Central Banking Technical Assistance to Countries in Transition

Statement of the National Bank of Azerbaijan

Susana Almuina, Ian McCarthy, Gabriel Sensenbrenner, and Justin Zulu
Published Date:
December 1995
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The technical assistance program provided by the IMF’s Monetary and Exchange Affairs Department for the National Bank of Azerbaijan has so far covered monetary and credit operations, banking supervision, payments systems, accounting and audit, foreign exchange operations, organization and management, public debt management, and legal issues. Two reports have been prepared that provide a reference for the needed reforms, and contain detailed recommendations to enhance the effectiveness of the National Bank’s operations.

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.

Technical assistance in the conversion of the accounts to the new chart of accounts was provided to the National Bank. The Bank has made good progress with its plans to introduce a new chart of accounts; it now has a chart of accounts that covers all current relevant aspects of its operations. The follow-up visits by two experts from the Austrian National Bank in August 1993 were also instrumental in this progress.

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.

Advice was also provided regarding the progress of the National Bank in changing from the domestic interbranch settlement (MFO) ledger system to a correspondent account system. The MFO system is still in use; however, plans have been developed for implementation of a correspondent account scheme at the beginning of July 1994.

The political and economic uncertainties experienced in 1993 delayed Azerbaijan’s completion of the move to its national currency, the manat, which was first put into circulation in August 1992. The manat became the sole legal tender as of January 1, 1994, and the remaining ruble banknotes were withdrawn from circulation. The switch to the manat, due to the inflow of ruble notes from neighboring countries and the miscalculation of existing rubles in the hands of the public, triggered an acute cash shortage in Azerbaijan. This was only partially cased with the arrival of new manat shipments from France (where the currency is printed) and led to sizable wage arrears in the aftermath of the wage increases granted in November 1993.

Given the political and economic instability, many of the recommendations provided by the technical assistance missions of the Monetary and Exchange Affairs Department have not yet been implemented. These missions have been instrumental in terms of diagnosing the problems and challenges facing the National Bank in its reform process, and much remains to be done on a broad range of issues.

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.

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