Azerbaijan: Currency Drop Prompts Broader Economic Worries

An unexpected devaluation of Azerbaijan’s currency has led to fears of economic problems ranging from inflation caused by rising import costs to  borrowers who cannot repay bank loans.

The country’s central bank announced the devaluation on February 21, setting a new exchange rate of 1.05 manats to the dollar, a 35 per cent fall in value from the previous 0.78 to one, and a slightly lower fall for the manat/euro rate.

Azerbaijanis rushed to sell manats, and prices in the shops shot up. In response, the banks temporarily stopped selling dollars.

Central bank chairman Elman Rustamov appeared on state television and urged the public not to panic, promising that the steep devaluation seen in some other countries was not being considered.

With “the might of the Azerbaijani state behind it”, the manat remained fundamentally sound and “a sharp devaluation is not anticipated”, he said.

A statement issued by the central bank said the shift was needed to keep the economy competitive, make exports cheaper, and thereby maintain stability in Azerbaijan’s balance of payments.

“Processes taking place in the region inevitably affect us, too,” the bank said. “The tensions seen in recent months and over the last year [in the former Soviet Union] have exerted some influence on the economy of Azerbaijan.”

President Ilham Aliyev similarly portrayed the devaluation as a necessary way of “protecting” Azerbaijan from the effects of turbulence in the Middle East, Europe and the former Soviet Union.

As both Aliyev and the central bank played up the effects of contagion from other economies, they made less mention of the steep decline in global oil prices over recent months, which has already affected Russia’s finances and is likely to do the same to Azerbaijan, a major exporter of crude.

Vahid Ahmedov, an independent who sits on parliament’s economic affairs committee, accuses the central bank of tipping Azerbaijan into a financial crisis.

“Most of the banks suffered serious losses literally within minutes, and it’s possible many of they will go bankrupt,” he said. “Azerbaijan has been plunged into the [kind of] crisis seen in the United States and Europe since 2008.”

Ahmedov said he had spoked to central bank officials beforehand and urged them “not to embark on a sharp devaluation, but to lower the manat’s exchange rate gradually”.  But the opposite happened, and he said “the central bank’s leadership has deceived us parliamentarians and the entire Azerbaijani nation”.

Azer Mehdiyev, head of the Centre for Promoting Economic Initiatives, says the devaluation will help the government by saving on the real amount it draws from the State Oil Fund, where Azerbaijan’s oil revenues are held to avoid overheating the economy. This year, the fund is due to hand over 10.4 billion manats to the treasury. Before devaluation, that would have cost the fund 13.3 billion dollars, but now it will take just 9.9 billion to cover the same manat-denominated amount. In addition, price inflation will lead to businesses paying more tax, increasing government revenues.

Qubad Ibadoglu, head of the Movement for Democracy and Prosperity, warns that the effects on the real economy will be negative.

“As the dollar becomes more expensive and the manat loses value, the immediate effect will be that imported goods cost more, and subsequently the price of bread and other bakery products [made of imported flour] will go up by 50 to 100 per cent. That means one can forecast that inflation this year will be two or three times what the central bank is estimating. The result of these developments will be that the standard of living goes down, social indicators get worse, and relations between the public and the government deteriorate,” he said.

A second point, Ibadoglu said, is that “the manat’s decline has destroyed faith in the national currency and in the banks, so the economy will become more ‘dollarised’ – major transactions will take place in dollars, with cash payment. That in turn will increase the shadow economy, and government decision-making will have less of an influence on the [functioning of] the economy.”

People with outstanding bank loans will be especially hard hit because of a system imposed by the central bank two years ago requiring all loan sums to be calculated and fixed in dollars. Since monthly repayments are made in manats, borrowers will now pay a third more to cover the cost of the loan.

Last year, Zaur Mammadov, a 43-year-old resident of the capital Baku, took out a bank loan of 3,000 manats on which is paying fixed interest of 32 per cent (annualised) over four years. At the time, he felt the terms were unfair, but he had to agree to it because “we really needed the money”.

“For each of the first five months, I paid 93 manats, but this month I have had to pay 125. If the manat continues to depreciate, I’m afraid even to think what will happen to us,” he said.

Lawyer Anar Qasimli says this should not be happening, as the civil law code states that borrowers should continue repaying loans at the exchange rate prior to devaluation.

The central bank disagrees – its position is that the civil code is flawed and that loan repayments have to be made at whatever dollar/manat rate is currently in use.

Natiq Jafarli of the opposition movement REAL says it is up to Azerbaijan’s constitutional court, not the bank, to decide whether the civil code is wrong on this point.

“If everyone interprets it for himself, the banks will decide matters in their own favour and the customer will suffer,” he added. 

Mammad Suleymanov is a freelance journalist in Azerbaijan.