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What are the Options for Azerbaijan? |
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| By Rahim Hajiyev |
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For the first time in the last half century, the world's currency markets are faced with a real alternative to the endless power of the US dollar: since 1st January 2002, the common monetary unit of 12 countries of the European Union, the EURO, was put into operation.
In connection with this the following questions were raised by Azerbaijan's governmental, banking and scientific circles and the mass-media:
- Will the Euro affect Azerbaijan's integration with the world's economy and if so, how?
- Is there a chance that the Euro may push the US dollar out of the local monetary market in Azerbaijan?
- Does it make sense to weaken the present strength of the dollar of local economy by means of some "Euroisation"?
During the discussions, some completely opposing views were voiced:
One point of view argues that because Azerbaijan is not yet strongly integrated with the world economy, putting the Euro into operation cannot affect either its internal life or international economic relations. Thus, there is no need for any special measures concerning the Euro, so things should be left to develop naturally.
An alternative point of view states that Azerbaijan is already late in using the Euro therefore the country is losing its chance to gain related profits and there is a need to implant this new world currency into Azerbaijan's economy.
There is also the opinion that the Euro is simply another regular currency which neither now, nor in the future, can compete with the US dollar and thus queries related to its being used in Azerbaijan are just technical queries that will be resolved in a routine and regular way.
However, in spite of the differing opinions, all parties involved agreed that operation of the Euro deals with the strategic interests of Azerbaijan and opens up new perspectives for solving the country's objectives in foreign trade, currency policy, attracting investments, etc.
An analysis of the foreign trade structure shows that 90% of Azerbaijan's export is composed of oil and oil products while 60% of this figure is exported to EU countries. Only Italy is annually receiving 45% of the total export from Azerbaijan and this is related to further sales of the Azeri oil via Mediterranean ports. Nevertheless, all deals are still carried out in US dollars.
In contrast to export, import operations basically include customer goods and it can be assumed that there is a need to use the Euro (both cash and bank transfers) for the import operations of local businessmen. In addition to direct operations with EU countries, Azerbaijan has a wide range of deals with Turkey and East-European countries, which are strongly associated with EU countries and where the Euro has already occupied a strong position, serving as an alternative to the US dollar in basic payments.
The dominant position of the US dollar in Azerbaijan's currency market has two negative features for the international economic relations of Azerbaijan:
Firstly, the absence of the demanded bulk of the Euro in the internal currency market causes local importers to experience a double loss related to their exchange operations: 1. the expenses for changing manats to US dollars; 2. changing dollars to Euro's as a payment unit for EU countries.
Secondly, the rate of the US dollar in the world's currency markets changes regularly. If the manat is aligned strongly to the US dollar, then the rate of the manat will automatically change along with the rate of the dollar to other currencies, including the Euro. This situation is negative because it can cause either real loss, or loss of opportunities related to rate changes, and this is important for the intensively developed private sector of Azerbaijan's economy.
In connection with this, it is important to consider measures that can be applied by the currency authorities of Azerbaijan to meet the need to reject dollarisation of the country's economy.
In a mid-term perspective, use of the Euro in Azerbaijan will be formed basically by two factors:
1. The Euro's success in the world market of energy resources, which form the currency inflow to Azerbaijan;
2. The investment processes in Azerbaijan at the level of governments and corporations of Western European countries.
In recent years, EU countries became the main foreign investors in Azerbaijan, and it is expected that this tendency will increase. Azerbaijan's foreign debt now is US$1.2 billion, including over US$180 million (about 15% from the total debt) of the countries using the Euro. Viewing the structure of loans received from these countries one can see the leading positions of the German banks, and the European Bank of Reconstruction and Development (EBRD).
Table 2 shows that during 1995-2000, Germans invested US$31.4 million into the economy of Azerbaijan, while the maximum level of their investments was in 1997 - US$16 million. During 1999-2000, France also made investment activities in Azerbaijan, having invested about US$64.7 million during this period.
The EBRD Board of Directors decided to give Azerbaijan in a loan of 25 million Euro in 2002 for progress in economical development. It seems that along with this progress there will be a greater use of the Euro in interbank payments between Azerbaijan and EU countries.
In short, all the factors mentioned above confirm that use of the Euro is beginning in Azerbaijan at a time when the manat is weak and the economy is strongly dominated by the US dollar; while there is such an imbalance between the structure of the currency reserves and currency trades, on the one hand, and the structure of its international economical relations, on the other. This is not just a financial loss for the country, but also makes Azerbaijan dependent on a single foreign currency.
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