IMF improves inflation outlook in Azerbaijan

By Azernews

By Nigar Abbasova

The International Monetary Fund has improved its forecast of inflation in Azerbaijan for 2016 and 2017 by reducing the level to 10.2 and 8.5 respectively.

The previous forecast of the Fund was at the level of 12.8 and 9.5 for 2016 and 2017 respectively. The rate of inflation is expected to sharply reduce to 4.2 percent by 2018, while it is forecasted to stand at 4.1 and 4 in 2019 and 2020.      

The Fund appreciates measures taken by the government, as well as the recent increase of interest rate, which is aimed at deterrence of inflation in the country. IMF experts believe that the policy pursued in the country will lead to the gradual reduction of consumer prices.

The head of IMF mission in Azerbaijan Mohammed el Gorchi told Trend that the Fund may render its assistance to the country in the improvement of macroeconomic policy and strengthening of institutes, which are considered to be essential constituents of reforms.

He mentioned that the assistance may be rendered by means of cooperation between IMF and the government of Azerbaijan.  

“The switch to a new economic model, which is mainly based on the growth of non-oil sector of economy, requires liberalization of markets, as well as implementation of certain measures on the improvement of management system,” he said, adding that a number of reforms have already been implemented in the country in this regard.

Drop in oil prices and economic slowdowns, as well as double devaluation of the national currency (the manat) negatively influenced the situation in the financial market of the country.

The Central Bank of Azerbaijan (CBA) switched to a floating rate of the manat, on December 21, 2015, following intensified external economic shocks. The bank abandoned its dollar peg thus allowing the currency to tumble by almost a third. 

The head of mission said that devaluation of the national currency resulted in the increase of competitiveness, while a new rotating regime brought needed flexibility to the exchange rate, adding that more flexible exchange rate may mitigate the influence of shocks and reduce the process of dollarization.   

Meanwhile, the CBA increased the interest rate from 9.5 percent to 15 percent. The measure is considered to be taken in a bid to underpin the national currency (the manat) and encourage manat deposits. The change in the monetary policy of the country is aimed at the provision of macroeconomic stability in the country as well as the increase of confidence in national currency and reduction of the dollarization process observed in the banking sector of the country. 

The upper limit of the interest rate corridor will increase from 15 percent to 18 percent, while the lower limit will rise from 4 percent to 12 percent. CBA reported that the recent changes in the internal and external factors affecting inflation necessitated taking additional anti-inflationary measures.

The change is also expected to influence the agiotage, which was connected with the conversion of means to USD, as the conversion will become disadvantageous.

Last time, the interest rate was changed in March 2016, when the CBA increased it from 5 to 7 percent. The interest rate has almost been under 5 percent since 2009.

IMF's office has operated in Baku since 1992.