Central Bank Of Azerbaijan ((LINK))

The Central Bank of Azerbaijan (CBA, Azerbaijani: Azrbaycan Mrkzi Bank) is the central bank of Azerbaijan Republic. The headquarters of the bank is located in the capital city Baku.

Article 14 titled "The Banking system and money circulation" of the Constitutional Law of the Republic of Azerbaijan "On Grounds for Economic Independence of the Republic of Azerbaijan" dated 25 May 1991, stipulated the legal basis for the independent banking system and circulation of the national currency in Azerbaijan, and determined the status and authorities of the National Bank.[citation needed] The National Bank was declared a supreme emission agency, that pursued the state policy in lending, money circulation, settlements and foreign exchange relations, regulating the overall performance of the banking system and discharging reserve bank functions.

Central Bank Of Azerbaijan

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Currently, the Central Bank is guided by the third generation banking laws (second edition of the Law of the Republic of Azerbaijan on the National Bank of the Republic of Azerbaijan was adopted on 14 June 1996, and third edition on 10 December 2004).[citation needed]

The goals of the Central Bank are also to organize and ensure operations of centralized interbank and other unlicensed payment systems, as well as support the stability of the banking system. Profit-making is not the main goal of the Central Bank.[citation needed]

By October 1992, Azerbaijan had already taken a number of steps to provide the basis for a market-oriented financial system and to lay the framework for establishing a two-tiered banking system with the National Bank of Azerbaijan as an effective modern central bank.

A Monetary and Exchange Affairs Department mission, with the participation of experts from six cooperating central banks, first visited Baku in October 1992. The main areas the mission covered were monetary operations, banking supervision, payments systems, foreign exchange operations, monetary analysis and research, accounting and audit, and technical aspects of the issuance of a national currency. The mission also provided assistance in preparing for currency conversion.

The purpose of the second mission (February 1993) was to follow up on the work of the earlier mission and to assist the National Bank in the areas of monetary policy and money market development, banking supervision, payments systems, foreign exchange operations, and organizational structure and management. In the areas of monetary policy and money market development, the mission recommended the containment of refinance credit by quarterly limits on the volume as well as an increase in the rate of interest charged on National Bank lending in line with the inflation rate that would be applied uniformly to all banks.

It was also advised that the reserve requirements be applied to all banks, including the state banks which were then exempt, and that the requirement should be uniform across maturities of deposits and across banks. These measures were implemented by the National Bank.

The February 1993 mission also stressed the importance for the National Bank of Azerbaijan to change the focus of its supervisory activities so that they concentrate on evaluating the risks being undertaken by banks. The mission assisted with the establishment of prudential rules and licensing requirements to ensure the soundness of the banking system. Advice on the structure and modalities of on-site and off-site supervision was also provided. Most of these recommendations were also taken on board by the Bank; however, the licensing criteria applied by the Bank are liberal and the number of banks has increased.

One of the many challenges is to develop a strategy to mobilize the foreign exchange funds and to ensure that they can be concentrated and traded through a transparent, organized market. The Bank also needs to take important policy measures in the areas of monetary policy and money market development, such as the containment of refinance credit and the establishment of monetary instruments to ensure effective monetary control. The development of a solid information/statistics base and analytical research is also an important objective. In addition, it appears necessary to give guidance on the reporting of past-due credits and nonperforming loans. There appears to be a need for on-site inspections to become more comprehensive and more focused on problem banks. Thus, the Bank would usefully benefit from future technical assistance regarding, in particular, the development of foreign exchange markets, the role of the National Bank in exchange rate management, the implementation of monetary policy and operations, and banking supervision.

Our actions aimed to create the necessary infrastructure for the interbank money market, encouraging banks to actively participate in interbank money market operations. We introduced standing facility instruments, increased the number and frequency of open market operations and introduced various money market indices for benchmarking. We also started to tighten our monetary policy stance. The ratios for the required reserve were raised and differentiated by the liability size of banks. We carried out bill auctions regularly across four different maturities, which also supported the formation of the yield curve for national currency. These operations have led to the sterilization of the money base by $2 billion dollars since the beginning of 2022.

Kazimov: As mentioned, the main concern for the central bank was high inflation; the fundamental question was the source of inflationary pressure. Our analysis showed that prices in the domestic market were elevated due to external supply factors. It is quite clear that the central bank will be less efficient in curbing externally driven inflationary pressure with monetary policy tools. During this time, Azerbaijan imported inflation from key trading partners, some of which have been significantly hit by high global food and energy prices. Our main strategy was to ensure that demand factors were under control by increasing the policy rate. Additionally, we maintained the stability of local currency in periods of excessive foreign currency supply. As a result, inflation was also reduced to some extent by the appreciation of the nominal effective exchange rate.

GF: Other than raising interest rates, Azerbaijan has been conducting several currency auctions. How does the central bank assess the impact of this two-pronged approach to fighting inflation?

Kazimov: This issue has two dimensions. Interest rate and exchange rate channels complement each other in Azerbaijan, requiring significant coordination between fiscal and monetary policies. The central bank rarely intervenes in the foreign currency market. As mentioned above, the State Oil Fund supplies the state budget with manat by converting its foreign currency into the market. We just organize these auctions between the fund and commercial banks. These actions do not influence the foreign currency reserves of the central bank. We primarily conduct the monetary policy through an interest rate channel to affect aggregate demand. The exchange rate effect on reducing prices could be achieved only through appreciation of the nominal effective exchange rate.

I think we have accomplished a lot in those areas. The volume of the interbank unsecured market, which was 787.5 million manats in September 2022, increased more than six times, reaching 4.9 billion manats in August 2023. This indicates that there is a great perspective in this segment of the interbank money market.

Moreover, the AZIR index, as a short-term benchmark interest rate, has been formed for the unsecured market. In parallel, the interbank secured market was also developed, and the AINA index was formed for this purpose. More information on monetary operations and those indices is available on the official website of the central bank. Our ultimate goal is to steer short-term interest rates within the monetary policy corridor and influence long-term interest rates.

The central bank particularly focused on advancing the digitalization of the financial system and facilitating the secure introduction of innovative financial services. To achieve these objectives, the central bank is currently developing a comprehensive fintech strategy. This strategy focuses on several key priorities: enhancing the competitiveness of financial services, improving efficiency and stability, nurturing the growth of a robust domestic fintech ecosystem and advancing professional training within the sector.

Kazimov: We acknowledge that cyber resilience in financial markets is crucial. A cyberattack on any part of the financial markets has the potential to cause a systemic event leading to disruptions in the economy. In this regard, the central bank always keeps in focus issues related to improving cyber resilience and strengthening information security in financial markets.

If you think you've used the wrong SWIFT code to send money, you should get in contact with your bank right away. They may be able to cancel the transaction. If it's too late to cancel, you might have to contact the recipient yourself and request that they return your money.

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Constructing different scenarios to analyse policy effects and inform monetary policy decision-making; this includes managing the money base in the country and foreign exchange reserves held by the central bank

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