Azer Mehdiyev: Devaluation Not Expected Next Months

- Azer Bey, for a long time there are difficulties in connection with the purchase of US dollars. Banks either refuse to sell them, or offer with a certain limit. And this has already led to a panic among the population. What do you think is the reason for this? There is a rumor that this is due to new devaluation. Do such rumors have a basis?

- First of all, let's start with what these conversations about the expected devaluation are related to. There is a well-known saying: "Burn yourself with milk, blow on the water." If we recall what processes in recent years took place in Azerbaijan in the economic sphere, in particular, with AZN, it should be recognized that people are still experiencing those shocks and have not been freed from their consequences. In Azerbaijan, the population has such an attitude: everyone expects that something must happen after political processes. If you notice, every time after the election, rumors of higher prices appear. And after the devaluation in 2015, these messages grew into a constant rumor about the forthcoming decline in the exchange rate of the manat in relation to the currencies of other countries. Moreover, after the change in the date of the presidential election, comments have spread that in the second half of the year 2018 the situation in the country will become tenser. And, given the likelihood of an aggravation of the economic situation, the authorities hastened the conduct of the elections. In other words, such rumors along with the application of sanctions against Russia, events in Syria, the collapse of the Turkish lira and the Russian ruble, etc. formed people's opinion that all this will affect Azerbaijan. The coincidence of such mentality with the conduct of political elections to a certain extent has shaped such expectations among the population. But there is something more serious than these factors. Here there is a mistrust of the government and the power structures. As after the words "no devaluation will happen" said by the head of the Central Bank before the collapse of AZN in 2015 AZN sharply depreciated at once, the population involuntarily drew the appropriate conclusions from this. Everyone is trying to act with caution, as they want to insure their funds, regardless of the amount. Those who have AZN try to exchange it for USD. Ensuring the stability of the AZN rate in 2017 after instability in 2015 and 2016 somewhat eased the tension, and the level of dollarization in economic processes significantly decreased. But the rumors that arose in connection with the early elections revived the discussion of the probability of devaluation. However, the worst thing is that sometimes such a panic situation is provoked by those who want to really make money on this. That is, those who have resources, certain groups that want to buy currency, can try to take advantage of this in one form or another. Thus, a number of factors coincide here. The factor of mistrust, political processes happening in neighboring countries, the actions of people intending to make money on all this, the panic caused by the coincidence of all this, creates certain expectations, in particular, the assumptions about the possibility of devaluation. Naturally, in this case, there is an increase in demand for currency. In addition, it is necessary to take into account the calendar period when these processes occur: usually after the Novruz holidays and at the beginning of the second quarter there is an increase in economic activity and in demand for dollars from those who trade in foreign currency. In recent months, banks have shown an increased interest in buying currency: they increase foreign exchange assets. And can all this lead to devaluation? To answer this question, it is first of all necessary to consider the economic and political bases of the stability of the manat.

- Are there currently economic reasons for the devaluation of AZN?

- The current state of economic processes, the balance of payments and the volume of the country's currency resources, as well as world oil prices, give grounds to say that in the coming months, devaluation is not expected. But compared to the period until 2014, now the country's currency flows and currency regime are under stricter control. The restriction of economic activity and changes made to the currency regime limited the outflow of foreign exchange from the country. It is clear that in Azerbaijan the main factor ensuring the stability of the national currency is still oil revenues, that is, the level of oil prices in the world market. The country's foreign exchange earnings, as before, come mainly from the export of oil and natural gas. For example, in 2017, crude oil, oil products and natural gas were sold abroad for $ 12.2 billion, or 88.4% of the country's total exports ($ 13.8 billion). And imports last year amounted to $ 8.8 billion, which is 5.5 times more than non-oil exports. At the same time, at the end of 2017, the foreign trade surplus amounted to $ 5.0 billion, while the surplus of the balance of payments totaled $ 1.6 billion. By the end of last year, the currency reserves of the Central Bank (CB) increased to $ 5.3 billion, and the assets of the State Oil Fund of Azerbaijan (SOFAZ) reached $ 38.8 billion. In the first quarter of 2018, oil prices in the world market were also quite high and varied in the range of $ 50-70 per barrel. In the same period, exports exceeded imports by $ 1.2 billion and amounted to $ 3.4 billion, of which about $ 3 billion was derived from the sale of oil and petroleum products. At the end of March this year, the Central Bank's foreign exchange reserves reached $ 5.5 billion. Consequently, the current state of foreign trade turnover and the balance of payments, the country's currency reserves, even taking into account payments on external public debt, generally do not give grounds for concern. Most importantly, at present the price of oil in the world market is at a very beneficial level for the government. And according to forecasts, and taking into account the political processes taking place in the world recently, a sharp decline in oil prices is not expected in the coming months. And this ensures the inflow of currency into the country in sufficient volume. From this point of view, oil-related factors form the basis for the stability of the currency. On the other hand, I already noted that the currency flows from the country and the currency regime are strictly controlled. The only economic factor of concern is the economic processes taking place in our main foreign trade partners in the non-oil sector - in neighboring Russia, Turkey and Iran, and the depreciation of their national currencies. The devaluation of the national currencies in these countries can create problems for Azerbaijani exporters and lead to a decline in our exports and, at the same time, stimulate the growth of our imports in trade with them. But I do not think that all this is at a level sufficient to create a serious threat to the currency reserves of Azerbaijan. Nevertheless, the Central Bank should track the changes taking place in the real effective exchange rate of the manat against the currencies of these countries and take the necessary steps. In addition to economic factors, political reasons may lead to devaluation. But in the political aspect, the situation in the country seems to be quite stable. That is, if nothing unusual and unexpected happens in the near future, then the existing political factors also cannot cause devaluation.

- As you mentioned, the appointment of early elections and the recent statement of the head of the Central Bank in connection with the devaluation issue somewhat intensified this panic. Elman Rustamov said the manat is not threatened by anything. Let me remind you: despite the fact that the head of the Central Bank said the same words before the first depreciation of the manat, two days later we witnessed the opposite of his statement. And now the majority of the population is worried about his similar speech. So maybe the creation of such a panic serves someone's interests? Maybe someone wants to take advantage of the emergence of such a situation in the country?

- When I listed a number of factors, I said there are different interested groups in society. Indeed, the factor noted by you takes place, and serious conclusions should be drawn from the fact that all this happened 2 days after the statement of the head of the Central Bank that devaluation was not expected. In order to earn people's trust, the representatives of the authorities need to be more sincere in their speeches and addresses to the people, avoid lying in every possible way, and not to allow discrepancies between their words and deeds. For economic stability, trust is very important. On the other hand, by developing, promulgating and honestly and correctly implementing clear long-term strategies, the government thereby can save people, especially investors and the business as a whole from uncertainty. Both these provisions are very important for economic stability. And if they are not respected, then some groups interested in the emergence of uncertainty in society, from time to time, sowing panic, may try to take advantage of this for mercenary purposes. World experience shows that in countries where state institutions are weak, such cases are a lot. There are no studies of the existence or absence of such groups in Azerbaijan, which have very large resources and are willing to make big money on such a panic. But it is necessary that the Central Bank and the Financial Markets Supervision Authority (FIMSA), or the structures accountable to them, conduct research and take preventive measures in this area with a view to timely preventing such attempts. Today, civil society and independent researchers do not have the capacity to investigate these issues.

- Azer Bey, what will be the real ratio of AZN to other currencies without regulation, under the present regime of a floating exchange rate?

- Unfortunately, I cannot say for sure, since we do not have relevant studies. But today there are no real conditions for transferring AZN to a floating exchange rate, which would in fact be regulated by the market, because our economy is not sufficiently diversified. In particular, our exports, thanks to which the country receives currency, are mainly related to oil and gas. Change in oil prices will certainly directly affect the stability of AZN. Only in this case it is possible to switch to a floating exchange rate of AZN - if the economy of the country is diversified so that, on the one hand, along with oil and gas, other products and services would bring large currency incomes, and on the other hand, a strict balance would be established between export and import in our non-oil sector. In other words, a complete transition to a floating exchange rate of the national currency in conditions of high dependence of its fate on one (even a few) export products and the market price of the latter is not only very risky, but can even be dangerous. Since, for various reasons, sudden changes in the rate can often occur, which, leading to financial instability, high inflation and other negative consequences, can increase uncertainty.

- In the past, experts said the government used administrative resources to artificially maintain the AZN rate. Do you think these resources continue to be used? Is it necessary to protect AZN in this way?

- I have actually answered this question. If there are no real conditions for a full transition to a floating exchange rate, regulation becomes inevitable. Until 2014, the country received large revenues from oil, which came mainly to the Oil Fund (SOFAZ). However, at that time a large part - more than half of the state budget revenues - was formed at the expense of a transfer from SOFAZ. For the transfer of the funds entering the Oil Fund in USD to the state budget, it is necessary to exchange the currency for AZN. SOFAZ had to sell its currency in the market in order to transfer funds to the state budget in AZN. In addition, foreign contractors participating in oil contracts were forced to sell the currency in order to pay profit tax to the state budget. Despite the fact that so much currency was being brought to the market, there was no demand for such a volume (the demand of foreign companies that are in foreign trade relations was much lower than the dollar supply). As a result, the Central Bank was forced to buy most of the dollars coming to the market (otherwise, the manat would have become too strong) and in fact the Central Bank's foreign exchange reserves therefore quickly grew. Thus, the Central Bank of the country prevented the emergence of a deeper form of the so-called Dutch Syndrome in the economy. However, after 2015 the situation changed somewhat: foreign exchange earnings to the country decreased and it seemed as if there was no sharp "gap" between demand and supply. Perhaps this is the reason for the proposal to switch to a floating exchange rate. But, as I noted above, the country's foreign exchange earnings are mainly formed due to oil exports and a high degree of dependence on oil prices in the world market is still preserved. To implement a floating exchange rate, it is necessary to have a diversified and more stable economy. You probably noticed that last year, to ensure financial stability, the Oil Fund allocated a large amount to the Central Bank. These funds, basically, were intended to protect the AZN rate. This year, no funds have been allocated from SOFAZ for such purposes. At present, the use of certain administrative resources continues to preserve the stable rate of AZN and, in our opinion, in this case it is inevitable. As the export diversification grows, in other words, due to the multichannel provision of foreign exchange earnings to the country and the reduction of dependence on oil revenues, as well as the increase in the volume of locally competitive goods in the country's markets (the lack of the need to purchase goods from outside), the degree of administrative regulation can be lowered gradually.