Samir Aliyev: ‘It Is Necessary to Adopt Strategy of Anti-dollarization of Economy’

Even if the State Oil Fund (SOFAZ) and the Central Bank in a single auction fully meet the needs of commercial banks for foreign currency, it will have a short-term effect, experts say.

So, starting in June, in each currency auction the demand exceeded the supply by 10-12 times.

In July, the State Oil Fund sold the banks $ 450 million, and in August - $ 394.5 million, while the monthly demand reaches $ 1-1.2 billion.

Prior to the first devaluation in February 2015, the Central Bank at the expense of foreign exchange reserves held the exchange rate of the manat, which led to the depletion of reserves, which fell from $ 13.758 billion in 2014 to $ 5.016 billion a year later.

And the results of 8 months of 2016 the Central Bank reserves fell by another 16.4% to $ 4 billion 192.5 million.

After that, the Central Bank sharply limited the volume of intervention and in the course of the year it only sold currency three times in the total amount of about $ 1 billion. For comparison, in 2015 the Central Bank sold 8.4 billion dollars.

Currently, the demand for currency is partially satisfied by the participation of the State Oil Fund in the auctions, where it sells currency and transfers the AZN proceeds to the state budget and to other projects.

In the state budget for 2016 transfers from SOFAZ should make 7.615 billion manats ($ 4.9 billion). However, due to the austerity policy, obligations on transfer in the first half of the year were carried out by about half.

SOFAZ assets in H1 increased by 4.6% to $ 35 billion 117.9 million (33.57 billion dollars in 2015).

Experts believe that so far there are no objective reasons for the termination of dollar growth: more imports dependence, low oil prices, servicing the external debts of banks, and return of the compensation to the depositors of the closed banks - all this stimulates the demand for the dollar.

The absence of other channels for the inflow of foreign currency increases the demand for foreign currency, creating a deficit.

The economist Samir Aliyev stressed that administrative methods such as the limitation of manat supply, the reduction of imports and the ban on the export of capital are not a way out of the situation and may result in economic decline. In his opinion, it is necessary to use economic instruments.

Dollarization of the economy is very strong and it puts pressure on the national currency, jeopardizing macroeconomic stability.

‘From the end of 2014 to July 2016 the share of foreign currency loans increased from 27% to 48%. And the level of dollarization of deposits increased from 38% to 80%.

The share of foreign currency in the money supply of the country has also increased from 36% to 90%,’ he said.

The expert believes the government should develop a strategy for anti-dollarization.

‘The banking sector should be liberalized. State loans in the national currency should be indexed in line with inflation. Mandatory standards for the reserve should be increased from 1 to 3%, and the incomes of citizens with deposits should be taxed,’ the expert believes.

In addition, Aliyev said there is a need to create a mechanism of indexation that will insure the deposits in the national currency at the time of abrupt changes in the rate.

‘It is necessary to explore the possible conversion of foreign currency consumer credits to the national currency, and recommend it to banks. It is necessary to accelerate the transition to cashless payments and apply restrictions on cash payments (more than 1-2 thousand manats). The Central Bank should issue trust loans to banks in the national currency and a fund for problem loans should be set up under the Central Bank,’ Aliyev said. -71B-