∘ Tariel Gurbanov ∘ Asif Mustafaev ∘ Ilkin Bayramov ∘
CURRENCY REGULATION PROBLEMS OF CYCLICAL DEVELOPMENT IN THE ECONOMY OF AZERBAIJAN

Annotation. The presented article examines the main features of currency regulation in the process of ensuring cyclic development. First of all, the essence of cyclical development for the modern period and the main economic indicators in the process of its provision are noted. Undoubtedly, the quantitative and qualitative changes in the global economy in recent years have created certain complexities in the inter-cycle interactions of cyclic development. In this regard, the article focuses on this factor and highlights the conditions for its provision for the Azerbaijani economy. The main emphasis is placed on currency issues. The main reason for this is that over the past 10 years there has been several devaluation processes in the Azerbaijani economy and its consequences are heavy for the economy. Therefore, the article tries to find an inter-cycle relationship of cyclic development and evaluates its main possibilities of influence.

Keywords: cyclical development, currency, regulation, Azerbaijan economy, macroeconomic indicators, Central Bank, Capital, etc. 

Introduction

The cyclical development of the economy is repeated fluctuations in economic activity that occur in a certain sequence of stages. These stages make up the economic cycle or business cycle and are characterized by changes in production, employment, income and other macroeconomic indicators. It is characterized as a period of expansion (upsurge), which is the main stage of the economic cycle-an increase in production and economic activity. This period in itself is distinguished by the activity of the main economic indicators. To such a system of indicators, it is necessary to highlight an increase in employment and a decrease in unemployment, an increase in incomes and consumer spending of the population, an increase in investments in business and infrastructure projects, and an increase in demand for goods and services. When there is growth in the economy on the main four mentioned indicators, cyclical development can be mentioned. However, ensuring cyclic development does not occur suddenly. It has other stages, which, accordingly, complement each other. The main stage of cyclic development is undoubtedly considered to be its peak period. This circumstance can also be characterized as the highest stage in the development of the economy over the past years. During the peak period, it becomes characteristic that economic activity reaches its maximum level, employment and productivity are at a high level. Undoubtedly, economic experience has proved that economic growth cannot fully cover the long term. In this regard, certain stagnation occurs in the economy, the main aspects of which are as follows:

- Reduction of production and economic activity.

- Increase in unemployment.

- Reduction of income and consumer spending.

- Reduction of investments and reduction of business activity.

- Decrease in demand for goods and services, etc.

Currency regulation plays an important role in reducing the effects of economic cycles and maintaining macroeconomic stability. The relationship between cyclic development and currency regulation is manifested in the following aspects:

1. Maintaining exchange rate stability: the growth of exports and capital inflows during expansion are considered factors that strengthen the national currency. The central Bank intervenes in the foreign exchange market to avoid excessive strengthening of the currency and to maintain the competitiveness of exports. During the recession, however, the decline in exports and capital outflows weaken the currency. In this aspect, the Central Bank uses foreign exchange reserves to stabilize the exchange rate and prevent excessive devaluation, which can lead to inflation.
2. Capital flow management: during periods of upsurge, foreign capital flows can be significant, which requires measures to manage these flows in order to avoid overloading the economy. In this regard, capital outflows during the recession can aggravate the recession, which means that the Central Bank imposes restrictions on the export of capital in order to stabilize the financial system.
3. Monetary policy measures: during periods of economic growth, the Central Bank raises interest rates to prevent inflation and prevent overheating of the economy. During the recession, the central Bank can lower interest rates and carry out quantitative easing to promote economic activity, support lending. Thus, currency regulation is an important tool that helps to reduce fluctuations in economic activity, ensure macroeconomic stability and promote sustainable economic development. 

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Currency regulation in Azerbaijan involves the management of the value and volume of the national currency by the central Bank or other monetary regulatory body. We can cite monetary policy as an example as one of the main economic foundations of currency regulation. Monetary policy-central banks regulate the currency through interest rates and open market operations to control inflation, stabilize the currency, and support economic growth. Monetary policy (or monetary policy) is a set of measures taken by central banks to achieve macroeconomic goals such as controlling inflation, maintaining the stability of the currency and promoting economic growth, and regulating the money supply and interest rates in the economy. Central banks such as the US Federal Reserve system (FED), the European Central Bank (ECB) and the people's Bank of China (NBK) use a variety of monetary policy tools. The main aspects and tools of monetary policy are manifested in its main goals. These goals include inflation control (the goal is to keep prices stable. High inflation undermines purchasing power and economic stability), currency stabilization (maintaining a stable exchange rate of the national currency against other currencies to promote International Trade and investment) can be attributed. In addition, maintaining financial stability is considered one of the main goals of currency regulation. This circumstance is applied in order to avoid excessive fluctuations in financial markets and the banking sector. In this case, in monetary siastin, it is first necessary to look at the measures of central banks on interest rates.

As a basic rate (refinancing rate), we can indicate that central banks set the basic interest rate at which they issue loans to commercial banks. Changing this rate affects all other interest rates in the economy, including rates on loans and deposits for consumers and enterprises, which is directly related to the continuity of cyclic stages. Measures such as reducing interest rates are usually used to stimulate economic activity during periods of recession. Low interest rates make loans cheaper, which stimulates borrowing and investment. Interest rate increases, on the other hand, are used to curb inflation during periods of economic growth. Higher interest rates make loans more expensive, which stops borrowing and slows down growth.

In particular, it should be noted that the process of conducting open market operations on currency regulation is also carried out. In this case, central banks buy or sell government securities on the open market to regulate the money supply. Purchase of securities in this case, the Central Bank increases the money supply in the economy, as it pays for securities, increases banks reserves and stimulates lending. In contrast, the sale of securities, on the other hand, reduces the money supply, since the central Bank withdraws money from the economy by selling securities and reducing banks reserves.

As an example on a global scale, we can cite the fact that the US Federal Reserve System (FED): in response to the 2008 financial crisis, the Fed reduced interest rates to zero and began a quantitative easing (QE) program by purchasing government and mortgage securities to increase liquidity and stimulate the economy. The European Central Bank (ECB), on the other hand, took advantage of negative interest rates and made large-scale asset purchases to combat low inflation and promote economic growth in the Eurozone. The people's Bank of China( NBK) accordingly regulated interest rates and reserve requirements to control the money supply and stabilize economic growth amid global economic instability.

Monetary policy plays a key role in managing economic activity and maintaining macroeconomic stability. Central banks use various tools to control inflation, stimulate growth and ensure financial stability. The effective use of these tools allows you to reduce economic fluctuations and ensure the stable development of the economy.

The main link in currency regulation is undoubtedly considered to be the exchange rate policy of the state. Exchange rate policy is the management of the value of a national currency against other currencies, which may include fixed, floating or controlled exchange rates. This was carried out regularly in the Azerbaijani economy from 2015 to 2017 and the transition to a floating exchange rate was approved. Besides exchange rate policy, it is the set of measures and strategies applied by the state and monetary authorities (usually central banks) to control the exchange rate of the national currency against other currencies. The purpose of the course policy is to ensure economic stability, maintain the competitiveness of exports, control inflation, and attract foreign investment. Exchange rate policy can include various exchange rate regimes, each of which has its own characteristics and is applied depending on the economic conditions and strategic goals of the country. In exchange rate regimes, the fixed and floating exchange rate has manifested itself mostly in the practices of countries. Undoubtedly, depending on what stage of cyclic development it is at, these modes are interchangeable, and each of them, cyclically, has its positive and negative sides. Within a fixed exchange rate, the Central Bank determines and maintains a certain value of the currency against another currency or basket of currencies. This value is fixed and maintained through interventions in the foreign exchange market. The positive aspects of this regime can be cited as an example of price stability and simplification of forecasting for International Trade and investments, and control over inflation with reference to a stable foreign currency. However, this regime also has certain disadvantages. This circumstance brings restrictions on monetary policy. If it is necessary to maintain the exchange rate in the country's economy, the risk of a shortage of foreign exchange reserves is also able to increase.

Within the floating exchange rate regime, the value of the currency is determined directly by the market forces of supply and demand without the intervention of the Central Bank. Automatic stabilization as its advantages, since the course adapts to economic conditions. Freedom in the implementation of an independent monetary policy, etc. We can give an example. To its disadvantages, we can cite high volatility, which can create uncertainty for International Trade and investments, the risk of uncontrolled course fluctuations affecting economic stability.

The depreciation of energy products contributed to the fight against inflation, inflation was somewhat moderated in the reporting year. Towards the end of the year, both the recovery in economic activity and price cuts have eliminated the staqflationary concerns of international organizations for the world economy, and the expected wage-inflation spirals have not followed. The growth of the Consumer Price Index at a relatively weak pace compared to the previous year was positively influenced by the elimination of supply chain disruptions and high price shocks, as well as the fall in China's export products. Against the background of a decrease in prices for goods, a decrease in prices for services was not traced, which hindered disinflationary trends. The fact that the main production costs in the service areas consist of wages did not contribute to a price reduction in this area. According to IMF data, the Consumer Price Index increased by 6.8% worldwide, and the growth rate weakened by 1.9 percentage points compared to the previous year (Table 1). The rapid recovery of supply volumes in OECD in the post-pandemic period has contributed to a slowdown in inflation. In low-income countries, however, inflation continued to remain high, which was mainly due to inflationary imports from the world market (food, fuel and fertilizer), as well as the depreciation of national currencies. According to the IMF's regional analysis of inflation, the weakening rate of price growth was due to various reasons in the regions, declining energy prices were mostly in the Eurozone, and tight monetary and fiscal policies were the main factor in the United States.

Table 1

Annual change in the World Consumer Price Index, in%

Source: [1] 

-       According to data released by the World Bank, in 2023 food products fell by 9.2%, including oils by 18.1%, grain by 11.5%, and fertilizer prices fell by 34.9%.

-       Main features of currency regulation in Azerbaijan

-       Currency regulation in Azerbaijan plays a key role in maintaining economic stability and control over monetary policy. The central body responsible for conducting currency policy is the Central Bank of the Republic of Azerbaijan. It should be noted that the main legislative document on currency regulation in Azerbaijan is the law of the Republic of Azerbaijan on “currency regulation” [https://e-qanun.az/framework/9238]. The Government of Azerbaijan has chosen several main objectives as a priority in currency regulation. They can be attributed to:

-       - Protection of the stability of the national currency (Azerbaijani AZN).

-       - Inflation control.

-       - Ensuring sustainable economic growth.

-       - Reduction of risks associated with external economic factors.

-       In order to achieve the stated goals, the central Bank periodically implements a number of measures. These events have become more intensive since 2015. It belongs to them:

-       - Intervention in the foreign exchange market: the Central Bank actively participates in operations in the foreign exchange market in order to stabilize the exchange rate of the manat. Interventions may include buying or selling foreign currency to regulate exchange rate changes. It should be borne in mind that in 2023 the foreign exchange market of the Central Bank amounted to 1.4 billion dollars. The US dollar has been a purchase-oriented intervention. As a result, the foreign exchange reserves of the Central Bank increased by 20.3% to 10.8 billion. Exceeded the US dollar.

-        Reserve policy: the Central Bank collects and manages international reserves, which allows maintaining the stability of the national currency and ensuring liquidity in the event of external shocks.

-       Interest rate policy: the central Bank regulates interest rates to influence economic activity and inflation. During periods of economic upsurge, interest rates can be increased to prevent the economy from overheating, and reduced to promote growth during periods of recession. The central Bank began lowering interest rates since November 2023, when inflation in the country returned to its target framework. Benchmark interest rates, which by November 2023 were 9.00 percent, fell to 2024 percent, with 25 and 50 basis points lowered in each of the sessions until May 7.25. In total, interest was reduced by 175 basis points to four meetings. However, the benchmark interest rate above 7% is considered a strict monetary policy [2].

- Capital control: for residents and non-residents, measures to control the movement of capital have been introduced, including the rules for the purchase and sale of currency, investment and withdrawal of capital abroad.

In 2015, after a long period of financial stability in the Azerbaijani economy, there was a serious devaluation. Most people in Azerbaijan regarded the devaluation as a “rise in the dollar”. In fact, this event was a depreciation of the manat against the dollar and other currencies against the dollar. It should be noted that after the first devaluation, the manat depreciated by 34% against the dollar, and the currency rate changed from “1 USD = 0.78 AZN” to “1 USD = 1.05 AZN”. 10 months after the first devaluation, that is, on 21.12.2015, the manat did not withstand the pressure and was depreciated for the second time. This time the coefficient of depreciation was even greater – 47%. The new course was set as "1 USD = 1.55 AZN “and the Central Bank of the Republic of Azerbaijan informed the public about its decision to switch to the” floating exchange rate" system. In subsequent periods, the USD / AZN exchange rate repeatedly moved up and down, and in some cases even reached the mark of 1 USD 1.9-2 AZN. At present, this course has stabilized for a long time and is set at around “1 USD = 1.70 AZN”. In relation to other currencies except the Dollar, the manat began to strengthen its position after 2015. Make this clear from the presented table (see table 2).

Table 2

Official average exchange rate of Azerbaijani manat against foreign currencies

(by the end of the year) 

Source: [3] 

1. The practice of the post-devaluation period showed that although the exchange rate was weak, it conditioned a number of positive trends that would stimulate cyclical development in the economy. To positive points we can attribute the following:
2. A positive balance of foreign trade operations was achieved, and even starting in 2017, this difference began to grow. The price effect in export operations for a number of key products also began to increase.
3. The financial situation of exporters began to improve significantly. Their budget and the debt burden on other creditors have been drastically reduced. Statistics also showed that the ratio between the obligations of a number of exporters to the budget and the profit from exports began to decline.
4. Due to the increase in the financial resources of exporters, investments in a number of non-oil sectors also began to increase. Most exporting enterprises began to resume production activities, which had stalled.
5. Due to the decline in imports, the demand for the production of domestic products began to increase. And dependence on imports decreased accordingly. The improvement in the financial conditions of enterprises and the growth of aggregate demand have stimulated the growth of production in most Processing Industries. For this reason, the recession observed in the processing industry in 2016 stopped and was even offset by a 2 percent increase [4].

Azerbaijan is currently using the managed floating course. This means that the exchange rate of the manat is determined by the market, but the central Bank can intervene to eliminate excessive fluctuations or achieve target indicators.

A number of steps have also been taken to regulate foreign exchange transactions. For banks and licensed financial institutions on the purchase and sale of currency, the right to conduct transactions on the purchase and sale of foreign currency is provided. The central Bank establishes rules and limits for such operations. The volume of transactions on the non-cash foreign exchange market in 2023 amounted to 29.5 billion. It has been 4 in the US dollar equivalent. 79% of non-cash currency transactions were made in US dollars and 21% in other currencies. 21% of foreign exchange transactions were carried out in the interbank foreign exchange market (BVB) and 79% in the intra-bank foreign exchange market (BDVB). The volume of operations in the BVB in the reporting year amounted to 6.2 billion. It was equivalent to US dollars (including operations of Sofaz and Central Bank). In this segment, 98% of transactions were carried out in US dollars. The turnover on foreign exchange transactions in the BVB was formed mainly due to transactions on the “Bloomberg” platform. In the reporting year, while maintaining the existing auction mechanism in the interbank foreign exchange market, Bloomberg's “BMatch” platform was activated, which allows the Central Bank to react flexibly to foreign exchange market processes, allows banks to track demand and supply for foreign currency in real time and conclude transactions at the most optimal exchange rate. The volume of foreign exchange transactions in BDVB amounted to 23.3 billion. It was the equivalent of US dollars, of which 74% were transactions in US dollars. 93.8% of foreign exchange transactions in BDVB accounted for foreign exchange transactions with legal entities. The volume of transactions carried out by banks on the purchase and sale of foreign currency in cash amounted to 3.8 billion. It was in US dollar equivalent. 83.9% of this was made up of transactions in US dollars. For the first time in recent years, foreign currency purchases by banks exceeded sales in 2023. As a result, net sales settled in the negative zone [5].

The Central Bank and the government regulate foreign exchange transactions related to exports and imports in order to ensure the timely return of foreign exchange income and prevent capital outflow. Also, the Central Bank monitors and analyzes the country's balance of payments, taking measures to regulate the imbalance. 

The result

Currency regulation in Azerbaijan is aimed at maintaining the stability of the national currency and the economic system as a whole. The measures carried out by the central bank include interventions in the foreign exchange market, Resource Management, interest rate regulation and control over the movement of capital. These measures help to reduce the impact of foreign economic shocks and ensure the sustainable development of the economy. The main directions of currency regulation in Azerbaijan for the upcoming period should take into account the current economic situation, global trends, as well as domestic economic goals and priorities. Some of the main directions that may be relevant are:

- Strengthening currency control:

1.  Strengthening the monitoring of foreign exchange transactions to prevent illegal withdrawal of capital.

2.  Application of measures to ensure transparency and accountability of financial transactions.

- National currency support:

1.  Conducting a policy aimed at maintaining the stability of the manat.

2.  Interventions in the foreign exchange market, if necessary, in order to avoid sharp fluctuations in the exchange rate.

- Liberalization of the currency regime:

1.  Gradual removal of restrictions on foreign exchange transactions to stimulate international trade and investment.

2.  Facilitating access to foreign currency for enterprises, especially for exporters.

- Foreign exchange market development:

1.  Development of foreign exchange market infrastructure, including the introduction of new tools and services.

2.  Increasing liquidity and accessibility of the foreign exchange market for participants.

- Integration with international financial institutions:

1.  Cooperation with international financial organizations to exchange experience and receive technical assistance.

2.  Harmonization of the best international practices and standards in the field of currency regulation.

- Management of foreign exchange reserves:

1.  Effective management of State foreign exchange reserves to ensure financial stability.

2.  Diversification of resources to minimize risks.

- Ensuring macroeconomic stability:

1.  Coordination of monetary policy with monetary and fiscal policy.

2.  Prevention of inflation and maintenance of sustainable economic growth.

- Export Promotion and investment attraction:

1.  Creation of favorable conditions for exporters, including supporting currency hedging.

2.  Application of incentives to attract foreign direct investment.

- Education and advanced training:

1.  Improving the financial literacy of the population and entrepreneurs in the field of foreign exchange operations.

2.  Conducting trainings and trainings for specialists in the field of currency regulation.

These directions can help Azerbaijan strengthen its foreign exchange policy, increase economic stability and stimulate further development. 

References 

1. https://sai.gov.az/files/2023_icra_rey-336563546.pdf
2. https://banker.az/m%C9%99rk%C9%99zi-bank-faiz-q%C9%99rari-verir-yumsalma-davam-ed%C9%99c%C9%99kmi/]
3. https://www.stat.gov.az/source/finance/
4. Ganbarov F. Exchange rate policy: new challenges and opportunities. Baku -2021. P.156
5. https://www.cbar.az/page-13/monetary-policy-review

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