Manat’s roller coaster ride and its blend of effects
On December 21, 2015, Azerbaijan’s Central Bank switched to a floating rate for the national currency, which caused massive devaluation of manat. The country’s national currency almost immediately lost 98% of its dollar value. The Central Bank in an official statement justified the move came as a result of “intensifying external economic shocks”, referring to the global oil price slump that started in mid-2014 and intensified over the next year(s). Even prior to this eventful devaluation, the Central Bank executed yet another devaluation of manat by 33.5 percent in mid-February that same year. These back-to-back devaluations plotted manat to become the world’s worst performing currency in 2015.
Azerbaijan from the time of its independence has been heavily dependent of global oil prices. It has remained a leading oil and natural gas supplier in the Caspian Sea region, particularly for European markets. The role of oil, and natural gas in recent years, has been so important that its official inflation rate is inversely related to the price of oil in international markets. Thus, it witnesses rising inflation when global oil prices fall, and falling inflation when global oil prices rise.
The motive force of the government behind devaluation of manat was to give a push to the exports, primarily of commodities, both raw and semi-processed. It is widely held that devaluing of any national currency enables correcting balance of payments and reduces fiscal deficits of home economy. However, in case of Azerbaijan there arose serious unexpected problems with the devaluations, such as repayment of loans under real-time currency value vis-à-vis currency value at time of procuring that, rise in level of corruption in government agencies, decrease in foreign reserves to a critical level that caused sharp rise in foreign currency demand, increasing trade deficit worth $ 225.8 million in the first half of 2016.
On 28 February 2019, Azerbaijani President Ilham Aliyev signed a decree “On additional measures to resolve issues with problem loans of individuals in the Republic of Azerbaijan.”
Under the decree, the part of an individual’s loan debt under USD 10,000 (AZN 17,000), which increased after the devaluation in manat terms, will be repaid at the expense of the State Budget. The principal amount of loans taken out before 21 February 2015, will be compensated at AZN 0.25 (USD 0.15) for each US dollar, and of loans issued from 22 February to 21 December 2015 at AZN 0.6 (USD 0.35) for each US dollar.
Despite initial setbacks, manat has steadily regained stability from spring 2017 onward. The currency has maintained an exchange rate of exactly 1.7 per dollar. The Central Bank has limited the intervention options with free floating, and avoided currency exchange operations. This has enabled the global market forces to get settled across different sectors in the economy. Azerbaijan hit a record trade surplus of $348851 USD Thousand in the second quarter of 2019, clearly implying that the devaluation risks is finally paying off. Today there is a growing sense of realization among local economists and policy makers that the devaluation was a necessary step, without which the country’s ‘bubble economy’, based on oil, would have busted causing even greater harms.
The current rise in prices of Azerbaijani oil, corresponding to the global price rise of oil, is a major driving factor of manat regaining stability. Even today its oil exports continue to far exceed the value of its commodities exports, which mostly happen with its neighbouring countries. Other factors contributing towards stabilizing of the nation currency include higher exchange rate of national currencies of its trade with non-oil export countries, such as Italy, Canada and Czech Republic, and growing stability of Russia’s rubble (which directly effects manat due to the natural gas trade export from Russia to Azerbaijan and oil transit revenues Azerbaijan collects from Russia).
Manat’s stability is a crucial factor for the government to decide the future course of activities in the economy and formulate foreign policies. Its newfound stability, although that could be temporary, is enabling the government to execute measures directed towards functioning in a post-oil scenario, like setting up new manufacturing units (like Tabaterra CJSC, a private company has gained state support) and building large infrastructure projects (like Baku International Sea Trade Port).
But a bottom-line remains that unless the government is able to break free manat’s dependency on oil revenues, its economic system will not transform into an innovation-driven ecosystem.
Relevant links:
https://bakuresearchinstitute.org/how-did-azerbaijani-banks-face-a-test-of-devaluation/
https://eurasianet.org/why-has-the-azerbaijani-manat-flatlined
https://menafn.com/1098810296/Azerbaijan-increases-exports
https://www.ft.com/content/b5f46eac-a7c4-11e5-9700-2b669a5aeb83
https://president.az/articles/32092
https://tradingeconomics.com/azerbaijan/balance-of-trade
http://kaspi.az/en/stability-of-manat-rate-has-positive-effect-on-development-of-economy
