Dollarization leaves Azerbaijan economy vulnerable to undesirable trends abroad

Dollarization leaves Azerbaijan economy vulnerable to undesirable trends abroad
# 26 September 2008 08:59 (UTC +04:00)
This is the herald of dollarization in the national economy.The National Bank of Azerbaijan said foreign currencies, especially the US dollar accounted for 46% or AZN 2 912.9 million of the bank loans totaling AZN 6 361.5 million as at August 1.
Interestingly, the currency structure of loans has changed since 2006 until when loans in foreign currencies prevailed. For example, loans in foreign currencies made 62% of total loans at the end of 2005 and 51% at the end of 2006.
The structure is difference in deposits. Deposits in foreign currencies account for 57.4% of total deposits (AZN 4 049.1 million), 84% of which are term deposits and 16% are current accounts. That is to say, depositors prefer foreign currencies when putting their money in banks.
The dynamics of the US dollar against manat has gradually changed and declined since 2005.
In this case, it is more advantageous to take out loans in dollar and put deposits in manat. However, the reality is on upside down. This trend shows Azeri economy’s conventional dependence on the US dollar. That is why the ratio of the domestic foreign exchange market to GDP is 60.6%.
The main reason for dollarization is that the national currency is the number one choice for business subjects. This usually is the case when the dollar is more steady and strong against the national currency but the manat has been stronger for long time.
However, the dollar is not only the currency of choice for transactions but also for saving.
Also, most of goods (mainly imports, real estate, cars) are sold in dollar in the country.
Experts also argue that one of the reasons behind the dollarization is that the central bank has low curb on the money supply in the open market.
The most negative effect of the dollarization is that the economy becomes more vulnerable to fluctuation in the US financial system.
One must admit that such cases are regular in Azerbaijan.