bne IntelliNews -

The Central Bank of Azerbaijan (CBA) has announced that it will drop pegging the manat to the dollar and move to an exchange rate policy of a dual-currency basket with the dollar and the euro, AzerNews reported on February 16. The Azerbaijani manat has been effectively pegged to the dollar at just over AZN0.78 per dollar since mid-2011, and it has managed to strengthen against both the dollar and the euro despite falling oil prices badly affecting the national currencies of regional countries, including Kazakhstan, Georgia and Russia.

A central bank official told Reuters that the new dual-currency basket would probably be split 30% in euros and 70% in dollars, in line with Azerbaijan's exports. The bank will also set a trading corridor so that the bank can intervene to keep the exchange rate within that corridor.

The plan to drop the dollar peg is a key policy shift for Azerbaijan’s energy export-oriented economy. Oil and gas products account for 92% of Azerbaijan's exports, and 60% of state budget revenues.

The use of the new operating framework will make it possible to follow a more flexible exchange rate policy and ensure macroeconomic efficiency, as well as helping economic entities gradually adapt to the new conditions, AzerNews quoted the CBA as stating.

Following the decision, Azerbaijan’s President Ilham Aliyev stated on his website that “further strengthening of manat against euro isn’t a positive development”, as a “stronger manat causes problems for Azeri exports”.

In a note to investors on February 16, Standard Bank’s head of emerging market research, Timothy Ash, wrote that the CBA was fighting a wave of speculative concerns over the outlook for the manat, losing $553m in foreign exchange reserves in November and $1.27bn in reserves in December, to $15.9bn. 

“The move by the CBA likely comes as an attempt to moderate any larger sell off, timed with the recent recovery in the rouble and the relative stability seen in oil prices recent months. Such a major currency reform for a country like Azerbaijan will be viewed with some nervousness, hence the move to adjust the currency from a position of relative strength. The CBA is positioning for much more challenging times ahead,” Ash said.

The CBA's move also addresses concerns over the impact of weaker regional currencies, namely the ruble and the Turkish lira, which affect the manat's real effective exchange rate. "The Georgian lari and Armenian dram have also been allowed to weaken in recent months, so this is a case of keeping up with its peers," Ash added.