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Azerbaijan Shifts to “Managed Floating Exchange Rate”, Setting Oil Price for 2016 Budget

Azerbaijan's government will form the next year budget setting the oil price at the level of $50 per barrel.

Elman Rustamov, the governor of nation's central bank, made the announcement.

"The largest financial institutions expect oil prices to vary in between $50-$55 per barrel. For a long time, oil prices have moved within this range. Our calculations also show that the prices will be at the level of $50-$55. Therefore, in 2016, we plan to establish a base price of a barrel of oil at $50," Rustamov said.

The country would lose 9 billion manats a year in oil revenues if the average price of oil was to stand at $40 per barrel.

Azerbaijan is the second-largest oil producer in the former Soviet Union region after Russia and Kazakhstan. Oil and gas make up 95 percent of Azerbaijan's exports, over 65 percent of its state revenues, and 40 percent of its GDP.

The oil price was set at the level of $90 per barrel in the 2015-state budget approved in November 2014. The 2015- budget anticipates revenues of 19.4 billion manats and spending of 21 billion manats. The current state budget's deficit is expected to hit 2.8 percent of GDP.

Noting that no sharp devolution has been seen in the country, Rustamov said the manat rate will depend on oil prices. "If crude falls sharply, manat will "adapt to it"," he noted.

The Central Bank of Azerbaijan put an end to the dollar peg for the manat in February that had held since mid-2011. The manat weakened by 33.5 percent against the dollar, and by 30 percent against the euro last month.

Such pressure on the national currency has been ongoing for months as oil prices tumbled by more than 50 percent from summer 2014, and currencies of neighboring countries, such as the Russian ruble, the Georgian lari and the Turkish lira, suffered sharp falls.

The Central Bank reserves fell by nearly $1.13 billion in December and by $1 billion in January to stand at $12.68 billion, down more than 10 percent from 2014

Explaining the reasons behind the decision to devaluate the manat, Rustamov said the change in the national currency rate was needed.

"In fact, not manat devalued, but the cost of the Azerbaijani oil decreased. Previously, the Azerbaijani oil sold for $140 a barrel, but now its value has decreased almost three times, to $50-$55. It was therefore necessary to take appropriate measures in this regard," he said, adding that the correction of the manat also aims to protect the domestic market and export promotion.

The governor also announced that the Bank shifted to manage floating exchange rate.

Rustamov noted that the Azerbaijani economy can be badly affected if the central bank was to allow the national currency to trade freely, as the number of organizations brining huge funds to the country's economy is small.

He said Azerbaijan has only 3 earners of foreign currency, including the state wealth fund -- SOFAZ, CBA and energy giant SOCAR.

"That is why the manat may gain or lose 20% to 30% should Azerbaijan fully move to free float," he said.

Azerbaijan is expected to produce an economic growth of 1.5 percent in 2015 thanks to revenues from the oil and gas sector accumulated in previous years, the European Bank for Reconstruction and Development (EBRD) announced in mid March.

"Geopolitical risks have risen and have had an impact on many countries, including Azerbaijan," Dmitry Gvindadze, the EBRD chief economist, told reporters in Baku. "But Azerbaijan's fiscal and financial buffers are much stronger than in many countries in Eastern Europe and the South Caucasus."

He said that total assets of the central bank and the state oil fund of about $50 billion or 60 percent of GDP created a "safety cushion".

The governor also warned those banks, which try to change the term of loan agreements signed with clients.

"The Azerbaijani population should return a bank loan in the currency in which it was received," he said. "If the bank changes the terms of the contract without the permission of the client and converts the loan into another currency, it is a very serious violation of the law. In such cases, the central bank will take serious measures. "

Meanwhile, Rustamov's candidacy was nominated for a next fifth five-year term at the Parliamentary Commission on Economic Policy of Azerbaijan.

Rustamov's term of office expires in April 2015 and in this regard, President Ilham Aliyev put forward a proposal to extend his powers.

Source: AzerNews

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