Assessment on Real Effective Exchange Rate in Azerbaijan: 2017 Outlook

Abstract

The implementation of fixed exchange rate regime for 20 years (1994-2014) resulted in a formation of an insecure currency position for all interest groups, including the government and business. Although the pressures on manat have commenced to increase since the second half of 2014, the Central Bank and the government failed in comprehending the process. That is why, promising statements have been made to the general public. But the following events proved the underlying problem more severe and the implemented monetary, fiscal and exchange rate policies ineffective in the long-term. Business, citizens, as well as state-owned enterprises faced serious financial losses. The country experienced serious threats with regard to its financial sustainability. The Central Bank promised that “stable exchange rate of manat is going to be among the important priorities” in its statement on the major directions of monetary and financial stability policies in 2015, nonetheless, only after two months a decision about the devaluation amounted to 25.7% of national currency has been adopted. The next devaluation of 32.3% on December 21, 2015 made manat the worst performing currency of the year. Thus, manat lost its value by 49.6%. All interest groups are now seeking answers to their questions such as until when manat is going to depreciate, what to expect from the monetary policy of the Central Bank, what to expect from the liberal exchange rate regime. This report will try to provide answers to the aforementioned questions in the following chapters.