/By AzerNews/

By Nigar Orujova

Many people in Azerbaijan were shocked with the decision of the Central Bank to abandon the national currency peg and float the manat, following the strengthening of U.S. dollar and decline in oil prices that continues to show record lows. As a result, the USD soared 48 percent against the manat.

However, the move of the Central Bank of Azerbaijan should have been expected. Earlier this year, Azerbaijan’s manat has lost 34 percent of its price after the devaluation in February. But, the CBA continued supporting the manat against the sharp declines.

This trend ended up on December 21, when the exchange rate between the manat and US dollar changed from 1.0499 to 1.5500. The official exchange rate of euro to Azerbaijan’s manat was set at 1.6850 manats.

The policy shift to floating rate means that the rate of the manat against other currencies will not be determined by the Central Bank, but be shaped by the market, which behavior is hard to predict.

The CBA announced that the decision was made taking into account the strengthening of the long-term shocks in the foreign economy to equilibrate the balance of payments, save foreign exchange reserves in the country at a critical level and secure competitiveness of the national economy in the international arena.

Oil and gas account for about 95 percent of Azerbaijan’s exports and 60 percent of government revenues. The state budget for the next year was laid at price of oil at $ 50 for a barrel, while today the oil price is less than $40.

The Central Bank has long been spending its reserves to maintain the exchange rate of the manat at the post devaluation level of 1.05. The reserves were at $6.2 billion as of late November, down from more than $15 billion a year earlier.

Given the uncertainty that awaits the international oil market, Azerbaijan, like many other countries of the region, was forced to take a very important decision to save its economy.

Experts believe the rising dollar and the cheapening manat will allow the budget of the country to increase its profits in manats.

After the switch, the CBA has increased its foreign exchange reserves by more than 3 billion manats. At today’s exchange rate, the foreign exchange reserves of the CBA in manat equivalent have made 9,681 million manats.

Meanwhile, the State Oil Fund of Azerbaijan is expected to save nearly $2 billion due to the devaluation of the manat in 2016.

However, its’ look like cheapening of the manat will not stop with this second devaluation. Economists believe that the process of the dollar’s rise in price will gradually continue throughout 2016.

Ogtay Haqverdiyev, doctor of economic science, said that the real value of the dollar could reach three to five manats.

MP Vahid Ahmadov also thinks that cheapening of the manat will continue.

The devaluation is expected to negatively affect the banks in Azerbaijan. The second devaluation will have a negative impact on the quality of assets and capital of banks, said Dmitry Vasiliev, director of the agency’s Financial Institutions of the International Ratings Agency Fitch Ratings.

He added that it is necessary to wait for the continuation of dollarization of deposits in the country.

In this situation, experts believe that developing of the non-oil sector is a primary task facing of the country’s leadership. Development of domestic production is also needed to increase and diversify the exports.

What population should do?

Azerbaijan’s manat was the most stable currency in the region until this year that is why the population did not hurry to convert their savings.

However, the situation has changed and it is expected that rises and falls will continue the next year as well. Now, the country’s population is concerned about the possible rise.

The government will make every effort to prevent the rise in food prices because of the devaluation, Azerbaijani MP Rufat Guliyev told Trend.

The products manufactured on Azerbaijan’s territory should not rise in price, said the MP, adding that manat’s devaluation can and will affect the imported goods.

The main task is to keep the prices for food products, housing services and transport, so that this situation would not so strongly affect the population’s welfare, Guliyev noted.

What about the loans?

MP Rufat Guliyev believes the banking system of the country should develop a common policy to deal with all credit and deposit problems of the population, and first resolve the issue with the already accumulated problem loans, which reached 1.3 billion manats.

“Banks should give an opportunity to population to return these loans, as this will benefit the banks themselves. It is necessary to increase the terms of payment in two or three times and reduce the interest rate so that the population would be able to return the loans," h said, noting that there is simply no other way.

Guliyev noted that similar processes take place in Azerbaijan's neighboring countries, including Russia, Kazakhstan, Ukraine and Belarus.

He reminded that with the increase in oil prices, a reverse process could occur, and the manat will strengthen, as it already happened in 2005. In addition, in the coming years, major gas projects will be launched that will allow to increase foreign exchange earnings.

What about the remaining savings?

People who still have savings wonder where to invest. Expert in real estate Rovshan Talibzade said the purchasing power and the prices of apartments will continue to fall.

However, expert Araz Abdulkerimov assures that the price of the real estate market can grow and it is difficult to predict in this situation.

“If there will be changes in the cost of food, no doubt, this wave will spread to the real estate market,” he added.

The expert recommended citizens who have savings in manats, to invest in the purchase of real estate: land and apartments.

Those, who want to save their money in banks, should remember about the risks associated with savings in the national currency. Even though banks offer manat deposits at 13-14 percent per annum and interest on deposits in foreign currency fell below 5 percent, there is always a risk of cheapening of the manat.