Page 87 - Azerbaijan State University of Economics

50. Fakhri Mammadov: Exchange Rate Stabılıty and the Development of Fınancıal System
51. in Azerbaıjan
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intervention currency to exchange market are society’s prediction that devaluation is
inevitable. (Center for Economic and Social Development (CESD), 2016)

Changing floating exchange rate system end of the 2014, connection with second
devaluation caused fluctuation in financial market. Central Bank’s decision to accept
devaluation aimed to complete the process of dollarization in a short term and reduced
public anxiety with the lower costs. After that Central Bank forced limitations on
currency exchange outflow, some currency exchange offices were briefly closed.

Central bank started its contractionary monetary policy to fight with demand to
dollar and keep manat safe. This policy weakened the private sector as banks refused
any credit in manats. Economic growth speeds up as financial depth grows. Until
loan to GDP ratio reaches 86.5% (optimal point) this indicator positively impacts
economic growth and afterwards negatively. However in our country loan to GDP
ratio reached its peak of 38.5% in 2015 and afterwards decreased and then stabilized
at 38.5% in 2017. (Gorkmaz Imanov 2019)

REVERSE SCENARIO FOR USD
The Monetary Authority of the Central Bank of the Republic of Azerbaijan used to
intervention in the financial market and had a preference for a pegged currency rate. It
followed this policy during times of high oil prices which meant larger oil windfalls.
Since 2014, slightly decreasing of oil prices in world market have resulted oil producer
countries, like Azerbaijan, faced unplanned and unexpected reduction in oil revenues
and intensification of monetary and fiscal policies. Monetary Authority had to interfere
in currency market with to use foreign reserves as request of pegged exchange rate
policy and it reduced foreign exchange reserves of CBAR. Before diminishing oil prices
started CBAR had foreign reserves were 15 billion US dollars, whereas at the end of
2016, it had 4 billion US dollars in reserves and lost their supplier position in auction.

After the implementation of the floating exchange rate policy through “The Strategic
Roadmap of the Republic of Azerbaijan on National Economy Perspectives”, the
Monetary Authority followed an Expansion Quantitative Easing (henceforth QE)
policy for foreign currencies because of obtain financial stability in the local
economy and meet market requirements with the support of SOFAZ. Thus, SOFAZ
provided foreign currency to commercial banks through auctions twice a week. In
addition to this policy, SOFAZ transferred 4.2(Center for Economic and Social
Development (CESD), 2016) billion dollars to the CBAR to complete the foreign
exchange reserves of the Central Bank. As a consequence of the transfers and liberal
exchange rate policy, the CBAR then possessed nearly 4.5 billion USD in reserves.

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