Taleh Kazimov, governor of the central financial institution of Azerbaijan discusses central banking, financial coverage amid rising power costs, and extra with International Finance.
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International Finance: Do Azerbaijan’s strong energetical matrix and strategic geopolitical positioning maintain the important thing to a better-than-average general financial efficiency within the years forward?
Taleh Kazimov: The reply to the query lies in understanding how the economic system has grown through the years. Azerbaijan had a exceptional run of development during the last 20 years. Financial development tripled because of dynamic growth and market-oriented reforms. Throughout this time, the economic system has efficiently proven a excessive stage of resistance to numerous exterior shocks. Regardless of these unprecedented shocks, Azerbaijan’s economic system efficiently remained on the expansion path of diversifying its non-oil economic system, particularly non-oil exports.
Underneath the good management of His Excellency Ilham Aliyev, Azerbaijan has an ideal imaginative and prescient for reaching sustainable and excessive financial development sooner or later. There’s a well-developed socioeconomic strategic plan for the economic system of the nation—the 2022-2026 State Technique—which was adopted this 12 months. In a nutshell, this technique is designed to engineer sustainable financial development, improve the resilience of the economic system, encourage the inclusiveness of society, create excessive competencies and abilities demanded within the twenty first century and make sure the growth of a inexperienced economic system.
GF: How have latest geopolitical occasions influenced Azerbaijan’s financial agenda?
Kazimov: Azerbaijan, like many different international locations on the planet, confronted excessive inflation shocks since mid-2021. You will need to say that the character of the inflation pressures was fairly totally different this time. Since my first days because the chairman of the Central Financial institution of Azerbaijan initially of 2022, combating in opposition to double-digit annual inflation was a key a part of my coverage agenda. Our first step was to evaluate the effectivity of financial coverage. Then, we undertook key reforms to enhance the linkages between related channels of financial transmission.
Our actions aimed to create the mandatory infrastructure for the interbank cash market, encouraging banks to actively take part in interbank cash market operations. We launched standing facility devices, elevated the quantity and frequency of open market operations and launched numerous cash market indices for benchmarking. We additionally began to tighten our financial coverage stance. The ratios for the required reserve had been raised and differentiated by the legal responsibility dimension of banks. We carried out invoice auctions usually throughout 4 totally different maturities, which additionally supported the formation of the yield curve for nationwide forex. These operations have led to the sterilization of the cash base by $2 billion {dollars} because the starting of 2022.
GF: Azerbaijan’s inflation has been significantly impacted by the core a part of the studying. How do you counter that development, in an economic system that good points from rising power costs?
Kazimov: As talked about, the primary concern for the central financial institution was excessive inflation; the basic query was the supply of inflationary stress. Our evaluation confirmed that costs within the home market had been elevated attributable to exterior provide elements. It’s fairly clear that the central financial institution will likely be much less environment friendly in curbing externally pushed inflationary stress with financial coverage instruments. Throughout this time, Azerbaijan imported inflation from key buying and selling companions, a few of which have been considerably hit by excessive international meals and power costs. Our important technique was to make sure that demand elements had been beneath management by rising the coverage price. Moreover, we maintained the soundness of native forex in intervals of extreme overseas forex provide. Consequently, inflation was additionally decreased to some extent by the appreciation of the nominal efficient change price.
Oil income doesn’t straight have an effect on inflation by way of the combination demand channel. In response to the institutional framework, the State Oil Fund (SOFAZ) receives all oil and fuel income and transfers the predefined quantity of that income to the state price range in accordance with the fiscal rule.
GF: Apart from elevating rates of interest, Azerbaijan has been conducting a number of forex auctions. How does the central financial institution assess the affect of this two-pronged strategy to combating inflation?
Kazimov: This difficulty has two dimensions. Rate of interest and change price channels complement one another in Azerbaijan, requiring important coordination between fiscal and financial insurance policies. The central financial institution not often intervenes within the overseas forex market. As talked about above, the State Oil Fund provides the state price range with manat by changing its overseas forex into the market. We simply manage these auctions between the fund and industrial banks. These actions don’t affect the overseas forex reserves of the central financial institution. We primarily conduct the financial coverage by way of an rate of interest channel to have an effect on mixture demand. The change price impact on decreasing costs might be achieved solely by way of appreciation of the nominal efficient change price.
GF: Creating Azerbaijan’s interbank market has been a major focus for you. What are the primary challenges and objectives on that entrance proper now?
Kazimov: One of many key priorities on the reform agenda has been the event of an interbank cash market. We concentrate on three key dimensions: 1) the event of infrastructure, 2) encouraging the members—banks—to be lively out there, and three) the formulation of the benchmark short-term rates of interest.
I believe we now have achieved quite a bit in these areas. The amount of the interbank unsecured market, which was 787.5 million manats in September 2022, elevated greater than six instances, reaching 4.9 billion manats in August 2023. This means that there’s a nice perspective on this phase of the interbank cash market.
Furthermore, the AZIR index, as a short-term benchmark rate of interest, has been fashioned for the unsecured market. In parallel, the interbank secured market was additionally developed, and the AINA index was fashioned for this goal. Extra info on financial operations and people indices is on the market on the official web site of the central financial institution. Our final purpose is to steer short-term rates of interest inside the financial coverage hall and affect long-term rates of interest.
GF: How does the Central Financial institution of Azerbaijan view the function of digital banking and fintech options in additional enhancing accessibility and companies?
Kazimov: We see {that a} rising variety of central banks and regulatory authorities are more and more within the digitalization of the monetary sector. We additionally acknowledge the essential function of fintech in modernizing the nation’s monetary system. The central financial institution acknowledges that innovation is important for remodeling the banking sector and selling monetary inclusion.
The central financial institution significantly centered on advancing the digitalization of the monetary system and facilitating the safe introduction of revolutionary monetary companies. To realize these targets, the central financial institution is at the moment creating a complete fintech technique. This technique focuses on a number of key priorities: enhancing the competitiveness of economic companies, enhancing effectivity and stability, nurturing the expansion of a sturdy home fintech ecosystem and advancing skilled coaching inside the sector.
The lately adopted regulation on fee companies and programs will assist the event of fintech exercise by encouraging a aggressive atmosphere for monetary establishments. Moreover, the sandbox regime will present testing alternatives for revolutionary and safe monetary merchandise.
GF: How have these efforts contributed to enhancing safety and stability inside the nation’s banking sector?
Kazimov: We acknowledge that cyber resilience in monetary markets is essential. A cyberattack on any a part of the monetary markets has the potential to trigger a systemic occasion resulting in disruptions within the economic system. On this regard, the central financial institution all the time retains in focus points associated to enhancing cyber resilience and strengthening info safety in monetary markets.
These efforts contributed to creating a Cybersecurity Technique in Monetary Markets for 2023-2026, which is designed to be adaptable and to account for a constantly altering cyber panorama.
The technique introduces 5 objectives for strengthening cyber resilience in monetary markets in opposition to evolving cyberthreats: 1) reinforcing the regulatory and oversight framework for info safety and cybersecurity, 2) fostering the tradition of cyber danger administration in monetary markets, 3) establishing an info expertise administration system, 4) strengthening cyber resilience in monetary markets, and 5) forming a tradition of data safety and cybersecurity in monetary markets.
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