Monetization rate in Azerbaijan lags far behind international practice

Monetization rate in Azerbaijan lags far behind international practice
# 14 November 2008 10:32 (UTC +04:00)
The National Bank of Azerbaijan told APA-Economics that money supply M2 reached AZN 5 514.5 million as of October 1, its ratio to GDP (AZN 30 370.4 million) for this period stood at 18.2%.


The M2/GDP ratio measures the extent of monetization of the economy, and is the first symptom of liberalization, and inflation measures price instability in the economy.
This ratio makes 90-120% in the developed countries. By international practice, this ratio should be as high as 70% in developing markets, but most countries can’t achieve this.
In economics, money supply, or money stock, is the total amount of money available in an economy at a particular point in time.
M2 is M1 + time deposits, savings deposits, and non-institutional money-market funds. M2 is a broader classification of money than M1. Economists also use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 contains cash and assets that can quickly be converted to currency.
By classic macroeconomic theory, M2/GDP ratio measures the extent of money in the economy whereas this axiom is questioned because it doesn’t answer what causes the difference between GDP and money supply.
So, this ratio gauges whether money supply is too low or much in the economy and necessitates an increase or decrease respectively to reach the normal level.
It is generally accepted that an increase in money supply stimulates inflation. But this is the case in unhealthy economy and financial system.
However, injecting money into the financial sector, including the real economy by loans to increase the efficiency could boost production, reduce cost price and, ultimately bring down production costs.
Investments account for 5.6% of the assets in Azerbaijan’s banking system and most of the investments went to the banks’ fixed capital.
Besides, 64% of bank loans went to non-real economy.
So, we can sum up that the desired result couldn’t be achieved in Azerbaijan by increasing the money supply to raise monetization rate.
Besides, high monetization level is the indicator of predominance of long-term financial means in the economy while low monetization level is the sign of prevailing short-term investments.
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