Our Analytics 10 december — 17:38

Errors, merits and forecasts of Elman Rustamov (Topical commentary)



Within the framework of the discussion of the budget package for the next year at the plenary session of Milli Majlis, Chairman of the Board of the Central Bank of Azerbaijan Elman Rustamov reiterated that inflation was our main problem. And this time he named, finally, the specific level of inflation, which is forecasted for the next year: 6 per cent. To achieve this, the Central Bank (CBA) should closely coordinate its activities with the government.

Elman Rustamov, Head of the Central Bank

Forecasts of chief bankers around the world deserve special attention, since they are always more restrained and close to reality, built on careful calculations. True, here such forecasts (even the most short-term ones) recently quite often began to be executed exactly the opposite. Apparently, this circumstance caused a new wave of expert interest: will Mr Rustamov manage to reduce inflation more than twice. The expert community is easy to understand, because the chief banker of the country has taken on a really great responsibility.

Yes, this is a very difficult task. Inflation has been growing for three consecutive years, and quite dramatically. If in 2016 it was 12.4%, then by the results of 10 months of 2017 the average annual inflation in the country has risen to the level of 13.7%. And although the government predicts average annual inflation this year at 13.2%, the approaching end of the year and not falling inflation do not allow believing this.

True, Rustamov himself believes that such high inflation is not due to monetary reasons, but mainly due to external factors. Therefore, the trend of maintaining high inflation was expected. Over the past month, global prices have seen an increase in prices for individual goods, including livestock and crop production, which hinders the reduction of inflation in the country. And this factor does not give any reason to talk about the possibility of a double reduction in the level of inflation in the country in just one year.

Think about it, if high inflation this year occurred mainly under the influence of external factors, then why should they decline in a year. Did external factors begin to change in favour of Azerbaijan? Yes, oil stably fluctuates in the range of 60-65 dollars per barrel, but otherwise no special positive changes are observed. The economic situation of our main foreign trade partners -- Russia and Turkey -- leaves much to be desired. Even the largest experts today cannot predict, say, the exact exchange rate of the rouble or the lira for the next year, although they are all confident of a sharp drop in their price. This, of course, will lead to inflation in these countries and worsen the situation of our partner neighbours. And Azerbaijan can hardly make an exception.

As Rustamov noted, the rate of the manat, which in recent years was the main driver of inflation, has stabilised. The CBA carries out a conservative monetary policy taking into account inflation. To the supporters of accelerating inflation through the money supply, he said that this process has a very serious macroeconomic aspect. Decrease in incomes of the population, internal demand leads to decrease in economic growth, loss of workplaces. At the same time, the foundations of macroeconomic stability have been created in the country. Ahead are serious tasks, such as strong financial discipline, macro-anti-inflationary measures, liberalisation of tariffs of natural monopolies and prices.

How does the CBA intend to keep stability in the foreign exchange market next year? After all, the manat rate no less than the other anti-inflationary measures directly affects inflation. Elman Rustamov did not ignore this question. He predicts stability in the foreign exchange market, but again provided that there are no shocks in foreign markets. The main task of the chief banker is to accelerate the pace of economic growth, for which an effective macroeconomic policy, continued structural reforms and the development of human capital is needed. And in the medium term, the country needs to gradually move from a stabilising to a stimulating macroeconomic environment, for which it is necessary to reduce the level of inflation, to activate the money market, and to stimulate fiscal policy. 'In particular, more funds are directed from the state budget to the development of human capital, rather than to passive spending. This is an important international trend,' he stressed. And only at the end Rustamov said that it was necessary to complete the restructuring in the banking sector in the medium term, continue the process of increasing the capitalisation of banks, and resolve the issue with the troubled assets of banks.

Unfortunately, it remains unclear how the chief banker is going to maintain currency stability, if it again depends on external shocks, the probability of which, again, has to be repeated, is very high. And speaking about the acceleration of the rates of economic growth, for some reason, only in the end he speaks about the need to connect the country's banking sector to this process. True, since the beginning of this year, the manat has strengthened by 4%, and further strengthening of its rate could lead to a number of macro- and microeconomic risks. Preventing such an undesirable factor can be attributed to the merits of the CBA. At the same time, this factor once again confirms that the manat rate is still not completely free.

Among the merits of the CBA could be named many more indicators, and no one denies its desire to rectify the situation. The aggregate liabilities of commercial banks and non-banking organisations to the CBA fell, though insignificant, but below 7 billion manats. The dollarisation level dropped to 70%, the CBA's currency reserves grew by 31%, the balance of payments surplus for 9 months amounted to 1.1 billion dollars, External liabilities of the banking sector decreased by 6%. True, the last two circumstances are more connected with the growth of oil quotations and the transfer of troubled assets of the International Bank to the state in the amount of 2.266 billion dollars (3.85 billion manats), but this is also the merit of the CBA.

At the same time, unfortunately, the share of problem loans continues to grow at the same time, which already makes up 15% of 12,437.2 billion manats, the aggregate loan portfolio of banks and non-bank credit organisations of the country. And the bank deposits of the population as of November 1 compared to the beginning of the year decreased by 2.3%, amounting to AZN 7 bn 280.1 million. In January-October of 2017, the banks' credit investments decreased by 23.6% or AZN 3 bn 648 mln compared to the same period of last year.

Disadvantages can also be listed for a long time. All this makes us think about how realistic is the current forecast of Elman Rustamov about the double reduction in the level of inflation in the country...

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