Why are our foreign exchange reserves depleting?

In 30th of October, foreign exchange reserves was worth 6 billion 834.6 million dollars. In general, the currency reserves have been steadily decreasing since July of 2014. The figure for that period was 15.193 billion US dollars. The reason behind the depletion of our currency reserves is mostly known. The global and regional events, sharp drop in oil prices, devaluation are considered to be main reasons. 

The impact of these processes is not felt as much in neighboring countries such as Georgia and Armenia and their currency reserves have not been steadily decreasing like ours. Certain measures have been taken to develop the non-oil sector recently. Despite all these efforts, why are we not able to save our currency reserves? What is the reason for the steady decline of foreign exchange reserves in our country compared to other neighboring countries? What measure have to be taken in order to prevent the decline? 

One of the reasons is maintaining Manat 

In his interview with our newspaper, Deputy Vahid Ahmadov stated that it is important for Azerbaijan, which is currently in a state of war, to possess large amounts of foreign exchange reserves. According to him, for a long time Azerbaijan managed to maintain it's foreign exchange reserves at the rate of $53-54 billion dollars: " But due to the events happening worldwide, as well as the neighboring countries, and the sharp devaluation in the national currency have had a serious impact on the foreign exchange reserves. While the Central Bank of Azerbaijan held 16 billion manat in its foreign exchange reserves after the devaluation in February, nowadays the volume of the foreign exchange reserves is a little more than 6 billion manat. 

V. Admadov says that, the reason for the steady drop in the foreign exchange reserves is due to the maintaining of   the exchange rate of manat: " We kept the exchange rate of manat for many years. As we were making a lot of money out of oil, we did not feel its impact. That's why the exchange rate was maintained. It was a right thing to do because the living conditions of our people had to be taken into account. As the leader of the country mostly paid attention to the social conditions, he gave instructions to maintain the exchange rate of manat. But the recent drop in the oil prices, the economic deterioration put pressure on manat too. "

According to the MP, for the time being, resources have been allocated to maintain the rate of manat. But he thinks that sooner or later, manat has to drop to its real value, its market price. There has to be a slight devaluation: " The CBA has started this process. If you have paid attention, dollar has slightly gained against manat. Manat is slowly nearing its market price. I mean, there has to be a soft devaluation in order not to suddenly shock people. Because the reserves of the Central Bank of Azerbaijan has sharply declined. They cannot allocate 500-600 million every month to save manat. It is an important issue. It is true that we would have maintained manat, if we could. But the global processes makes it difficult to maintain the current exchange rate of manat. "

“Foreign exchange reserves takes place in countries that have reserves”

V. Ahmadov cites the sharp drop in the decrease in the revenues from the Oil Fund as one of the reasons for the decline in the foreign exchange reserves. " And this has happened against the backdrop of reduction in the oil revenues and the drop in oil prices. For instance, Russia has also witnessed a drop in their oil revenues. This happens in the countries who have reserves. What decline would happen in the countries that don't even have reserves? What I mean is, the decline of the foreign exchange reserves happens in the countries who have an oil based budget and economy. "

Our respondent says that, work is being done to develop the non oil sector in the country. But those sectors cannot be considered very profitable: "Those sectors don't generate much revenue for the economy. And this is very important. I have addressed this topic in the parliament, we have to examine the structure of the non oil sector. We have to focus on concentrating the sector that have the potential to generate a lot of revenue for the budget. The agriculture industry is not taxed. They only pay a land tax and they are free from all other taxes. Newly built technoparks are free from taxes for seven years. This term has not ended yet. In order to develop the non oil sector, Azerbaijan has made certain concessions in taxing. Agriculture is also a non oil sector. We have to pay attention to this structure in order to make more profit. Petroleum engineering has historically been an active industry in Azerbaijan. I am proposing that we build three or four good factories and to provide jobs for people, as well as providing revenues for the state budget. The government has to work on it. "

The Central Bank has to change its exchange rate policy 

Economist Vugar Bayramov blames the exchange rate policy for the decline of the foreign exchange reserves: " In neighboring countries, floating exchange rate policy is implemented. The Central Bank does not directly determine the exchange rate. But in Azerbaijan, the exchange rate is directly set by the Central Bank. Therefore, on order to supply the demand for dollar, it has to constantly intervene in the market. For example, there is a demand for a million dollar in the market today and it is purchased. While the 800 thousand of the million is supplied by the market, the rest of it is supplied by the Central Bank. The Central Bank intervenes and puts 200 thousand dollars in the market. It increased its intervention expenses and causes a reduction in the volume of its the foreign exchange rates. The Central Bank spends its foreign exchange reserves by constantly intervening in the market. Especially considering the fact that, during the last month the exchange rate of dollar was strengthened, this simultaneously caused the manat to weaken against dollar. As a result, the expenses of the Central Bank was increased."

The economist also states that the Central Bank of Azerbaijan should unequivocally make changes to its exchange rate policy to stop the reduction of its foreign exchange rates. It is important to adopt regulates, floating exchange rate policy: " More has to be done about this. The purpose here is to prevent the sharp decline of the exchange rate of the national currency by adopting a regulated, floating exchange rate. This adoption of this regime will not cause the national currency to drop, it will also stop the constant intervention of the Central Bank in the market." 

V. Bayramov noted that, the size of Azerbaijan's economy and the high demand for the foreign currency has also contributed to the depletion of our foreign exchange reserves: " If we look at the neighboring countries, the reduction in the foreign exchange reserves is associated with the reduction of people's resources. The large size of the country's economy is viewed as one of the main reasons for the increase in the demand for foreign exchange. Therefore it is projected that the Central Bank will make changes to its exchange rate policy and will adopt a regulated, floating exchange rate regime in 2016. And this will prevent the decrease in the foreign exchange reserves of the Central Bank."