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Elman Rustamov


Managing the Flows

Governor, Central Bank of Azerbaijan


Elman Rustamov started his career in 1973 at the USSR State Planning Committee, later becoming Chief Councilor at the Presidential Office of the Republic of Azerbaijan. In 1992 he became the First Deputy Chairman of the Management Board of the National Bank of Azerbaijan, and later rose to become Chairman. In April 2000 he was appointed Governor of the Central Bank of Azerbaijan and is currently serving his third term.

What is the monetary policy framework of the Central Bank of Azerbaijan (CBAR)? The monetary policy target is to keep inflation at an acceptable level. However, the Central Bank considers […]

What is the monetary policy framework of the Central Bank of Azerbaijan (CBAR)?

The monetary policy target is to keep inflation at an acceptable level. However, the Central Bank considers financial stability a target as well when pursuing monetary policy. CBAR counts money supply and the exchange rate as interim targets. Benchmarks for these parameters are determined depending on the macroeconomic environment in the country and phases of the economic cycle. The Central Bank utilizes both liquidity injection and sterilization to primarily regulate money supply. Liquidity injection tools include different types of bank lending, as well as the purchase of various forms of securities. Sterilization tools are comprised of the direct or temporary sale of short-term CBAR notes as well as required reserve norms. The Central Bank manages the exchange rate through sale-purchase operations in the forex market. Overall, the bilateral exchange rate of the manat against other foreign currencies has recently been formed depending on the forces of supply and demand in the forex market. CBAR operations are solely directed at the prevention of sharp fluctuations. Currently, the Central Bank is working on improving the monetary policy strategy and the formation of its counter-cyclic design given the post-crisis challenges.

What is the interest rate policy that CBAR is using?

The interest rate policy of the Central Bank depends on the country’s macroeconomic situation, the level of liquidity, and the presence of overheating in the economy. In the event of liquidity shortfalls in the economy, the Central Bank reduces interest rates on its operations. In response to the negative impacts and the deflation threat arising from the global crisis on the Azerbaijani economy, the Central Bank step-by-step decreased the refinancing rate from 15% to 2%. When aggregate demand starts to increase with inflationary pressures underway the Central Bank raises the refinancing rate. Given macroeconomic expectations, the Central Bank started to change its monetary policy toward neutrality from the end of 2010 and the refinancing rate was gradually increased from 2% to 5.25%. The Central Bank will thereafter pursue adequate interest rate policies considering the macroeconomic situation in the country. To note, the refinancing rate of the Central Bank affects interest rates in the country both physically and psychologically. One of the functions of the refinancing rate is to shape adequate expectations hinting to the key direction of CBAR’s policy benchmarks.

Thus, the Central Bank, making changes to the refinancing rate, transfers certain “signals” to the economy regarding the direction of the business climate that feed through to interest rates in the market.

Deposits in the local banking system have also shown strong growth over the past year. Can this be described as an indicator of an increase in confidence in the banking sector?

If the population rather than professional players of the market entrust their savings to banks, it displays confidence in the banking sector. It also indicates the confidence of the population in the Central Bank as an effective regulatory institution. Within the last 10 years deposits have increased 36 times and equal $4 billion. The growth rate in 2010 increased 36%, and the same trend is being observed in 2011. The sustainability and stability of the banking sector during the global crisis enhanced its credibility. The crisis witnessed no bank bankruptcy and no loss of deposits. The level of deposits protected through the deposit insurance system increased by five times to about $40,000. As a result, even at the peak of the global crisis in 2008 and 2009, the growth rate of deposits was around 30%.

What is the reason for the limited presence of foreign banks in Azerbaijan? Do you see the market as ready for a larger foreign presence in the system?

The Azerbaijani banking sector is open to foreign bank capital and there are no constraints on the entry of foreign banks to the market. The banking sector hosts several renowned foreign banks, including Yapı Kredi, a part of the Unicredit Group, as well as Russia’s second largest bank, VTB Bank. Foreign capital participates in the capital of over 20 banks. These investors include the European Bank for Reconstruction and Development (EBRD), the International Financial Corporation (IFC), and the German Investment Corporation (DEG). The Central Bank is interested in the presence of renowned bank brands in our country. There is a high level of interest in the Azerbaijani banking sector. The economic crisis slowed the entry plans of a number of foreign banking institutions to the Azerbaijani market. The local banking sector should be prepared to embrace the above expectations regarding foreign bank capital. The Azerbaijani banking sector is ready to welcome foreign players according to its development level, as well as technological and institutional standing. Favorable conditions are available for the participation of foreign banks, including a legal and regulatory framework in compliance with international best practices and standards, and effective banking supervision.

What are the priorities of the exchange rate policy of the Central Bank?

The exchange rate policy of the Central Bank is aimed at maintaining a low level of inflation in the country. However, the Central Bank, when pursuing its exchange rate policy, targets preserving the international competitiveness of the country. It should overall be mentioned that the exchange rate policy of the Central Bank has played an exceptional role in preserving macroeconomic and financial stability in recent years. Major international institutions and esteemed foreign experts as well assess the exchange rate of the manat as one of the key anchors of macroeconomic and financial stability. It is appropriate to mention here that the psychological impact of the wave of devaluation in a number of foreign countries—including our neighbors—at the height of the global crisis, caused some agiotage in our internal foreign exchange market. Some people, alarmed at the devaluation of the manat, began to convert their savings in the national currency into forex. Under these circumstances we conducted in-depth analyses related to exchange rate policy, and comprehensively assessed the possible implications of devaluation. We assessed over 20 macro and micro factors. Given the considerable prevalence of foreign exchange reserves over a critical level we found the maintenance of a stable exchange rate of the manat advisable built upon these evaluations. Further processes proved the correct position of the Central Bank. According to the IMF, the Central Bank successfully preserved financial stability through stable exchange rate and liquidity injections into the banking sector. A stable exchange rate enabled a reduction in the level of inflation, a slowdown of the temporary growth in dollarization, and the prevention of negative impacts on households and bank balances. The countries where devaluation was conducted suffered more from recessionary effects during the crisis. According to IMF studies, the slowdown in growth for stable exchange rate countries was 0.9 basis points lower than in countries with a floating exchange rate in 2008—2009. In the new post-crisis period the Central Bank is intending to gradually liberalize the exchange rate regime to increase the counter-cyclical capability of its monetary policy. Depending on the diversification of the country’s economy, and thus, currency supply channels, as well as the development of internal foreign exchange market infrastructure, the Central Bank is planning to gradually allow the market to set the exchange rate. In upcoming years, supply and demand in the forex market will mainly regulate the exchange rate of the manat, which will provide a level of flexibility in monetary policy to effectively target inflation.



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