THE QLOBAL CRISIS AND ITS IMPACT ON AZERBAIJAN

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• THE QLOBAL CRISIS AND ITS IMPACT ON AZERBAIJAN
• by Khagani Abdullayev
• Central Bank of the Republic of Azerbaijan
• Acting General Director

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Economic growth and price dynamics

• Oil GDP growth moderated due the decline in the
  oil exploration caused by technical problems
• Moderation of growth in the oil-related
  non-tradable activities is the main reason of
  the decline in the non-oil GDP growth rates
• Under these circumstances and given the Nominal
  Exchange Rate appreciation, domestic economy is
  faced with deflation.

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External sector

• Double decline in the oil exports is the driving
  force behind current account surplus reduction
• Growth in the capital account deficit is driven
  mainly by the oil sector capital repatriation and
  foreign debt service of banks.
• Cash dollarization (1 bln.USD) spiked during the
  first quarter 2009

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Strategic foreign exchange reserves

• But, external position is still favorable
• This prevented manat/USD exchange rate from sharp
  depreciation.
• Central bank was confident to keep exchange rate
  stable because of financial stability concerns
  (high dollarization)

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Money supply, credits and deposits

• High liquidity in the treasury account plus cash
  dollarization led to significant liquidity
  squeeze in the economy
• Large foreign debt payments tightened credit
  activities of banks.

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Liquidity of banks

• Banks accumulated huge liquidity to be well
  prepared for foreign debt service
• Worsening demand conditions in the economy
  affects the quality of the credit portfolio.

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Prudential Regulation and the Monetary Policy
Main Steps in 2008/2009

• PRUDENTIAL REGULATION
• 1. Strict Provisioning Policy and Tight Lending
  Standards
• increased risk classification of assets
• increased LTV ratio
• 2. Risk Management requirements - private action
  plans on individual banks to enhance risk
  management standards
• MONETARY POLICY
• Reduction of the main refinancing rate from 15
  to 2
• Reduced required reserves from 12 to 0.5
• Abolition of a 5 reserve requirement on external
  borrowing
• Central bank bond portfolio reduced and
  discount-window widened since October 2008
• The resulting impact liquidity injection
  equivalent to 10 of the monetary base (1 bln.
  USD injection).

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Economic Policy Priorities for the post-crisis
perid

• Enhancing fiscal sutainability
• Introduction of the Medium-Term Expenditure
  Framework (performance-based budgeting
  Permanent Income Approach in utilization of oil
  revenues)
• 2010 -2012 budget consistent with the inflation
  and output gap targets (removal of fiscal
  dominance over monetary policy)
• Diversification of economy
• Lowering tax burden for the non-oil sector
• Further removal of administrative barriers on
  growth attempts to stay among top reformer
  countries in Doing Business Report as was
  accomplished in 2008

• Central Bank Policies
• Active implementation of the basket pegged
  Exchange rate Policy transitory regime towards
  flexible inflation targeting framework
• Development of interbank money market
  precondition for the functioning of interest rate
  transmission mechanism
• Creating incentives for lowering dollarization
  (including through reserve requirements, etc.)
• Introduction of countercyclical macro-prudential
  framework

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• THANK YOU