency in this case does not mean that the manat will strengthen with the previous fall rate. If oil prices in the second half of 2015 grow to $ 90-100 per barrel, we can expect the ratio of 1 dollar = 0.95 manat. Nevertheless, CESD recognizes that this scenario is less realistic. The second scenario is based on the prices of $ 55-60 per barrel, which corresponds to the current situation. In this case, the Central Bank will try to change the exchange rate within the band of 5.0% by the fall of 2015. This means that the change in the range of $ 0.10 to $ 0.1 equals 1.04-1.10 AZN. This is an intermediate scenario. The worst-case scenario is that the price of oil in the world market will fall below $ 40 per barrel. The Central Bank announced that it will be the cut line, as the national balance of payments will be a deficit one. If the world market price of oil falls below $ 40 per barrel, even more currency will be a shortfall. In this case, devaluation of the manat will be inevitable. And the manat will again depreciate about 30.0% by the end of 2015.

The situation shows that the future of the national currency directly depends on oil prices in the world market. Meanwhile, news from the exchanges is still pessimistic. –0--