On December 21, The Central Bank of Azerbaijan announced the transition to a floating exchange rate for the manat, causing the national currency to immediately drop by 48% against the dollar. With financial analysts at odds over the benefits of such an approach, the country’s residents are struggling to deal with the sudden shock.
On Monday, the official exchange rate had risen to 1.55 manat per US dollar and 1.69 manat per euro, indicating a 47.88% devaluation. According to information from the Central Bank, the rate of the manat with henceforth be formed on the basis of supply and demand on the currency market. The Bank’s report says, “At the same time, to ensure the safety of bank deposits and other deposits, comprehensive measures will be taken for the financial stability of banks, increasing their liquidity, and improving the deposit insurance system.”
Earlier, the Central Bank had held back the fall of the manat for a year by selling US dollar reserves, which declined three times during the same period (from 18 to 6 billion US dollars). In February 2015, the Central Bank lowered the rate of the national currency by 34%, and now the manat is half as valuable as it was a year ago.
Meanwhile, in Baku, residents rushed to stores before the prices could skyrocket. Many stores remained closed on Monday, while others had most of their products out of stock. Office equipment stores were closed, and Silk Road Reporters observed workers gluing new price tags and guards at the door prohibiting photos.
“The thing that happened was not a shock for us”, says Farida, a retiree from Baku, “My son works in a bank and told me a month ago that soon manat will fall. The main problem is pharmacy, I did not have time to buy all the necessary medicines, and today pharmacies don’t sell them, and I do not know how much they will cost tomorrow.”
“My sister lives in the Moscow suburbs and I planned to buy an apartment there to move out”, says programmer Anastasia Livnik, “For several years I worked a lot and have already collected a lot of money. Last week I learned that manat will soon fall again and quickly went around several points of currency exchange, but I couldn’t find dollars. They simply refused to sell me the dollars.”
“For many years, the government has made profits with high oil prices and didn’t think about reforms, but today the situation has changed and it turned out that they are not capable of reform the economy,” says economist Natig Jafarli, board member of the ReAl political movement, “I have repeatedly offered them to devaluate the manat smoothly since such measures do not result in shock deterioration in the business environment and banking systems, which are accustomed to forecast changes of working conditions. ”
The expert is confident that next year the manat will continue to fall, unemployment will increase, and many banks will be closed. “The problem is that the state still does not have clear and specific programs to overcome the crisis,” said Jafarli.
“The Central Bank announced a ‘floating rate,’ and immediately announced new value of the manat – which means that there is no floating rate and never will be, the state will continue to regulate the rate via old methods, and will further strengthen the panic in the market,” says the head of the Center for Assistance to Economic Initiatives, Azer Mehdiyev. “Panic is enhanced by the fact that all decisions are made in secret from the public; they are not debated and are taken suddenly in a one day.”
The Popular Front Party of Azerbaijan called the Central Bank decision “a serious blow to the country’s economy.” “This will have a negative impact on the welfare of citizens and lead to hyperinflation,” it said in a statement, “but the biggest problem is return of citizens loans and a possible banking crisis. At present, the volume of unpaid consumer loans is 684 million manats.”
Meanwhile, government sources are trying to reassure the population, calling sharp devaluation a “forced measure” and the result of “caring about the citizens of the state” and promising economic growth next year. None of the high-ranking officials have commented yet on the sudden devaluation. The Central Bank has cited the fall in oil prices and the difficult economic situation in neighboring countries as reasons for the devaluation.