Cash Crisis in Azerbaijan

Friday, 23 September, 2005

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Nurlana Gulieva

A sudden jump in the street value of Azerbaijan’s currency, the manat, over the weekend was quickly rectified, but not before it caused panic among ordinary savers who rushed to dump their US dollars.

Opposition politicians did their best to argue that the crisis showed the government had lost control of monetary policy - key to Azerbaijan’s economic stability and growth - on the eve of the parliamentary election scheduled for November.

On September 17, a Saturday, when banks are closed, manats suddenly started changing hands at between 3,500 and 3,800 to the dollar at private currency exchanges in the capital Baku. Other key exchange rates –for the euro, Russian rouble, Turkish lira and British pound shifted accordingly.

This drop of between 17 and 23 per cent from the previous, fairly stable rate of around 4,580 to the dollar was a dramatic shift which, if reflected more generally, would have represented a major appreciation, in real as well as nominal terms, in the manat’s value.

In many countries of the former Soviet Union, national currencies may be less weak than they used to be, but continue to face the risk of depreciation against the dollar – still the preferred currency for many people with cash savings.

In Azerbaijan, on the other hand, the danger in recent years has been that the manat will appreciate in real terms, meaning not only in nominal value but also when inflation is taken into account. This is because a large amount of hard currency - mostly dollars - is entering the country thanks to oil-sector revenues and investment.

Dollars therefore become “cheaper” in relation to the manat, since there are more of them about. Economists warn that a too-strong manat could weaken and ultimately destroy sectors of the economy outside the oil industry as they become less competitive.

So it was unsurprising that late on the night of September 18, the Azerbaijani government held an emergency meeting and decided to fix the problem by injecting 16 billion manats (worth close to 3.5 million dollars) into the banking system. The extra manats eased the pressure and by September 20 the exchange rate was back at 4,579 to the dollar, although some exchange points were still giving dollars away at 4,500 manats a time.

Elman Rustamov, who is head of the central bank, the National Bank of Azerbaijan, NBA, attributed the rapid appreciation to a “group of dealers, who saw that the dollar was weak [and] decided to organise a run on it”. Rustamov suggested that the speculators deliberately chose a Saturday knowing that the banks would be shut.

Oqtay Haqverdiyev, who heads the government’s economic policy and financial credit office, told a press conference that the crisis was the result of “sheer negligence” on the part of the commercial banks, which he said had failed to stock up adequately on manats last week to ensure that exchange outlets would not run out.

Haqverdiyev also alleged that some banks did have enough cash but failed to deliver it to the cash exchanges.

Some officials believed the buy-up of manats was orchestrated by forces seeking to discredit President Ilham Aliev’s regime ahead of the November election.

“I’m very worried about what has happened,” said parliamentary speaker Murtuz Aleskerov. “Such a sharp change in the exchange rate does not happen by accident… The guilty must be punished.”

Opposition politicians were quick to blame the crisis on the government’s economic policy.

“The currency crisis shows that President Ilham Aliev has no control over either his own team or the country,” Ali Kerimli, leader of the opposition Popular Front Party, told reporters.

“Through its incompetent actions and internal strife, the government has multiplied the number of people who will never vote for the current administration.”

The crisis alarmed ordinary Azerbaijanis, who feared they would lose their dollar savings. Little data is available on what proportion of people’s savings are held in US banknotes, but anecdotal evidence suggests a high figure, as few trust the manat over the long term.

As people flocked to change money, the increasing shortage of manats only exacerbated the appreciating exchange rate. Some exchange points closed down for a few hours, as did a number of open-air markets where dollars are traded.

“I had 2,000 dollars which I was keeping for my daughter’s dowry,” said Fatima Guliyeva, a Baku resident. “When my neighbour told me the dollar rate was dropping sharply, I became frightened that I would lose out even more, and decided to exchange it all for manats.”

But now that the panic is over, she reflects, “I was lucky – not one exchange point would agree to take the entire sum.”

Economists are agreed that the large amount of cash dollars sloshing around the Azerbaijani economy was a major contributory factor to the crisis, and that the NBA’s decision to relax exchange rate policy may also have played a role. But they disagree over the politics.

In February, the NBA moved away from an interventionist policy of buying and selling large sums of manats to maintain the desired exchange rate, and adopted a more laissez-faire attitude. The move was in line with recommendations from the International Monetary Fund, IMF, which would like to see a gradual, managed appreciation in the nominal exchange rate to counter the threat of inflation caused by oil money.

As a result, the manat’s nominal value against the dollar has risen by six or seven per cent since the start of the year, with the pace of appreciation picking up in recent months.

Gubad Ibadoglu, who heads the Centre for Economic Research and is a member of the opposition Musavat party, attributes appreciation over the past six months to record world prices for Azerbaijan’s main export, oil. Higher oil revenues bring more foreign currency into the economy, so dollars become less expensive.

The problem, says Ibadoglu, is that the NBA has failed to adjust to the manat’s rising value. He believes the weekend crisis was an inevitable consequence of flawed central bank policies.

“The NBA has failed to update its policies to reflect the new economic realities, and has done nothing to control the manat’s appreciation,” he said.

He noted that the immense shadow economy in Azerbaijan made exchange rate predictions even more difficult.

On the government side, Agakerim Hajiev, a departmental head at the Economic Reform Centre of the Ministry for Economic Development, agrees with some of the points in Ibadoglu’s analysis, but says the currency crisis was provoked by money-market speculators.

“At the beginning of September, the manat was 7.2 per cent stronger than it had been early this year,” he said. “As it became obvious that the manat was strengthening at an alarming pace in the run-up to the general elections, people hurried to get rid of their dollars.”

Although its intervention rapidly brought the exchange rate under control, the NBA took further swift steps to prevent such a crisis happening again.

First, it reduced the margin that currency exchange points are allowed to charge over the official exchange rate. Second, it ordered the immediate closure of 20 exchanges and eight commercial banks. It is unclear whether the measure is a temporary one.

Finally, it has decided to bring forward its planned introduction of a new set of banknotes from October 15 to October 2.

“A new batch of banknotes worth 250 billion manat and consisting mainly of 50,000-manat notes, is on its way, and will put an end to cash shortages in the economy,” a central bank source told IWPR.

In January, Azerbaijan will take some of the zeros off its banknotes with a re-denomination, which will mean that one new manat is worth 5,000 of the current ones.

But the change in face value should not fundamentally alter the government’s monetary policy which, as it has indicated to the IMF, envisages a continued, managed nominal appreciation of the manat.

As Prime Minister Artur Rasizade told IWPR, “The dollar will continue to decline next year. We think it will bottom out at 4,500 [current-denomination] manats - and we would like to stick to that rate.”

Nurlana Gulieva and Fatima Mamedova are reporters for the Kaspiy newspaper in Baku.