“The devaluation of the manat is expected.”

Question: Rashad bey, it is clear from recent official statements that the manat will soon switch to a fully floating exchange rate regime. What can you say about that?

Answer: In recent days, the exchange rate of the manat and the transition to a floating exchange rate regime and devaluation have been the main topics of public discussion. But today, the analysis of the actual situation shows that Azerbaijan is not ready for a floating exchange rate regime, and at the same time, there are no serious grounds for devaluation. Of course, it can be said that there are certain determinants that shape the agenda. Processes in national currencies in the countries of the region and major foreign trade partners, the devaluation of national currencies, especially the views expressed by the President in his speech, as well as the behavior of banks in the real foreign exchange market, the exchange rates they set, budget process, and the results in the foreign exchange markets have made discussions on this topic even more relevant. However, in spite of all this, it should be unequivocally noted that under the current circumstances, the decision of the Azerbaijani government on devaluation does not seem realistic at all. Because all the factors create a conjunctural opportunity to maintain the exchange rate of the manat. So, the surplus of the balance of payments, the excess of the trade balance, and, most importantly, the high price of oil, the sale of oil at 60-70 percent higher than planned in the budget minimize the need in this direction. At the same time, it can have social consequences. The risk of inflation is very high. Devaluation can dramatically increase inflation risks, which the government does not need.

Furthermore, it should be noted that the government's messages indicate that under the current conditions, efforts will be continued to keep the manat stable. For example, if we look at the budget document, the government calculated the exchange rate of manat by taking the equivalent of 1.70 manats to 1 US dollar even for 2024. This, in a sense, still limits the possibility of devaluation. Regarding the transition to a floating exchange rate regime, I think that neither the banking sector, nor citizens, nor businesses, including the government, are ready for a floating exchange rate regime in Azerbaijan. In the early stages, this can lead to very serious complications. This, in turn, will create an undesirable environment for all market participants. Therefore, the transition to a floating exchange rate regime is not expected in the short term. But on the natural horizon, the only alternative is always a floating exchange rate regime.

Question: In a recent interview with local TV channels, the President touched upon the previous administrative steps taken to keep the manat stable. “The depreciation of the manat had a negative impact on people's well-being. But we had to take that step. Because if we did not take that step, we could spend all our foreign exchange reserves. The delay in this step had already led to a significant depletion of the Central Bank's foreign exchange reserves. About $ 10 billion was used to keep the manat stable. As a result, the Central Bank failed to keep the manat stable and we lost $ 10 billion.” How much money has been spent to keep the manat stable so far? Or what other administrative methods have been used?

Answer: Of course, the president's speech should be evaluated in some ways. First of all, I understand that if another new situation arises, the president's message is that the government will not act as it did in 2015 and will not be interested in spending large resources to keep the exchange rate of the manat stable. In fact, the money spent in recent years to keep the manat stable is only the currency put on sale by the State Oil Fund. Since 2016, the Central Bank's strategic foreign exchange reserves have begun to increase in part. The Central Bank does not directly intervene in the currency market. It can even be said that it has withdrawn even a small amount of currency from the market. It sometimes carried out the sterilization process, albeit at a slow pace. People should know unequivocally that there is no question of spending to keep the manat stable at this level.

As for the additional work done, the government's attitude towards the exchange rate has changed since 2015. The government is trying to prevent the currency from being taken out of the country as informally as possible in the interests of certain countries. Moreover, it has made some changes to the framework of currency transfer. The issue of declaration and, at the same time, the requirements for exporters have been tightened. Exporters must bring the product and its value into the country within six months of exporting the product. In a sense, this is a regulatory step. On the other hand, the government closed exchange offices, one of the main participants in the foreign exchange market, and tried to form a centralized management system. It has not given up this policy for the past six years. In order to limit large sales, a currency sales mechanism has been introduced based on evidence of official revenues, which to some extent limits the access of the shadow economy to foreign exchange. Of course, there are factors such as the formation of the black market. But in general, it was able to partially neutralize the demand for currency in this direction. At the same time, it tried to neutralize the psychological pressure in this direction by interfering in the sale of foreign currency by banks, if necessary, with unofficial instructions.

Question: How much can they protect the manat by administrative means?

Answer: Of course, administrative means are only partially effective in times of high oil prices on the world market, when the market is self-sufficient. This is not a sustainable mechanism. It is impossible to pursue a long-term exchange rate policy with this approach. However, in the current context, the opportunities for the government to continue its current dictating exchange rate policy are relatively favorable. In the first serious risks, especially in the event of a sharp drop in oil and gas prices on the world market due to external fluctuations, Azerbaijan will face a new devaluation pressure. In fact, the government is late in this direction. It should improve its policy, gradually soften it, and take small steps to adapt to changes in the countries of the region, especially in its foreign trade partners, even if the exchange rate of the manat is a regulated exchange rate so that there is no need for sharp devaluation in the next serious risks and pressures and that businesses, citizens, banks, and governments do not face serious losses by going through this process in stages.

Question: So we can conclude that the manat may devaluate.

Answer: The devaluation of the manat is expected in any case. The manat is losing its real value today. The manat can only maintain its face value against the US dollar. Inflation is going on, the US dollar itself is depreciating. This gradually leads to the devaluation of the manat. When it comes to losing face value, this is a lot of pressure. In any case, the manat may lose value against foreign currencies in the long run.

Question: What are the ways to normalize the situation? 

Answer: Steps must be taken in a number of areas, including administrative, institutional, and economic areas. Confidence in the Central Bank must be strengthened, confidence in its independence must be increased. The government must make better use of existing communication opportunities. That is, it should provide more information. It must be open in its exchange rate policy. Economic factors need to be reconsidered. Supporting export-oriented initiatives, increasing the competitiveness of local production, and minimizing dependence on oil should be key requirements. A number of steps should also be taken in the financial and banking sector. In particular, the mechanisms for protecting deposits and savings in manat should be further strengthened. 

Kamran Mahmudov