Prudence pays off

By bne IntelliNews April 29, 2010

Clare Nuttall in Baku -

Azerbaijan maintained its strong rate of GDP growth through 2008 and 2009 thanks both to its high oil and gas revenues and to the prudent policies of the Central Bank of Azerbaijan Republic (CBAR). Though measures have been put in place to enable the central bank to help the real economy this year, it doesn't expect such support to be needed to any great degree.

Azerbaijan achieved GDP growth of 9.3% in 2009, including 3.2% growth in the non-oil sector. Speaking during the Caspian International Banking & Finance Conference in Baku on April 13, chairman of the CBAR, Elman Rustamov, said that although the crisis had "tested" Azerbaijan, it was one of the countries least affected globally. "In 2008 and 2009, the central bank encouraged banks to pursue a very prudent policy as a precaution. Foreign debt in our economy was limited, which is good, as it was one of the detonators of the crisis," Rustamov said during the conference. "We amended the banking laws and helped banks if they found it difficult to repay their obligations. In the real sector, we offered an aid package to [state oil firm] Socar - the cornerstone of Azerbaijan's economy - and to the aluminium sector. We also gave concessions such as tax exemptions to banks and insurance companies."

Legislation governing the CBAR's activities was also amended to give the bank more flexibility. In particular, the bank now has the right to give credits with long maturity and credits in foreign currencies.

In total, the CBAR provided around $2bn in liquidity support to the banking sector, according to Azer Aleskerov, director of the CBAR's monetary policy department. "As a result, broad money supply in manat was restored after a contraction in the first quarter," he said.

Unlike several other countries of the former Soviet Union, Azerbaijan has experienced few problems with distressed assets. In fact, recently there has been an increase in both domestic and foreign deposits with Azeri banks, demonstrating confidence in the sector. "We will continue an easy monetary policy this year. The CBAR is ready to give liquidity support to the banking system if it is needed," Aleskerov tells bne. "But we expect that the demand for CBAR liquidity support will much lower than it was last year."

Solid growth

The CBAR forecasts that the rapid pace of growth seen in 2009 will continue this year. Official government forecasts put economic growth at over 6%, including 5% growth of the non-oil sector. The International Monetary Fund's (IMF) forecast for this year is even higher at 7.4%. "Improvements in foreign conditions, including the increase in oil prices, gives additional impulses for economic growth in Azerbaijan," says Aleskerov. "The results of the first two months of this year confirm our optimistic expectations. During the first two months of the current year compared with the same period of last year, GDP growth was 5.6%. Growth in the non-oil sector was 4.2%."

Inflation during the first quarter of this year was 3.8%. Aleskerov notes that external factors can substantially influence the inflation rate in Azerbaijan, but adds that under all CBAR scenarios, inflation is expected to be at a "reasonable level from the macroeconomic stability point of view" this year.

The CBAR also intervened in 2009 to maintain the manat/dollar exchange rate after observing high demand for foreign currency and devaluation pressure in the first quarter of the year. "This pressure is mainly explained by psychological effects related to the devaluation in some neighbouring countries. To keep the national currency stable, the CBAR sold more than $1bn from its reserves," says Aleskerov.

"We expect that the bilateral exchange rate of the manat against the US dollar will be stable at least in 2010. The CBAR will keep the manat stable by regulating supply in the foreign exchange market, because a stable manat is important for stability of the financial system," he added.

The IMF's mission to Azerbaijan has given its support to the CBAR's plans to keep the manat stable in the short term.

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