It is difficult to accuse the CBA

Despite completion of the program of “qualitative mitigation” and slump of oil prices, rate of AZN to USD remains stable. Central Bank of Azerbaijan (CBA) continues keeping the rate at 1 AZN = 0.7844-0.2845 USD.

Till now it managed without any efforts and positive payment balance has contributed to that. By December 1, 2014 official currency resources of the CBA totaled $14,996,000 AZN against $14,152,000 AZN by January 1, 2014. Such a behavior of CBA may seem strange during the currency perturbations at the neighboring markets. But we basically deal with tying AZN to USD, which remains the currency board. In any case, the national currency acts as if it has been strictly tied up. Its fluctuations against the US currency did not exceed several percent during the past three years. The motives of such policy are clear – it is advantageous for oil exporter on the one hand and on the other hand because of this factor slump of oil prices does not affect cost of import and as a result – inflation. The population does not feel a negative effect of oil price reduction yet and there are no preconditions now for changing the situation for the worse.

We have said that during 11 months inflation rate constituted 1.6 % per annum. The task of inflation targeting has been fulfilled. Although such level of inflation close to deflation also shows reduction of activity in economy.

CBA had to choose between economic development and inflation control and it chose the second one and this is the simplest task in the current economic conditions. Meanwhile, it is hard to reproach CBA of unwillingness to assume upon itself general economic development with help of active usage of monetary policy. In the past it several times tried to assume this task upon itself, it has met an organized resistance of other financial institutions. This makes it clear why CBA will never reduce credit rates for the real sector, though  the government announced industrial development a priority of its policy and 2014 was announced the Year of Industry.

One can object by saying that the CBA has recently reduced the re-financing rate to 3.5%, which is the signal of the fact that money is getting cheaper in the country. But in actual fact everything is more complex. Though the re-financing rate the value of money for the banks is reduced, but how money is distributed in economy later remains behind the scene. The boom of consumer crediting in the past shows that the banking sector is not willing to assume upon itself this difficult task of funding the real sector.

By November 1, 2014, total volume of overdue credit payments reached 943.4 million AZN (+19% by early year) or 5.3% of all credits. This is not much. But the fact that the pace of growth of delay was above the pace of growth of credit investments of the banks and non-bank credit organizations into the economy, which increased by 15.7%, attracts attention. The higher speed of delays as compared to the volume of allotted credits means that negatives are accumulated here.

This explains why CBA tries to reduce the volume of consumer credits and invents new and new forms of its restrictions. Banks realize that and offer nee forms of crediting. International Bank of Azerbaijan (IBA) has created the form of corporate retail and other banks are going to use this product as well. CBA is going to limit retail credits via plastic cards – it cannot exceed 40-50% of the customer’s income.

Today the regulator focused absolutely on the problems of the banks. CBA’s goal is to optimize size of the bank sector and, possibly, change requirements to the banks. Dozens of the banks try to increase their minimum authorized capital at any cost not to turn into a non-bank credit organization.

From January to October 2014 CBA reduced re-financing of the banking sector by 2.5%.

CBA reported that by November 1, 2014 the volume of re-financing totaled 3,071,100 AZN against 3,076,100 AZN by October 1, 3,098,300 AZN by September 1, 3,166,700 AZN by February 1 (the highest level this year) and 3,149,300 AZN by January 1, 2014.

According to the International Monetary Fund (IMF), the tendency towards reduction of the volume of re-financing will lead to reduction of the bank crediting with respect to GDP. According to the Fund’s forecast, in 2013 it constituted 27.6% of GDP, but this year it will be reduced to 10.3%. In 2015 it will be restored only to 15.1%.

The economy’s supply with money is going down. During the past 11 years the volume of funds spent by the CBA into the economy of the country increased by 34 times. Monetarization of economy increased from 23% to 70%. But it impacts weakly on the interest rate.in the crediting/  .

Orkhan Bayramov, chief of the Azerbaijan Insurers Association (AIA), has said recently that the World Bank (WB) experts evaluate the potential at $4.4 billion of insurance premium with real collection of $600-640 million. Specific weight of insurance premium constitutes only 0.7% of GDP, while in the Eastern Europe, leaving the West alone, premiums of insurers constitute between 4% and 6%. The reason is a very careful policy of the state, which is afraid to introduce such mechanisms of insurance as obligatory medical insurance and on the other hand, the population is not rich and it does not trust insurance.

The hopes pinned on the growth of the stock market did not justify themselves. The growth of 1.5-1.6% was predicted here, but it seems like we will not see it. The corporate sector uses more borrowings mainly in forms of bonds or through a closed issue of shares.