Vusal Qasimli, Executive Director of the Center for Analysis and Communication of Economic Reforms (CAERC), responded to questions regarding the current situation in the currency market.

Currently, cash outside banks (M0) totals 9.3 billion AZN. On average, each Azerbaijani citizen spends approximately 300 AZN per month, totaling 3 billion AZN monthly for consumption. Based on this, the potential reserves in banks available for currency exchange in manat are limited. In the coming days, the intensity of currency exchange in banks is expected to decrease, as monthly consumption accounts for about one-third of the cash supply. This portion of cash is needed for everyday expenses and does not need to be converted into dollars.

This week, during three currency auctions at the Central Bank with participation from the State Oil Fund, an average of 700 million USD was sold to banks. Notably, the demand at each subsequent auction was lower than the previous one. This suggests that in the coming weeks, especially considering Novruz holiday purchases in manat, the frequency of converting manat to dollars will decline.

Regarding converting manat deposits to dollars, this entails a potential loss of up to 10% on average due to interest rate differences and conversion costs. According to rational choice theory, converting manat deposits to dollars is currently riskier, and citizens are reluctant to do so. In contrast, while in 2014 manat deposits exceeded 9 billion USD, today this figure is 5.1 billion USD equivalent. Pressure to dollarize manat deposits is therefore significantly lower than in 2014.

Meanwhile, freely convertible currency deposits reached 10.6 billion AZN in January of this year, 2.6 times higher than in 2014. The increase in deposits in freely convertible currencies helps reduce pressure on the currency market.

Overall, in 2014, 81% of the broad money supply (M3) was in manat, while now it is 63%. The share of manat in the broad money supply has decreased by 29% between 2014 and 2020, meaning there is less need to convert manat into dollars compared to 2014. Comparing the ratio of cash outside banks to the broad money supply with the same indicator in 2014, a significant decline is observed – now at 45%. When calculated across monetary aggregates, pressure for dollarization is significantly lower than in 2014. Thus, it is currently easier for the government and Central Bank to meet demand in the currency market.

Considering expected reductions in imports from China, Iran, and other countries this year, as well as last year’s monetary gold imports, less foreign currency will be required for import needs compared to previous years.

It is important to note that the Central Bank’s foreign currency reserves primarily serve as a macroeconomic “stabilizer” and “safety cushion.” Currency auctions held this week were conducted jointly with the State Oil Fund, which plans to supply 6.8 billion USD to the domestic market this year to finance budget transfers and improve housing conditions for refugees.

The main current task is to regulate supply and demand in the currency market and prevent panic. The demand for foreign currency by the population will be fully met.