Azerbaijan’s financial policy outcomes in 2024 Stable manat and growing reserves

The year 2024 has proven to be successful in strengthening Azerbaijan’s macroeconomic and financial stability. Against this favourable backdrop, the Central Bank of Azerbaijan (CBA) has progressively eased its monetary policy from late last year through the middle of the current year, while keeping the discount rate unchanged in the second half of the year. These efforts have led to increased profits and assets in the banking and insurance sectors, while also effectively managing inflation and monetary risks. Most recently, the CBA Board decided to maintain the discount rate at 7.25%, a sign of the ongoing stability of the country’s macroeconomic situation and positive outlook for the year ahead.

Since the beginning of this year, the global macroeconomic environment has been influenced by several factors, including ongoing conflicts, geopolitical tensions, and a slowdown in economic activity in key industrial and financial centres worldwide. During the crisis years of 2022 and 2023, regulatory authorities in Europe, the United States, and other developed regions focused on combating inflation. To achieve this, they implemented aggressive monetary tightening measures, including raising interest rates. As a result, by the end of last year, global price growth for goods and raw materials had slowed. However, the downside of these measures was a deepening recession, marked by a slower pace of economic growth.

As global inflation expectations have eased, many countries have shifted their focus towards improving GDP growth, reducing the tax burden, and expanding business incentives. This trend has also strengthened in Azerbaijan since the beginning of this year: the country's financial regulator has lowered the discount rate several times, bringing it down from 9% to 7.25% by June. In the following months, the regulator made no further adjustments, maintaining the rate at the end of the year. Both the upper and lower limits of the interest rate corridor remained unchanged at 8.25% and 6.25%, respectively.

As reported on December 18, the decision to keep the discount rate unchanged was based on actual and forecasted inflation within the target range (4±2%) and an analysis of macroeconomic trends. "Since the last meeting, annual inflation in Azerbaijan has remained within the target range: in November 2024, the annual average inflation rate was 4.4%. Specifically, the annual price increase for food products was 4.4%, for non-food products 2.2%, and for services 6%. The relatively low price growth in the food and non-food segments has been one of the key factors supporting the achievement of the inflation target," the regulator stated.

The next decisions regarding the parameters of the interest rate corridor will be made by the regulator in the coming year, taking into account actual and forecasted inflation, as well as the dynamics of domestic and external risk factors.

The Central Bank of Azerbaijan’s calculations are supported by a favourable external environment: unlike the previous two years, the current global macroeconomic landscape is shaped by expectations of interest rate cuts in Europe and the U.S., as well as a steady decline in global price growth for goods and raw materials. The regulator’s forecasts regarding external inflation factors also remain stable. "According to IMF data, compared to the same period last year, the global commodity price index has increased by only 0.7%. At the same time, the 7.1% strengthening of the nominal effective exchange rate of the manat over the first 11 months of 2024 has had an additional effect in reducing imported inflation," the Central Bank reported.

In this context, the fundamental condition for the stability of the monetary and credit market is the balance of key macroeconomic parameters, particularly the monetary factor. Unlike many of its trading partners, Azerbaijan has managed to maintain the manat's exchange rate against the dollar unchanged for the eighth consecutive year. All of these factors contribute significantly to the resilience of the domestic financial sector to both external and internal stresses.

According to the data provided by the regulator recently, Azerbaijan’s current account surplus for the first three quarters of this year reached $4 billion, equivalent to 7.2% of GDP. The main component of the current account is the trade balance, where, according to the State Customs Committee, a positive surplus of $5.6 billion was recorded over the first 11 months of 2024. The document notes that, amid favourable external indicators, stability remains in the currency market, and demand at foreign exchange auctions organized by the Central Bank is fully met. Overall, according to the October forecast, the current account surplus in 2025 is expected to reach $5.5 billion, with the Central Bank predicting continued stability in the currency market in the coming year.

As in previous years, the country's economy continued to grow in 2024, driven by the non-oil sector. Despite a decline in foreign trade (primarily due to a reduction in oil production and lower global oil and gas prices), Azerbaijan still maintains a positive trade balance. According to the State Customs Committee (SCC), in the period from January to November this year, Azerbaijan conducted trade operations with foreign countries totalling over $43.1 billion, which is an 8.9% decrease compared to the same period last year.

Despite this negative trend, the republic continued to see growth in strategic foreign currency reserves, which provided an additional buffer and strengthened financial stability. These reserves are also used, as needed, for sterilizing the money supply and regulating the exchange rate of the national currency. It is worth noting that the Central Bank’s foreign currency reserves increased by 1.6% since the beginning of the year, reaching nearly $11.8 billion by the end of September, significantly expanding the regulator’s operational capacity.

"As previously reported, to meet one-time government expenses, the Central Bank purchased foreign currency on the domestic market and carried out planned sales in November 2024. Despite these expenditures, by the end of November 2024, the CBA's foreign reserves stood at $10.9 billion, still significantly exceeding internationally recognized adequacy standards. For example, the current level of the regulator’s foreign reserves is twice the volume of the country’s imports of goods and services for a three-month period," stated the Central Bank.

Overall, the Central Bank’s policy on regulating the monetary and credit markets ensured their stability throughout the year and was adjusted in response to economic processes and the situation in the financial sector. Specifically, since the beginning of the year, the volume of CBA note issuance has decreased by a factor of 4.6. 

"The 1DAZIR index in November and the current period of December has remained within the current interest rate corridor, and activity in the unsecured market remains high. The average daily volume of transactions on the unsecured money market was 627.3 million manats [$368 million] in November and 402.3 million manats [$236 million] in the current month," stated the Central Bank. 

The report also notes that monetary policy instruments (including the regulator’s notes) are applied in line with financial market processes and changes in the liquidity position of the banking system. Considering the impact of changes in government account balances on banking system liquidity, the CBA has significantly reduced sterilization operations since the beginning of the year.