Our Analytics 22 august — 14:13

Elman Rustamov met with Azeri Daily analysts. How much money do our banks need?

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BY MAMMAD EFENDIYEV, ELDAR ALIYEV, ECONOMICS SECTION

In our articles we noted that it was time for the Central Bank of Azerbaijan (CBA) to help banks to restore lending to the real economy. For this, it has in its arsenal all the necessary tools, which in principle are used by other central banks in the world. But how effective are the monetary instruments of central banks in our banking system? This, perhaps, deserves a separate discussion.

By the way, immediately after the publication of our article the head of the Central Bank held a meeting with employees of the economy section of Azeri Daily. And shed light on many questions of interest to us.

So, the CBA's answer did not take long. The head of the Central Bank argues that his agency provides banks with sufficient money. In particular, the monetary base, which is the main goal of monetary policy, in the first half of this year increased by 6%. This factor not only ensures the stability of the payment system, but also expands the possibilities of lending to the economy.

But the dynamics of lending to the real sector amid a noticeable increase in liquidity in the banking system suggests the need for additional measures to support this economic system.

Simply put, the CBA, which is now criticised be everyone for the lack of provision of the economy with money, as it turns out, only is busy with this task. It was as a result of its monetary policy that we managed to increase the liquidity of commercial banks above AZN 6 bn. But then this process ends, that is, money does not enter the real economy from banks. But this problem is not in the competence of the CBA or the Chamber of Financial Market Supervision.

Most likely, the government should intervene in this process, but this does not happen yet. Apparently, the issue rests not only in administrative problems, but is much deeper. To ensure the full operation of the banking system, there is a need for some new institutions and mechanisms.

It seems that this issue should be worked, especially as these issues were raised in the recent plan of measures to improve the business environment and raise the international rating of the country, approved by President Ilham Aliyev. Meanwhile, the CBA, in order to somehow regulate the stability of the financial market, has begun to promote the development of financial instruments, through which it expands the arsenal for banks to attract liquidity in the interbank market.

We remember that once Head of the Central Bank of Azerbaijan Elman Rustamov said that in our banking system the norm of mandatory reserves for banks on attracted deposits had virtually no effect on the volume of lending. In fact, the statistics of the CBA shows that the volume of bank lending to the economy of the country is not correlated with the norm of banks' mandatory reserves. Despite significant fluctuations of this norm during the years of the country's independence, they had practically no effect on the credit multiplier: the ability of banks to generate new lending money. But the decline in the norm of mandatory reserves, as a rule, leads to an increase in the liquidity of the banking system, which creates new opportunities for increasing the volume of lending to the economy. We have no such effect, which raises serious questions and convinces us of the correctness of Elman Rustamov's words.

Let's consider this on a specific example. In March 2016, the CBA established a mandatory reserve ratio for attracted manat deposits from legal entities and individuals at a rate of 0.5%, and in foreign currency 1%. And on deposits of non-residents, this rate was reduced to the level of 0%. It would seem that such minimum standards, deducted by banks as a reserve in the CBA, really should have led to an increase in their liquidity, which would create conditions for increasing lending to the economy. But this did not happen, all these indicators were already at the minimum level of 0.5% up to that date too. Moreover, even a reduction in the norm of mandatory reserves on deposits of non-residents could not stimulate banks to borrow abroad, most likely, banks simply did not dare to increase their foreign borrowings in order to minimise the risks associated with the volatility of the national currency.

And why should banks need foreign currency, when the real sector of the economy is experiencing manat hunger. If in March 2016 the volume of bank lending in Azerbaijan in manats was AZN 10 bn, then by June 1, 2017 this amount decreased to about 8 bn manats. True, a significant role in this was played by the crisis in the country, including in the banking sector. But even the analysis of fat years shows that the ratio (coefficient) of the money supply to the monetary base in manats all the time remained at the level of 1.3-1.4. Such a low multiplier effect suggests that our banking system could not simply generate new loan money from the very beginning. And the growth in lending in these fat years was due to the growth of the monetary base, which in turn was caused by the inflow of petrodollars, and not by the generation of new credit money from the banking system.

Yes, Elman Rustamov was right then. The more the bank multiplier is approaching 1, the more the bank loses its classical properties and turns into a usurer - into a regular pawnshop. Conversely, the higher this indicator, the price of credit money becomes more accessible. But it should be noted that this is not at all a defect of our banking system, but a defect inherent in one way or another to the banking systems of all the CIS countries, including Russia. Meanwhile, in the European banking system, the multiplier effect noted above varies between 5-8 against the above-mentioned 1.3-1.4 in Azerbaijan (in Russia this indicator is slightly higher).

It turns out that in order to increase lending to the economy, banks need to wait for a new increase in oil prices on world markets, as in fat years. Is it really necessary for President Ilham Aliyev to intervene in this matter and simply oblige banks to take up their immediate business - to lend to the real economy. Such calls of the head of state have already sounded more than once, but banks are stubbornly unwilling to take risks. Having multibillion-dollar liquidity, the owners of banks sit on them like fabulous misers on their chests of gold. And this money is lying idle, causing only a lot of rumours around them. Therefore, the CBA also has to buy out manats from banks at deposit auctions, and lately it has been issuing notes for this purpose.

In fact, statistics show that the banking system has accumulated a lot of liquidity (about 3 billion manats) on correspondent accounts with the CBA. At first glance this can create the false illusion that our banks as a whole are self-sufficient to implement their own credit policy, but they refuse to lend. However, in reality, this may not be so. We simply do not know how many banks in the country are holders of the specified amount of liquidity in the statistical data. It is also unknown which part of this amount is blocked by the Central Bank as a pledge in foreign currency in the account of the manat loans taken from it. At the same time, another important factor - the CBA's net claims to banks and non-bank organisations (NBCOs), namely the CBA's claims to credit institutions minus its obligations to them, also make up a considerable amount (AZN 6.5 bn). Of this amount, about AZN 700 million has been allocated to banks, and a large portion of the remaining part is likely to be loans granted to CJSC Agrarkredit as a repayment for the toxic assets of the International Bank transferred to it. Although Agrarkredit is a non-banking organisation, the money allocated to it eventually returns to banks again.

But we will leave aside these billions and we will recollect, that internal deposits of legal and physical persons, which in the crisis years also began to decrease appreciably, are the main internal source of resources for banks. And if we take into account that the savings of the population have reached a minimum recently, then we cannot hope for further growth of deposits even in the medium term. Hence it follows that in reality our banks do not really have to rely on internal deposit resources.

An important external source of resources for banks is the attraction of funds from non-residents, the norm of mandatory reserves for which is 0%. The absence of a reserve requirement rate could encourage banks to actively attract foreign loans in foreign currency, but there are also complex problems in this matter.

First, after lowering the ratings of our banks by international rating agencies, these loans will rise in price for them. And secondly, in the current situation, banks may well not want to take risks associated with possible fluctuations in the exchange rate of the national currency in the medium term. The analytical balance of the country's commercial banks shows that their aggregate foreign liabilities fluctuate recently in the range of $ 4 billion. Perhaps, bankers are sitting in anticipation of a new devaluation of manat in the medium term. And this is justified, as US dollar's strengthening in the medium term only by 10% against the current exchange rate of manat, can lead to our banking system to immediately lose up to 700 million manats.

As can be seen, the change in the amount of the required reserve ratio for attracted funds in our banking system does not work properly. And not only these norms. Suffice it to recall that even a five-fold increase in the discount rate during 2016 was not able to have the desired effect. Even the 15 per cent discount rate, which lasted about a year, could not bring down the high inflationary wave, which will not settle in any way with the unanimous expectation of the chief banker.

On the contrary, a high level of inflation has led to a disastrous impact on domestic demand, which almost does not grow for the second consecutive year. The average citizen of Azerbaijan has already spent almost all of his income to meet his demand, even at a minimal level, and therefore his savings are reduced to the minimum level. The statistics show that the monthly disposable income per capita on average is 350 manats, of which 340 manats goes for final consumption, and only 10 manats for savings.

In order to realise all the perniciousness of the current situation, let us turn to the example of neighbouring Russia, since we do not have full-scale statistics on the incomes of the population. This is all the more permissible, since the situation in the two countries is not much different in principle, and the statistics of the northern neighbours is more clear.

Thus, an analysis conducted by Russian experts shows that almost 94% of the country's population no longer has new savings. And those savings, which a small part of people still have, are old savings that people are already beginning to spend. And this already allows us to assert that the aforementioned 10-manat savings of the average Azerbaijani are the savings of only a small part of the population (in Russia about 6% of the total population).

Although, by simple logic, the increase in the discount rate was supposed to help keep consumer spending level and increase savings. But in our countries this logic does not work. It works in developed economies, where the income of the population in the GDP structure is much larger than ours, and per capita income is several times ahead of the minimum subsistence level of the population. Only in this case the growth of the discount rate can have the proper effect. And the level of the discount rate cannot influence average Azerbaijani. If tomorrow the CBA raises it to 20% or drops to 5%, our average citizen spends all his income on everyday expenses.

In addition, the growth of the discount rate to 15% should help raise the average level of bank interest both in manat and in foreign currency deposits. This is also expected for loans. But as shown in diagrams 1 and 2, these indicators, on the contrary, began to decline just after the fivefold increase in the discount rate.

The same trend is observed in the sphere of interbank loans, with the exception of 1-3 and 3-6-month loans, for which today the average interest rate is more than 20% and 17%, respectively. This could be the result of increased demand for short- and medium-term liquidity of some banks. So the increase in the discount rate benefited no one. And it is unclear why the CBA allowed such a state of affairs for 10 months and why it was necessary to conduct multi-month targeting.

Economy cannot be imagined without money - these are two components of one whole. The economy itself is in the hands of the government, and the money is in the hands of the independent Central Bank. This is so throughout the world, and this combination allows you to achieve optimisation of the economy as a whole. Under normal conditions, the government and the Central Bank work in close tandem, seeking as a result the development of the economy of the country. When, in their relations, disagreements arise, in particular, on overcoming the crisis situation, this leads to imbalance in the economy and further deepening of the crisis. In Azerbaijan today between these structures on all external indicators there are no such acute disagreements. But this is more likely due to the political will of President Ilham Aliyev than to the objective situation in the country's economy.

All central banks of the world are called upon to solve three fundamental tasks - inflation, incomes and unemployment (opening of jobs). And inflation itself is not an end in itself. Its regulation is carried out in order to optimise the other two factors. In our country, the Central Bank and the government have somehow become stuck in the inflationary quagmire, forgetting about the incomes of the population and new jobs, on which the level of unemployment depends.

In the previous articles, we have already noted how continuing inflation eats up not only incomes, but also accumulations made earlier. And efforts to curb double-digit inflation by targeting it, in all likelihood, will bear fruit only next year. Pay attention, not this year, although this was the goal pursued earlier by the chief banker, but in the next.

For the time being, we are advised to prepare for annual inflation of at least 14%. A 6-7 per cent inflation rate is likely to be reached only by the end of the next year. And even not because of targeting, but due to the fact that real incomes of the population will reach such a minimum level that they will barely be able to cover its subsistence minimum. Such syndromes are already visible today, it is enough to find out the reason for the low attendance of pharmacies - people began to economise on their own health. Of course, we understand how difficult it is to simultaneously regulate all three fundamental factors. But no one will do this work for us.

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