Azerbaijan

Azerbaijan suffered similar dislocation to other FSU countries from the collapse of the USSR. It then opted for stabilisation, with some but varying success over the years. Structural reform was reluctant and limited, both in the wider economy and in the financial sector, and this meant that securities markets and monetary transmission remained weak so that there was a recurring tendency to revert to exchange rate stabilisation in the absence of an effective alternative nominal anchor.

Years Targets and attainment Classification
1992-94 independence (out of USSR) declared 1990, recognised late 1991, with regional territorial conflicts already having adverse economic effects; central bank with standard powers (but limited expertise) over monetary and credit policies and banking supervision set up early 1992 from merger of local branch of USSR central bank and two specialised state banks, which were then detached late 1992 with move to two-tier banking system including reorganisation of two other state banks and, over time, rise of many small new commercial banks; price liberalisation and some other moves towards market economy; cash shortage prompts introduction of new currency alongside and with fixed parity to ruble, initially in small quantities; issues of breakdown of FSU central planning and trade mechanisms and high inflation plus depreciation coming from Russia, but oil exports switched towards non-FSU markets and into USD; preparations for adoption of new national currency as sole legal tender, with ruble largely withdrawn from circulation mid-1993 (after Russian currency reform), manat pegged to USD late 1993 and made sole legal tender January 1994, restoration of ruble peg with devaluation March 1994, exchange rate floated May 1994; reserve and liquidity requirements revised and tightened, but most credit still allocated on annual credit plan via specialised banks, budget deficits still financed by central bank and foreign transactions heavily managed; rapid dollarisation; 1992-4 fighting over Nagorno-Karabakh, with Azerbaijani losses, which pave way for new President from late 1993 unstructured discretion UD
1995-2017 fiscal and monetary stabilisation 1995; payments system reform; central bank auctions refinance credits, attempts to control reserve money and manages forex reserves; forex auctions; reserve requirements restructured; bank activity concentrated in specialised state-owned banks, which turn out to have rising arrears and large NPLs and need to be rehabilitated; many small banks now exist but tied to one or few enterprises; 1996 treasury bill auctions; some rise in central bank autonomy; some more structural reform from mid-1996; securities markets still limited; possible Dutch disease effects from growing oil output and exports; 1998 Russian crisis, authorities tighten monetary policy and briefly stabilise exchange rate vs USD; restructuring of state-owned banks delayed; structural reform reluctant and limited; 2000s rising dollarisation; as of 2003 central bank’s primary objective is price stability, with exchange rate as nominal anchor, and (in light of  unpredictable money demand and underdeveloped treasury bill market) forex interventions are key instrument for affecting money supply; opposition to appreciation in context of oil boom and related fiscal expansion leads to sharp rise in inflation 2004-5, then exchange rate float and monetary tightening, followed by brief return to peg, with crawl from early 2006; currency reform (redenomination) 2006; talk of move to inflation targeting (IT) ‘lite’ to be pursued via base money targets with more exchange rate flexibility, plus later move to full IT (if/when preconditions fulfilled); March 2008 announced peg to USD/euro basket with adjustable weights, in practice peg is to USD, with forex purchases mostly unsterilised; GFC brings cut in oil revenues but fall in GDP averted, in part by temporary cuts in reserve requirements and policy interest rates; as of 2013 central bank still lends directly to real economy, interest rate transmission poor, stable exchange rate remains anchor of monetary policy, with authorities resisting IMF pressure for short-term rise in exchange rate flexibility; 2015, in response to shocks including oil price fall, two major devaluations followed by shift to managed float; rise in dollarisation; more focus on base money growth; reversion to de facto peg early 2017 loosely structured discretion LSD

Selected IMF references: RED 1993 pp19-21, 28-30, 103; SR 1993 pp11-13; RED 1994 pp14, 15, 16-17, 23-4, 28, 75-8; SR 1994 pp2-3, 5-6, 7, 10-13; RED 1995 pp17, 19-20, 22, 25-6; RED 1996 pp40-1, 42-3; RED 1998 pp22-32; SR 1999 pp10-11, 13-14; SR 2000 pp12-13, 17-20; SR 2002 pp18-20; SI 2003 pp36-9; SR 2003 pp12, 22; SI 2006 pp4-15, 28-30; SR 2006 pp18-19; SR 2007 pp9-10, 16-19; SR 2008 pp9, 17; SR 2010 pp4-5, 8, 10; SR 2013 pp12-13; SR 2014 pp14-15; SR 2016 pp4-6, 10, 14-15; SR 2019 pp4, 7, 13-14.