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Real effective exchange rate is expected to further rise in Azerbaijan

14 October 2008 14:58 (UTC +04:00)

The REER increased 8.5 percentage points since January, 1.
The REER is the weighted average of the countryâ€™s currency relative to currencies of major trading partners, and it is calculated by taking into account the countryâ€™s share in a given nationâ€™s foreign trade.
That means an average rate of the manat against the currencies of countries involved in Azerbaijanâ€™s foreign trade.
As the inflation rate in each country is assumed to broadly indicate the trends in domestic costs of production, the REER is expected to reflect foreign competitiveness of domestic products.
Nevertheless, effective exchange rate indicators are widely used to assess competitiveness.
An appreciation trend of the real effective exchange rate is considered unfavorable for the growth of export and import competing industries. This refers to the low competitiveness of domestic products.
One of the dimensions of the monetary policies pursued by the central bank in 2008 is the exchange rate policy.
As part of improving the mechanism of exchange rate policy is to switch the target from the US dollar to the dual-currency basket of the US dollar and euro.
These changes in the exchange rate policy have increased the central bankâ€™s levers to influence the nominal effective exchange rate and the real exchange rate.
By influencing the nominal effective exchange rate, the National Bank of Azerbaijan tries to preserve the competitiveness of non-oil sector and support economic diversification.
However, these measures have still not yielded good results - as at September 1, the REER for the non-oil sector rose 7.1 percentage points from early this year to 97.1%.
Overall, the rate is 2.9% below that of 2000, proving that the competitiveness of non-oil sector declines gradually over this period.
The REER could be cut down in two ways. The first is to lower inflation which is unrealistic now and the central bank doesnâ€™t have such a lever.
The second is a sharp devaluation of the manat, which is contrary to macroeconomic policy.
Thus, we can anticipate even more rise in real effective exchange rate which reflects the competitiveness of the economy.