Aaron in Azerbaijan

Just another blog about Azerbaijan.

“Market Intervention” is a Misnomer

with 4 comments

It’s a sad fact of oil economics that once the black gold is discovered, most of the time all your resources go to everything about oil.  From the most recent Asian Development Bank outlook:

Growth prospects hinge on oil.

Basically, the majority of growth in Azerbaijan is because of oil.  Nothing earth-shattering here.  The report gets a little bizarre, though.  I’m not sure if the ADB folks aren’t paying attention, but the Azeri Manat (AZN) is pegged to the dollar.  That’s hardly what I would call “heavy market intervention” by the Central Bank of Azerbaijan.  That’s the opposite of market intervention.   Since I’ve been here, it’s been ~.80 Manats for one dollar.  If the market was at all involved here, that wouldn’t be possible, especially with the heavy presence of oil here.

Some other significant findings in the report:

  • Agriculture sector growth fell to an anemic 3.5% last year.  That’s problematic.  The potential for helping a lot people through agriculture activities here is huge.  Yet the barriers listed, such as limited credit availability and irrigation problems are huge.  Azerbaijan has no significant domestic source of credit, and has a generally poor infrastructure for getting credit to farmers, anyway.
  • The report recommends increasing revenues from taxes.  Ha.  First, you’d have to get the tax folks to not engage in corruptive practices.  Then you’d have to find a way to squeeze more money out of the poor.  We know of too many families that barely get by on their one breadwinner’s 200 AZN/Month salary.  Good luck
  • The only real source of investment here from the government comes from SOFAZ.  With those funds being subject to oil prices, this seems like a recipe for disaster when forecasting what kind of public investments can be made from year to year.

I know there’s more here to discuss, but it’s a start.  Maybe the ADB is trying to be diplomatic, but it’s a tough report to handle when you’re living in the context of it.

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Written by Aaron

April 30, 2010 at 7:58 pm

Posted in Uncategorized

4 Responses

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  1. Aaron,
    I am enjoying your essays.

    I am confused by your juxtoposition of the word ‘sad’ with’oil’. Oil has pulled many cultures out of poverty. And remember — oil is a natural gift from the earth.

    Just a thought…keep writing.
    Love You – Sharon

    Sharon Volz

    May 2, 2010 at 5:38 pm

  2. Hey Aaron. You know I love your blog. Just one thing…

    I don’t think that “market intervention” is a misnomer. The ADB is saying that the Central Bank of Azerbaijan is intervening heavily in the foreign exchange market in order to keep the currency pegged.

    Quoting wikipedia: “Typically, a government wanting to maintain a fixed exchange rate does so by either buying or selling its own currency on the open market. This is one reason governments maintain reserves of foreign currencies. If the exchange rate drifts too far below the desired rate, the government buys its own currency in the market using its reserves. This places greater demand on the market and pushes up the price of the currency. If the exchange rate drifts too far above the desired rate, the opposite measures are taken.”

    Without the heavy market intervention by the Central Bank of Azerbaijan there would be a floating exchange rate. ADB reports that because of the CBA’s actions it prevented “a depreciation that would have caused inflation pressure and raised debt servicing costs for businesses that have sizable foreign currency loans.”

    Tim

    May 3, 2010 at 3:03 pm

    • Indeed, you’re right. I got a bit sloppy here, assuming they had artificially pegged the currency, like the Chinese have done as well. Instead it looks like this bit of info is required to know they they’ve chosen to use foreign currency reserves in this fashion: http://en.apa.az/news.php?id=97954

      Aaron

      May 3, 2010 at 3:22 pm

  3. […] a comment » I put up this post rather quickly and without much depth of thought as you can see from the comments.  Not that […]


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