The Central Bank of Azerbaijan

The Central Bank of Azerbaijan has announced that its monetary policy in 2009 was of anti-crisis nature and was aimed at maintaining macroeconomic and financial stability, ensuring liquidity in the economy, and stabilization of important banks and enterprises.

According to the “Report on the Central Bank’s Monetary Policy Priorities in 2010”, despite the decline in foreign financial flow to the country and the psychological pressure of devaluation in neighboring countries against the backdrop of global crisis, the stability of the national currency was maintained through the timely balancing of supply and demand in the foreign exchange market.

“The maintenance of home currency stability made it possible to prevent a sharp rise in price of imported goods. The successful exchange rate policy amid the signification share of imports in the domestic consumer marker played a big role in keeping the annual inflation rate at 1.5%,” said the report referring to 2009.

According to calculations, low inflation and exchange rate stability provided a good level of social status of the population, and contributed to a 6% rise in household incomes in January-November, and kept up the country’s competitiveness.

“The real multilateral exchange rate of manat decreased 5.5% during this period. Steady exchange rate of manat also prevented depreciation of deposits, appreciation of debts in foreign currency, decline of the reliability of the national currency and high dollarization of the economy,” he added.

The report notes that the global economy saw worsening trend of recession and a drop in prices in commodity markets and major market indices, and in increase in mortgage defaults, in bad loans, in unemployment and a decline in consumer spending and investment in 2009 especially in the beginning of the year.

“Most of the developed countries wrapped up the first quarter with a sharp decline in GDP. In such circumstances, many countries eased monetary policy, increased government expenditure and budget deficits, and raised control over the financial system.

The CBA noted Azerbaijan was to some extent affected by the global crisis - the country’s economy faced a number of risks. The negative impact of the crisis manifested itself in the fall in oil prices and export products, drastic drop in foreign loan flow to the banking system, and a decline in remittances from abroad.

“As a result, the economy may have been exposed to such risks as a violation of macroeconomic stability (the devaluation of the manat and rising inflation), violation of financial stability (the deterioration of the quality of loan portfolio, bank run, deterioration of the solvency of banks, suspension of lending to the economy) and economic recession,” said the central bank.

According to the report, among the anti-crisis measures, amendment to the law "On the Central Bank" played a big role and reflected recent global trends concerning the status of central banks.

“The Central Bank became capable of lending long-term loans to banks in various currencies, including the subordinated loans. Given the macroeconomic trends and microeconomic results of monitoring of enterprises operating in the real sector, the Central Bank has, since the end of 2008, reduced the refinancing rate from 15% to 2%, and the mandatory reserve requirements from 12% to 0.5%. In general, thanks to indirect and direct instruments, in October 2008 the central bank provided the economy with liquidity of 1.8 billion manata. This liquidity support covered the real sector and enterprises, including state oil company (SOCAR), OAO Azeraluminium along with the banking system. In such circumstances, growth of the economy for the first eleven months stood at 9%,” said the report.

”The liquidity policy of the Central Bank neutralized factors reducing the money supply, thereby preventing sharp narrowing of the financial sources of aggregate demand which is the basis of economic growth and employment. Broad money supply in manat grew by 2.8% in the second quarter, by 7.2% in the third quarter, and by 6.8% in October-November.
Under these conditions, since June there is a tendency of decline in average interest rates on loans,” said the report.

As a result of activities undertaken by the Central Bank before the crisis, high and risky growth rates of bank assets were limited, a system of regulating external debt was introduced, and in contrast to other similar economies in the region the external debts were restricted to 20% of banks’ liabilities in Azerbaijan, capitalization and financial provisioning were significantly increased, prudential regulatory requirements and framework were tightened. In addition, the liquidity position of banks were brought under control, the refinancing of external debt were carried out, the important institutions were provided with necessary liquidity support, corporate governance requirements for banks, especially for the risk management system were increased, the maximum amount of insured deposits was increased by6-fold to 30 000 manat, the Central Bank-secured interbank money market was launched to provide a very active flow of current liquidity,” said the report.

The report also noted that as a result of anti-crisis program the financial sustainability of the banking sector was further strengthened:

The banking system has liquid assets at 80% of current liabilities, adequately more than (30%) minimum standards;

Capital adequacy is twice the standard - 19%;

Quality of loan portfolio was maintained at an acceptable level, the proportion of overdue loans in the total portfolio is 3.3%;

Banks’ financial indicators were positive, return on assets (ROA) is 2.6%, return on equity is (ROE) – 17.8%.

Overall, the assets of banks increased by 8.6%, loan investments by 12.1%, and household deposits by 18.2% in January-November 2009. Banks repaid $1.2 billion in external debt.

APA