CBA keeps sterilization to avoid further manat strengthening

Source: AzerNews

The Central Bank of Azerbaijan (CBA) is keen on further sterilization of currency to prevent a significant strengthening of the manat and thus neutralize the negative impact on the competitiveness of the domestic non-oil sector.

CBA Deputy Chairman Khagani Abdullayev said that the bank has acquired over $1 billion on the foreign exchange market since the beginning of 2013 for this purpose.

According to Abdullayev, the amount of further intervention of the central bank will be determined by such factors as the state of the currency market, the demand for imports in the country, etc.

"We expect that the current account surplus in the balance of payments will exceed $10 billion by the end of 2013. Surely, this affects the amount of supply and demand. We expect that supply will exceed demand, as in previous years. We expect the clean sterilization by late 2013," Abdullayev said.

Although the rate of the manat against the dollar rose by an average of 0.4 percent in the first quarters of the past five years, the manat rate remained unchanged in January-March 2013. The standard deviation was also low - at 0.0001.

The stability of the national currency positively affected the sustainability of the financial sector. During the reporting period the manat consolidated in nominal and real terms with regards to the currencies of the U.S., the Eurozone, the UK, Turkey, Russia, Ukraine and Georgia.

In January-March, the nominal effective exchange rate (NEER) of the manat in the non-oil sector increased 0.8 percent in the total turnover. The share of change in the rate of the manat against the dollar in terms of NEER averaged 32.8 percent, while the share of changes in exchange rates of the partner countries to the dollar was 67.2 percent.

According to model estimates, the strengthening of NEER by one percent leads to lowering of the prices by 0.28 percent.

Accordingly, the central bank ensured the stability of bilateral exchange rate of the manat and the dollar in January-March, while the multilateral rate of the manat rose, which is a positive development in terms of achieving the objectives on inflation.

This year, the CBA continued its exchange rate policy in the framework of bilateral targeting of the dollar/manat. Under the conditions of a large surplus in the country's balance of payments, supply in the currency market exceeded demand.

Currently, 90 percent of external transactions are carried out in dollars, so targeting the dollar to the Azerbaijani manat is the best option. Two-currency targeting is also effective, but only if the share of the dollar and the euro in foreign trade operations is approximately equal.

The CBA has completely abandoned the use of the dual currency (dollar/euro) basket in the determination of the exchange rate of the Azerbaijani manat, and made a transition to the bilateral (manat/dollar) exchange rate targeting since January 2011.

The dual currency basket has been applied in Azerbaijan since March 2008. The CBA said this mechanism was abandoned due to intense volatility in recent rates of major currencies as well as with a view to maintain stability of the national currency.