DEC. 21 2015 (The Conway Bulletin) – Azerbaijan’s Central Bank ditched a euro-US dollar peg for its manat currency, triggering an immediate 48% loss in its value (Dec. 21).
The manat is now trading at 1.55/$1 compared to an earlier price of 1.04/$1. This is the second sharp devaluation of the manat this year. In February, the Central Bank cut the value of the manat by a third.
Oil and gas exporting countries in the South Caucasus and Central Asia have tried to curb inflationary pressures by propping up their currencies over the past 1-1/2 years, even though energy prices have collapsed.
But this has been expensive — Azerbaijan’s government has spent over half of its reserves this year — and has ultimately failed. Kazakhstan ditched its US dollar peg in August; Azerbaijan devalued its manat by a third in February and even secretive Turkmenistan cut 20% off its national currency at the start of 2015.
By ditching currency pegs, Central Banks reduce their role in the money markets. They can still influence the value of their currencies, through various monetary policy instruments such as interest rates, but their power is lessened.
The second devaluation of the manat in 10 months by Azerbaijan’s Central Bank highlights the increasingly tough economic climate for oil and gas exporting countries. At the start of the year the manat-US dollar exchange rate was 0.78/$1.
But, for Azerbaijan’s Central Bank, it’s not just a case of ditching the manat’s currency pegs. It now has to also create a genuine money market for the the manat.
At the moment the manat cannot be traded in a trustworthy market as there is a lack of financial instruments to trade. The establishment of a reliable stock market and improvement in freedom of expression for the media must now be high on the To Do list for Azerbaijan’s government.
>>The Conway Bulletin is a weekly newspaper focused on reporting on Central Asia and the South Caucasus.