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The Global Crisis and its Impact on Azerbaijan

This report analyzes the effects of the global crisis on the economy of Azerbaijan, including the decline in oil exploration, moderation of GDP growth, and the challenges faced by the domestic economy. It also explores the impact on the external sector, strategic foreign exchange reserves, money supply, and the prudential regulation and monetary policy implemented. The report concludes by highlighting the economic policy priorities for the post-crisis period, focusing on fiscal sustainability, diversification of the economy, and central bank policies.

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The Global Crisis and its Impact on Azerbaijan

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  1. THE QLOBAL CRISIS AND ITS IMPACT ON AZERBAIJAN by Khagani Abdullayev Central Bank of the Republic of Azerbaijan Acting General Director

  2. Economic growth and price dynamics • Oil GDP growth moderated due the decline in the oil exploration caused by technical problems; • Moderation of growth in the oil-related non-tradable activities is the main reason of the decline in the non-oil GDP growth rates; • Under these circumstances and given the Nominal Exchange Rate appreciation, domestic economy is faced with deflation.

  3. External sector • Double decline in the oil exports is the driving force behind current account surplus reduction; • Growth in the capital account deficit is driven mainly by the oil sector capital repatriation and foreign debt service of banks. • Cash dollarization (1 bln.USD) spiked during the first quarter 2009

  4. Strategic foreign exchange reserves • But, external position is still favorable; • This prevented manat/USD exchange rate from sharp depreciation. • Central bank was confident to keep exchange rate stable because of financial stability concerns (high dollarization)

  5. Money supply, credits and deposits • High liquidity in the treasury account plus cash dollarization led to significant liquidity squeeze in the economy; • Large foreign debt payments tightened credit activities of banks.

  6. Liquidity of banks • Banks accumulated huge liquidity to be well prepared for foreign debt service; • Worsening demand conditions in the economy affects the quality of the credit portfolio.

  7. Prudential Regulation and the Monetary Policy: Main Steps in 2008/2009 PRUDENTIAL REGULATION: 1. Strict Provisioning Policy and Tight Lending Standards: • increased risk classification of assets • increased LTV ratio 2. Risk Management requirements - private action plans on individual banks to enhance risk management standards MONETARY POLICY: • Reduction of the main refinancing rate from 15% to 2%; • Reduced required reserves from 12% to 0.5%; • Abolition of a 5% reserve requirement on external borrowing; • Central bank bond portfolio reduced and discount-window widened since October 2008; • The resulting impact: liquidity injection equivalent to 10% of the monetary base (1 bln. USD injection).

  8. Economic Policy Priorities for the post-crisis perid Enhancing fiscal sutainability: • İntroduction of the Medium-Term Expenditure Framework (performance-based budgeting + Permanent Income Approach in utilization of oil revenues) • 2010 -2012 budget consistent with the inflation and output gap targets (removal of fiscal dominance over monetary policy) Diversification of economy: • Lowering tax burden for the non-oil sector • Further removal of administrative barriers on growth – attempts to stay among top reformer countries in Doing Business Report as was accomplished in 2008 Central Bank Policies: • Active implementation of the basket – pegged Exchange rate Policy – transitory regime towards flexible inflation targeting framework • Development of interbank money market – precondition for the functioning of interest rate transmission mechanism • Creating incentives for lowering dollarization (including through reserve requirements, etc.) • Introduction of countercyclical macro-prudential framework

  9. THANK YOU

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