Winners and Losers of a More Floating Exchange-Rate

Manat DollarThe recent devaluation of Azerbaijani manat has given rise to uncertainty and skepticism among all economic sectors. While foreigners working in Azerbaijan are directly affected by the new exchange rate, the locals have already started recording their protest. Nonetheless, the Azerbaijani government has tried to paint a bright picture by underlining the long-term benefits of its sudden policy shift. The Central Bank of Azerbaijan insists that the non-oil sectors will benefit from the ‘corrected’ exchange rate and will help the country in diversifying its exports. On the other hand, the government officials can also be noticed using the Azerbaijan-Armenia relations to justify the new approach. It has been argued that the government is determined to preserve national savings for unforeseen circumstances where it might have to expand its military expenditure.

Azerbaijan relies on hydrocarbons for more than 90 percent of exports and forms 65 percent of its state budget from the petrodollars. The state budget 2015 was based on the oil price at the level of $90 whereas the world oil prices have plummeted to $60 and less. The 30% to 35% of the change in oil prices has directly affected the state budget, which is extremely important for a country that is hosting the first European Games in June. The devaluation of manat was carefully calculated to adjust the state budget before summer in order to avoid financial complications while hosting the mega event, which is believed to promote Azerbaijan’s positive image in the West. The new exchange rate has acted as a cushion between the world oil prices and state budget while providing the government of Azerbaijan a smooth road to host the European Games.

From the governments’ perspective, the process of devaluing manat was somewhat successful. The Minister of National Assembly Ogtay Asadov reportedly indicated: “The banks exchanged the people’s money within last 1-2 months. The CBA has taken and will take steps to prevent devaluation of manat.” However, financial analysts have made a case of sudden devaluation of manat harming the banking sector and insurance industry. According to Moody’s investment service, the unexpected policy shift is credit negative for Azerbaijani banks. The new exchange rate will overburden the debtors who will find it extremely difficult to payback their loans, which will in turn inflate the size of banks’ foreign-currency-denominated liabilities. The process of devaluing manat might be a success for a few people but it can also be seen as a tool to crush others.

On the whole, most of the working class has perceived the policy shift as the beginning of difficult times for Azerbaijan. The government has been viewed as shifting its burden on working class instead of compromising on its expenditures. Several stores and supermarket owners have tried to create an artificial price rise which has further worsened the situation. Speaker of the parliament, MNA Ogtay Asadov, reportedly said, “As far as I know, 70% of food products in the country are produced locally and increase in prices is not a natural process. I held negotiations with the Ministry of Economy and Industry, which is developing the plan for holding the prices at the same level in spite of the national currency devaluation.” According to Financial Times, some exchange offices in Baku stopped selling dollars in the wake of the devaluation, while many have nicknamed the occasion “Black Saturday.”

Although the government has defended the policy by claiming it should help improve the competitiveness of Azerbaijani industry in foreign markets, it has been perceived as an inadequate solution and a weak argument. Similar measures have been taken in neighboring countries like Kazakhstan where devaluation of local currency resulted in substantial wage and cost inflation. In the past, discontent towards the government policies in Azerbaijan is rarely recorded at any platform. However, based on ones’ personal observations and interactions, it can be inferred that there is a widespread disapproval for the current policy shift in the society which can be translated into the failure of political agenda. Political motives can also be seen as considerably failing because the claims of diversifying economy and saving national reserves for unforeseen military expenditure are not very well articulated. The government might make an attempt to gain political dividends by slightly appreciating manat but it solely depends on the pressure from civil society.

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