Azerbaijan’s Manat Makeover: Good Times Ahead?

It looks like a euro, it's denominated like the dollar. Azerbaijan's newly denominated banknotes and coins have been touted as a sign that the oil-rich state has finally come into its own as a regional economic heavyweight with a strong currency. But some observers worry that the government was too hasty in slashing zeroes off old banknotes. Without prior consideration of incoming oil revenues and ongoing economic reforms, the new bills could merely fuel inflation, they say.

To boost confidence in Azerbaijan's currency, the government had first to tangle with the dollarization of the country's economy. The old manats, known as AZM, encouraged a preference for dollars, noted independent economist Nazim Imanov. With the largest AZM banknote a mere 50,000 (a bit more than $10), people routinely used dollars for large purchases such as real estate and cars. "And it is understandable. To buy a car for $5,000, a customer would have to carry two suitcases filled with [old] manats," Imanov commented.

As a result, Azerbaijanis calculated large-item purchases in terms of dollars, even if the price was denominated in AZM, he added. "If, for example, a refrigerator cost AZM 5 million, [customers] had to convert the price into its dollar equivalent and would then comment [to a salesperson] that $1,000 is quite expensive for a refrigerator."

Under the new currency denomination, introduced on January 1, far fewer bills will be needed to make large purchases; one new manat, known as AZN, is equal to 5,000 AZM. When the transformation process is complete, there will be 1, 3, 5, 10, 20, and 50 gyapik (penny) coins and AZN 1, 5, 10, 20, 50, and 100 banknotes.

Arif Babayev, owner of a popular Baku café, agrees that the new denomination will boost confidence in the manat, and notes that private banks now offer slightly higher interest rates for manat-denominated accounts than dollar-denominated ones. "The manat is becoming stronger and if the government does not stop the process, the exchange rate [against the dollar] will even increase. After the dollar crisis in October, savings in dollars seem risky to me," he said. [For more information, see the EurasiaNet archive].

The government has presented the currency re-denomination as a sign that Azerbaijan has broken with the hyperinflation and severe economic hardship that marked the first years of independence in the early and mid-1990s. At an official presentation in late December 2005 to launch the new bills, President Ilham Aliyev called the currency's issue a "historic event that reflects the dynamic development of Azerbaijan."

By losing three zeroes, the new currency is also intended to wipe away recollections of the hyperinflation of the past. Under the old currency, commented National Bank Deputy Chairman Alim Guliyev at the presentation, "[p]eople lived with the expectations that devaluation [of the currency] and high inflation could recommence. That is why now we are considering re-denomination as an historical necessity."

Most Azerbaijanis still keep their savings in dollars, however, and did not rush to get rid of old manats. The new banknotes will enter into circulation gradually. So far, only coins and banknotes in denominations of one and five manats are in use. Ten and 20 AZN-denominated banknotes will come out in March, while 50 and 100 manat bills will appear in April. Both the new manat (AZN) and the old manat (AZM) will act as legal tender throughout 2006. Businesses have marked prices in the two currencies since October 2005.

Special attention has been paid to the currency's design, implemented by Robert Kollina, designer of the euro. Although some Azerbaijanis initially expected images of the late President Heidar Aliyev, father of Ilham Aliyev, to adorn the new banknotes, the bills instead promote Azerbaijani art, literature, education and economic development. The 20-manat note touches on Azerbaijan's claim to the disputed territory of Nagorno-Karabakh with images of the khari bulbul flower, a species found only in Karabakh, and of the steel helmet of an ancient Azeri warrior.

According to the February 7, 2005 presidential decree announcing the re-denomination, the currency reform is intended to make both domestic prices and the Azerbaijani currency's exchange rate easier to calculate. The AZN exchange rate is now situated between the US dollar and the euro. One new Azerbaijani manat is equal to roughly $1.09 or 0.9 euro.

But some observers say that the re-denomination is a move that comes with a strong potential risk of inflation. At a press conference to introduce the new banknotes in late 2005, National Bank of Azerbaijan Deputy Chairman Alim Guliyev termed any related price increase "technical inflation" and insisted that it would not exceed 0.3 percent. Economist Nazim Imanov counters that a more realistic "technical inflation" rate could range between 8-10 percent.

Already, some confusion over utility rates has ensued. In January, the state water company Azersu increased prices after issuance of a government decree that dictated that certain prices denominated in the new manats be rounded up. The increase was taken as a sign of further price hikes to come. By law, however, only the Ministry of Economic Development's Tariffs Council can set energy and water rates. After the Council intervened, the price increase was reversed.

Other observers object that the government should have held off on reform until it could judge the fiscal impact of fresh oil revenue that is expected to flow into government coffers soon. "Azerbaijan expects a huge inflow of oil money into the country within the coming years," commented Ali Masimov, a member of parliament from the Yeni Sisayet alliance, and prime minister of Azerbaijan from 1992 to 1993. "I think it would be rational to wait and see . . . how these increased revenues affect the country's economy and financial system."

Inglab Akhmadov, director of the Public Finances Monitoring Center, a Baku-based non-governmental organization, also believes that the government should have proceeded with greater caution. Upcoming reforms that will allow private companies to manage housing, water supplies, sewage systems and electricity could upset calculations for inflation, he noted.

"It would be efficient if the government would wait for the results of these reforms and then determine the optimal caliber of denomination [the exchange rate between the old and new currency denominations]." [The Public Finances Monitoring Center is funded in part by the Open Society Institute-Assistance Foundation Azerbaijan. EurasiaNet.org is run under the auspices of the New York-based Open Society Institute.]

The similarity between Soviet-era prices and prices denominated in the new manats already appears to have had some psychological effects on shoppers. A loaf of bread now costs 20 gyapik (formerly 1,000 AZM), a ride on the Baku metro 5 gyapik (formerly 250 AZM), and a kilogram of meat 3 manats 60 gyapik (formerly about 18,000 AZM). The National Bank's Alim Guliyev believes that the lower-denominated prices will facilitate the transition to the new banknotes and coins for elderly people, but the similarity could make it harder for consumers to watch for inflation, as well. Prices for some goods have increased by 25 percent since the beginning of 2006, according to Turan News Agency's Marketwatch, but the increase has not sparked any loud protests, and has been ignored by the media.

A generation gap, however, appears to mark popular evaluations of the currency reform. Exchange office posters that explain the new currency denomination are published only in Azeri, using the Latin alphabet; older generation Azerbaijanis who are better accustomed to Azeri Cyrillic who speak only Russian are left to fend for themselves.

"When they switched . . . to the new alphabet in 2002 [from Cyrillic to Latin], I lost the ability to read newspapers and follow events. We became illiterate, in fact," complained 76-year-old pensioner Yashar Mammadov. "Now we are not able to count our money."

But for some younger generation Azerbaijanis, as the government hopes, the new bills are just a sign of prosperity to come. Commented 20-year-old Baku State University student Anar Aliyev: "[I]f I try to spend this money somewhere in Portugal, people might never notice the difference from the euro."