TBY talks to Elman Rustamov, Governor of the Central Bank of Azerbaijan Republic, on monetary and financial policy.
TBY What is the Central Bank of Azerbaijan Republic (CBAR) targeting for monetary and financial policy in 2012?
ELMAN RUSTAMOV In 2012, CBAR’s monetary and exchange rate policy shall be directed toward preserving macroeconomic stability, with the main priority being the maintenance of the banking system’s sustainability based upon the formation of a counter-cyclical policy framework. Monetary policy will be aimed at finding a possible optimum between inflation and economic growth, and the value of money and rate of return in the economy. The main imperatives of financial stability are the maintenance of a sustainable and stable banking sector, and its balanced and sound development. In 2012 anti-inflationary policy will remain an important task. The main target for monetary policy shall be single-digit inflation (7%-8%). As in the previous year, external factors shall also have a significant effect on inflation. In order to achieve the inflation target, CBAR will use the money supply and the exchange rate as intermediate targets. The exchange rate of the manat will preserve its significance in the maintenance of macroeconomic stability, management of financial stability, as well as in preserving the international competitiveness of the non-oil sector. The exchange rate regime shall keep improving. CBAR will also adequately employ monetary policy tools to ensure a possible effect of money supply on economic growth. The parameters of the interest rate corridor, including the refinancing rate, reserve requirements, and the volume of CBAR bonds, will be adequately regulated depending on the level of inflation, the economic cycle, and the situation in the financial markets. In 2012, CBAR’s financial stability policy will be directed at enhancing the financial soundness of banks and the preventive regulation of risks. To that end, prudential supervision shall be adjusted to post-crisis requirements and the latest global challenges. To further resist risks, banks will be encouraged to adequately respond to the existing macroeconomic stance and increase financial provisioning through supervisory mechanisms. Restructuring and consolidation, and the promotion of competition in the sector will be some of our key priorities.
What were some of the most important achievements in 2011?
Azerbaijan celebrated the 20th year of its independence in 2011 and demonstrated to the entire world how dynamically and sustainably it has stepped into a new decade. Azerbaijan has confidently joined the group of middle-income countries. The Azerbaijani economy remained resilient against external shocks in the global economic environment. The country’s economy kept growing and macroeconomic stability was preserved. Whereas the credit rating of most countries was downgraded, the credit rating of Azerbaijan was upgraded. The surplus in the balance of payments in the previous year reached $40 billion. Strategic foreign exchange reserves surpassed $40 billion and totaled 65% of GDP. The paramount source of employment—the non-oil sector—grew at a high rate of 9.4%. Investments in the economy also grew by 27%. Per capita GDP exceeded $7,000. The poverty level continued reducing, dropped to 7.6%. Incomes in the population grew by 11% in real terms. To preserve and further amplify economic achievements the policy of diversification is continuing. In that regard, non-oil exports increased by 19% in 2011.
CBAR has not excluded the possibility of applying new liquidity regulations in 2012. What would be the aim of such a move?
Lessons from the global crisis and new post-crisis challenges have encouraged international efforts and new initiatives to manage financial stability. These processes are also accompanied by the formation of new regulations in the financial system in concert with the challenges of today. CBAR actively tracks international discussions associated with new frameworks in financial stability management. In order to develop new mechanisms that ensure financial stability, CBAR is guided by new standards emerging on the global stage. In general, a radical modernization of banking system regulation and the supervisory framework, built upon the latest best practices and standards, has become one of our top priorities. Within this framework, the application of a new liquidity norm proposed by Basel III standards to manage short-term liquidity in banks in a more advanced manner is on the agenda. Relevant research is underway to look at such a possibility. The aim is to adjust the prudential supervision framework to Basel III standards and attain the key targets of financial stability. Previously, CBAR applied a new leverage ratio, taking into account Basel III standards, which yielded positive results. All these measures are targeted at maintaining stable and sustainable performance in the banking system and preserving confidence among the population and investors.
CBAR’s forex reserves grew by 63.6% in 2011, reaching almost $10.5 billion. What is the institution forecasting for 2012?
Amid the surplus in the balance of payments forecasted due to high oil prices this year, the strategic foreign exchange reserves in the country as well as the reserves of CBAR will continue rising. According to CBAR estimates, the surplus in the current operations account of the balance of payments is expected to amount to 20%-25% percent of GDP in 2012. With no significant changes in the foreign conjuncture, in 2012 the growth rate of CBAR’s forex reserves is expected to stay at the same level as 2011.
Local bank assets reached a historical AZN14.3 billion, increasing by 7.3% on a yearly basis. How significant are such figures?
Indeed, the banking system continued growing. The assets of the banking system increased by 7.3% in 2011, and reached AZN14.3 billion, including 8.1% growth in bank loans that amounted to AZN9.7 billion. These figures are significant from the standpoint of amplifying financial intermediation, and increasing the access of economic agents to financial services. The regional network of the financial system in the country is expanding. In 2011, 13 banks launched 26 branches. CBAR licensed nine new non-bank credit institutions (NBCIs), as well as 19 new credit unions in 2011. Thus, the country possesses a financial system that has a wide network and provides financial services that underpin the policy of diversification.
By November 2011, the volume of deposits and savings in credit institutions increased by 24% as compared to a year ago. What does that signal?
The scale of savings and deposits of legal entities and individuals in the banking system increased by 24% in 2011 and reached AZN9.4 billion, including a 36% growth in deposits, which approximates AZN4.1 billion. This signals, on the one hand, high activity in the banking system, and high confidence in the banking system on the other. Manat deposits increased by over 61%, which indicates a reduction in the economy’s dollarization level. To note, the Deposits Insurance Fund, launched in 2007, greatly contributed to this high level of confidence.
It was reported that CBAR might introduce changes to mortgage lending regulations. What are your views on the mortgage market?
The mortgage system is the key macroeconomic contributor to economic growth and employment. To that end, we are focused on the expansion of access to mortgage lending. CBAR has drafted a specific state program for the development of mortgage lending in the country. This versatile program shall focus on several areas. In order to ensure wider access to mortgage lending, it is one of our key priorities to launch a guarantee mechanism to optimize the down payment requirement. One of the key priorities on our agenda is also to expand the scope of people with the right to obtain social mortgages to ease access for the broader stratum of the population, particularly for the youth and young families. We are considering the potential to apply new mortgage products in harmony with the needs of the population, particularly to issue loans for the construction and repair of residential buildings in the regions. We should stimulate the purchase of new houses in residential areas through mortgage lending and broadly apply a mechanism of advanced registration of the rights to property. We are also considering risks with respect to mortgage lending, which should not be disregarded. Over previous periods the Azerbaijani mortgage market remained stable. We shall continue this policy.
CBAR has made increasing efforts to bring the local credit card market to international standards. What are your priorities in this field?
There are 4.6 million credit cards in circulation. This market has huge potential in Azerbaijan. CBAR permanently strives to expand cashless payment opportunities, particularly card circulation in the country. We are implementing initiatives in the field with public institutions. These initiatives primarily target the enhancement of the legal and institutional base. The network of POS terminals is also being expanded. The number of POS terminals increased by 68% in 2011. A reduction of tariffs for cashless payments in the banking system is also being stimulated. We are planning large-scale public awareness campaigns on the advantages of plastic cards.
How do you see the Baku Stock Exchange (BSE) evolving over the next few years?
CBAR prioritizes the development of financial as well as forex market infrastructure. Relevant measures led to the integration of interbank forex operations to a Bloomberg-based unified e-trade platform in 2011. The transition of operations to a new trade system enabled the system’s players to follow the dynamics of USD/AZN exchange rates online, and scope indices on trade transactions and the average weighted exchange rate and supply and demand for forex. A total of 24 banks announce exchange rates on USD/AZN on a daily basis and conduct transactions, which has significantly increased transparency in the forex market. CBAR shall continue activities to develop financial markets and boost transparency.
What is your economic outlook for Azerbaijan in 2012 and beyond?
Prospects in the Azerbaijani economy are very favorable. The country has successfully transformed its oil wealth into social and human capital development and modernization of its socio-economic infrastructure. This process shall continue in the upcoming years. Sustainable and inclusive growth is the paramount challenge of the new era. President Ilham Aliyev has identified a strategic target for the upcoming decade on economic growth. The main goal of the new decade is to further grow the economy. We are exclusively oriented toward strategic targets and finding a new growth model. This is a catch-up growth model aimed at diversifying the economy. However, this model is to be primarily realized on the basis of the rapid development of human capital and market institutions. An export-oriented liberal economy is a strategic priority. We have the capability to increase per capita non-oil exports by at least 10 times in the upcoming decade. Private investment and SMEs will be the key drivers of the new growth model.
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