Reduced Discount Rate Fails to Lower Loan Interest Rates in Azerbaijan

The Central Bank of Azerbaijan (CBA) recently announced a reduction in the discount rate from 7.75 to 7.25 percent, citing considerations of actual versus projected inflation, stabilization of inflation expectations, and changes in risk balance. Despite these efforts, interest rates on loans in Azerbaijan have remained stubbornly high, prompting scrutiny into the factors contributing to this discrepancy.

In recent months, annual inflation in Azerbaijan has plummeted to approximately 1 percent, a notable decline that might typically signal conducive conditions for lowering loan interest rates. However, the persistence of high loan interest rates amidst successive reductions in the discount rate has raised questions about the effectiveness of monetary policy transmission mechanisms in the country.

Data from February 2024 reveals that banks in Azerbaijan offered loans ranging from 300 to 150 thousand Manats, with annual interest rates spanning from 11 to 16 percent. Concurrently, the loan portfolio of banks and other credit institutions surged by 20.3 percent compared to the previous year, reaching 24 billion 362.5 million Manats. Despite this growth, the amount of overdue loans decreased by 22.2 percent, accounting for only 1.9 percent of the total loan portfolio.

Rufat Guliyev, a Member of the Milli Majlis Committee on Economic Policy, industry, and entrepreneurship, shed light on the intricacies of loan interest rate determination. In an interview with Turan, he highlighted that loan interest rates are influenced by factors such as deposit interest rates, the discount rate, bank income, and associated risks. These considerations collectively contribute to setting loan interest rates, often resulting in rates upwards of 16-17 percent in Azerbaijan.

Economist Natig Jafarli expressed concerns regarding the limited role of the Central Bank's discount rate in shaping the country's lending landscape. n an interview with Radio Azadlig, he emphasized the absence of robust economic institutions and financial markets, limiting the impact of monetary policy tools. Despite fluctuations in the discount rate, loan interest rates remain largely unaffected due to structural deficiencies within the financial system.

Jafarli identified two primary factors contributing to the persistence of high loan interest rates: elevated deposit rates and an environment of non-competitiveness. High deposit rates compel banks to maintain correspondingly high loan interest rates to cover costs and mitigate risks. Additionally, the lack of competitiveness within the banking sector hampers efforts to lower loan interest rates, necessitating broader reforms to foster a more competitive environment.

Addressing the challenges surrounding loan interest rates in Azerbaijan requires multifaceted solutions. Strengthening economic institutions, fostering competition within the banking sector, and facilitating easier entry for foreign banks are among the measures proposed to alleviate the prevailing high-interest rate environment. As policymakers navigate these complexities, the efficacy of monetary policy interventions and their impact on lending dynamics will continue to be scrutinized in the pursuit of a more conducive financial environment for borrowers and investors alike.

It should be noted that the reduction in the discount rate by the Central Bank of Azerbaijan has not translated into lower loan interest rates, highlighting systemic challenges within the country's financial system. Addressing these challenges necessitates comprehensive reforms aimed at enhancing competitiveness, strengthening institutions, and fostering a more conducive environment for lending activities.