CBA: National currency’s rate adapted to oil prices

The ongoing global economic crisis, the sharp decline in oil prices since 2014, and other external factors eventually contributed to creation of a qualitatively new macroeconomic situation in Azerbaijan.

Finance Minister Samir Sharifov made the remarks during a discussion on the draft state budget and the concept of socio-economic development for 2017 and the next three years in Baku on November 30.

The state budget was discussed at a joint meeting of the parliamentary committees on defense, security and fighting corruption, economic policy, industry and entrepreneurship, agrarian policy, public unions and religious organizations, natural resources, energy and ecology.

“Rate of real growth of Azerbaijan’s GDP is projected at 1 percent, while growth of the country’s non-oil GDP is projected at 2.5 percent in 2017,” Sharifov said.

He added that the country’s GDP is expected to reach 58.8 billion manats (in 2016, which is 2.8 percent less than in 2015.

“Azerbaijan’s non-oil GDP in this period decreased by 6.1 percent,” Sharifov said. “A 27.4-percent decrease in the construction sector, a high level dollarization in the country, decrease in the trade turnover, as well as the difficulties faced by Azerbaijan’s banking sector and deterioration of the quality of loan portfolio are the main reasons reducing Azerbaijan’s GDP.”

The minister then spoke of assets of State Oil Fund of Azerbaijan, established in 1999 with assets of $271 million, noting that they should have decreased by $3.9 billion until the end of the year, but tight monetary policy made it possible to prevent the reduction of assets.

Based on SOFAZ’s regulations, its funds may be used for construction and reconstruction of strategically important infrastructure facilities, as well as solving important national problems.

He also noted that revenues of SOFAZ are forecast at 8.37 billion manats in 2017, which is by 4.89 billion manats (2.4 times) more compared to the forecast for 2016.

“As much as 87.8 percent of expenditures of SOFAZ (6.1 billion manats) account for transfers to Azerbaijan’s state budget, 11.8 percent (822 million manats) will be used to finance a number of infrastructure projects, and 29.3 million manats (0.4 percent) are provided for the education of Azerbaijani students abroad,” Sharifov added.

In turn, Elman Rustamov, Head of the Central Bank of Azerbaijan (CBA) said that rate of the Azerbaijani manat has adapted to world oil prices, which varied within the range of $45-55.

Rustamov went on to say that Azerbaijan has enough financial resources and funds to form its own economic policy regardless of oil prices.“We have already entered the post-oil era. Even if oil prices increase, there is no way back to the previous economic model,” added the CBA head.

The exchange rate of the Azerbaijani manat to the U.S. dollar decreased by 10.9 percent since the beginning of 2016 and reached a record low at 1.7318 AZN/USD on November 30.

Rustamov further said that the deficit in Azerbaijan’s payment balance will amount to $5 billion in 2016.

Head of the CBA said the biggest part of deficit of Azerbaijan’s balance of payments, that is 88 to 90 percent, is associated with problems in the capital flow balance. “It cannot be said that the balance of payments has been fully adapted to the new, lower oil prices,” Rustamov said.

The CBA head added that many problems are associated with the past and current debts.

“There are accumulated problems in the form of companies’ loans attracted under state guarantees, as well as external debts of the International Bank of Azerbaijan, and we have to repay all of them,” said Rustamov.

“In general, there is a problem with accumulated debts, which currently has a major impact on the market,” Rustamov noted. “On the other hand, we are implementing the giant international project, the Southern Gas Corridor, and Azerbaijan’s government has to use its own financial resources with regard to it. This all affects the component of the balance of payments relating to the capital flow balance.”

He said the exchange rate policy of Azerbaijan’s Central Bank is aimed to neutralize the impact of these problems on the current account balance.

The current account deficit of Azerbaijan's balance of payments amounted to $801.9 million in January-June 2016. The current account surplus of Azerbaijan's oil and gas sector stood at $2 billion in JanuaryJune 2016.

Rustamov said that the CBA hasn’t carried out intervention into money market since February 2016, adding that currently, manat’s rate is regulated in accordance with principles of floating rate.

The CBA switched to the floating rate of manat on December 21, 2015, as a result of which the exchange rate of dollar and euro increased by 47.6 percent and 47.9 percent and stood at 1.55 and 1.685 manats, respectively.

In late September 2016, the CBA, in order to ensure more flexible participation of banks in the money market, decided to introduce new mechanism of holding auctions on currency sale that allows banks to apply both for the purchase and sale of foreign currency.

Under a new mechanism, the official rate of manat is set, based on the weighted average rate in accordance with the transactions concluded with commercial banks in the interbank foreign exchange market and in auctions.

Speaking at the event Deputy Economy Minister Sevinj Hasanova touched upon issue of investment promotion certificates to the entrepreneurs in Azerbaijan, noting that this year some their number made up 70.

"The approved projects will allow creating over 6,000 new jobs. In addition, we have begun to use the mechanisms to promote the brand 'Made in Azerbaijan'," Hasanova said.

Under the document of investment incentives, half of the revenue of an individual entrepreneur, profits of legal entity are exempted from income tax for seven years. Import of equipment for the implementation of the projects is also exempt of VAT and customs duties.

Businessmen in Azerbaijan became eligible to get a document of the investment incentives following the approval of amendments proposed to the Tax Code of the country.

Priority areas for the country, which possesses a wide range of investment opportunities, are agriculture, heavy and light industry, alternative energy, tourism, information technologies and construction.

Speaking about the average annual growth of non-oil industry of Azerbaijan in 2017-2020, Hasanova said that the increase is expected to reach 7.4 percent.

The deputy minister said the growth of production in agricultural sector for the next year is projected at 4.9 percent, in service sector at 2.2 percent, while in the field of information and communication technologies at 6.7 percent.