The Central Bank of Azerbaijan (CBAR) is responsible for monetary policy in our country, which is intended to manage the money supply. The Central Bank has taken steps to establish a solid financial framework for implementing monetary management and to define the proper level and growth of the monetary supply. The central bank's control measures are evaluated in order to determine how well they have achieved their goals. This review will focus on achieving adequate monetary expansion and developing a safe and healthy financial system. The enabling legislation has recently increased the CBAR's authority over the banking and monetary systems. However, several other concerns that limit the Bank's capacity to successfully carry out its core purpose still need to be solved. In this paper, the author evaluated the current situation of Azerbaijan in terms of monetary policy. The author reviewed the current monetary policy that is applied by the Central Bank of Azerbaijan. In order to have an efficient central banking system and a long-term solution to monetary management problems, the government must recognise the importance of effectively carrying out the Central Bank's core functions, recognise the danger of non-performance, and provide sufficient freedom to do so on an ongoing basis.

Keywords: Central Bank of Azerbaijan, Central Bank, Monetary Policy

One of the first steps taken after reestablishing Azerbaijan’s independence was the foundation of the Central Bank. As we all know, each country's central bank plays a vital role in that country's economy. The Central Bank of the Republic of Azerbaijan also plays a crucial role in the economy of Azerbaijan. Since the beginning of this year, some interviews and news about the Central Bank were initially related to the Central Bank’s exchange rate policy. Recent information concerns the resignation of the new Chairman of the Management Board of the Central Bank of Azerbaijan, Elman Rustamov. The new chairman, Taleh Kazimov, has already started to work. But what changes will take place in the Central Bank and its exchange rate and other policies with the appointment of a new chairman, and what will be the potential changes?

In Azerbaijan, as elsewhere, there are several connections between monetary and banking actions. They significantly affect each other’s performance. First, the instruments used to regulate both processes are frequently used in the same procedure. Second, they are frequently held by the same institution, primarily the Central Bank of Azerbaijan. As a result, financial and banking operations will be viewed as one integrated system in this article.

Under the current functional structure, it is necessary to relate the theoretical underpinnings of monetary and banking system management to the bank’s experience in order to comprehend the role played by the Central Bank of Azerbaijan in controlling the system. In order to do this, the paper is divided into five pieces.

Following the introduction in Section One, Section Two looks at the basic concepts of monetary and banking system regulation. A discussion of the control techniques used by the Central Bank of Azerbaijan and how they have evolved through time follows in Section Three. The efficiency of the control mechanisms is evaluated in Section 4, while a summary of unresolved issues with the control of the monetary and banking systems is given in Section 5, along with concluding remarks.

To fully comprehend the mechanism for managing the system, one must have a solid grasp of the monetary systems' role in the economy and the justification for their regulation.

It is generally accepted that, under normal conditions, changes in the money supply would impact interest rates as well as production and prices in the short term (Mathai, 2020). As a result, the mechanisms via which activity in the financial sector is transferred to the actual sector are frequently the money supply and interest rates. An elevation in the money supply would encourage overall output and 5 expenditure in the short run. However, monetary growth would likely lead to inflation (Ireland, 2013). In addition, rising aggregate demand would boost import demand, putting pressure on the currency exchange rate and balance of payments. The Central bank can not print as much money as they want. Moreover, if monetary expansion is uncertain, production growth will experience inflation (Hanlon, 2022). That is to say, if there is a monetary expansion, this growth should be based on economic growth.

The potential significance of money in the inflationary process is indisputable. As a result, the continuous excessive increase in the money supply causes inflation and a protracted price rise, both unfavourable to expanding the economy’s production. All else being equal, an adequate monetary expansion would result in favourable nominal and real interest rates. As a result, there would be an increase in output, savings, and investment and a stable exchange rate (Draghi, 2016). It is important to apply adequate controls not only to the monetary sector but also to the banking channels through which monetary policies are executed, given the stated function of money in the economy.

Almost all economists know that monetary management's primary goal is to impact macroeconomic variables, including domestic prices, employment, balance payments, and sustainable economic development. These goals are accomplished using the proper tools, which differ across developed and developing countries. These tools fall into two general categories: direct and indirect.

In a developing financial environment, monetary management tools are limited to direct actions that set credit and monetary objectives at desirable levels and provide institutions with instructions on implementing the targets. Direct regulation, which establishes the level or range of interest rates, for example, by defining the rates for bank lending and deposits, is one of the leading direct control measures (Mr. Tomás J. T. Baliño, 1995). This method is typically employed in economies where underdeveloped financial markets and a lack of capital constrain the optimal distribution of resources. Implementing minimum reserve requirements on credit expansion and their allocation into sectors is a different indirect control (Alexander, 1996).

In market-based economies, where the amount of money might be affected by the link between the money supply and reserve currency, as well as the power of the monetary authorities to influence the establishment of reserves, indirect instruments are typically used. As is well known, these reserves are cash balances that banks hold with the Central Bank and in their vaults. The Central Bank monitors reserves to ensure that their expansion is in line with the goals of monetary management since reserves might be used to create money by banks. The following are some of the ways that the monetary authority's actions affect reserve formation and policy formation, and, by extension, the production of credit and money stock (Mr. Tomás J. T. Baliño, 1995):

Any central bank's control over the banking and monetary systems begins with the development of suitable policies, which are then put into practice and evaluated. The statute that specifies the connection between the Central Bank and the Central Government, on the one hand, and between the Central Bank and the banks, on the other hand, often provides the institutional foundation for this responsibility. Designing appropriate monetary and financial policies is the first step in taking control of the system once the institutional structure has been established. Beginning with an evaluation of the current, recent past, and present, forecasts of expected future trends in the absence of policy changes are made. A central bank can provide a variety of policy choices through this exercise (the policy initiator). The policy approaches are derived through statistical exercises that estimate the increase in the money supply needed to maintain economic expansion under certain assumptions about domestic prices, external equilibrium, and low unemployment. Since the banking system plays a major role in implementing monetary policy intended to manage the money supply, monetary policy formulation takes steps to establish a stable and effective banking system. The policy measures of the Central Bank are often incorporated into the National Budget, where they are compared to other policies before receiving permission from the central government. Following approval, the policy measures are implemented and adjusted as needed.

The government, which has general jurisdiction over the system, collaborates with the Central Bank to manage the monetary and banking system. As a result, the Central Bank develops the guiding policy measures and puts them into practice. The Bank's efforts to manage the monetary and banking systems go through several stages, including identifying the policy's goals and aims, its design, approval, budgetary integration, execution, review, and additional bank-specific controls.

Over time and following the macroeconomic policy’s core principles, control measures of the Central Bank begin with establishing the monetary and banking policies’ goals, some of which include promoting price stability; easing external sector pressures; stabilising the effective exchange rate; and promoting economic expansion.

These goals can only be achieved in stages, so some prioritisation is necessary. In order to effectively accomplish these broad goals, efforts are undertaken to define the intermediate goals, which include establishing a strong financial framework for implementing monetary management and determining the 7 proper level and growth of the money supply.

The approaches of financial programming, which aim to provide some consistency throughout the economic sectors, are used in the formulation of monetary policy, which is developed concurrently with banking policy. The monetary programme begins with an in-depth analysis of previous economic performance as well as existing and impending issues. The programme often makes an effort to determine the optimal amount of money that is consistent with the presumptive objectives for GDP growth, inflation rate, and foreign reserves. The economy's absorptive domestic credit is obtained from the computed appropriate money supply, allowing growth objectives to be established for some of the intermediate policy variables of money supply and aggregate domestic credit. The government and commercial sectors are then given a share of the total permitted domestic credit. The amount of the budget deficit that must be covered by the Central Bank, commercial banks, and merchant banks determines how much is taken up by the government. The private sector is left to handle the balance. Through this approach, the central bank has been able to control credit growth, subject to the level of the fiscal deficit supported by the banking sector, either directly under the regime of credit limits or indirectly through market-based instruments.

Credit limitations imposed on banks, administratively regulated interest and exchange rates, the regulation of sectoral credit allocation, and the prescription of cash reserve requirements and special deposits are the main instruments of policy in the period of direct monetary control. The decision was made to switch to an indirect approach that relies on the use of market-based instruments like reserve requirements, the discount rate, and open market operations as a result of the adverse effects of prolonged use of direct tools on the effectiveness of monetary policy and the financial sector. Supporting a deregulated, competitive, and substantial money market became essential for operating the new indirect monetary control regime. The finance sector was significantly deregulated, though with some difficulties along the way. Interest rates and the market for government debt instruments were often the objectives of deregulation. Other steps to support the financial sector, particularly banks, and improve monetary control include strengthening institutional and legal frameworks, addressing financial distress, and decreasing systemic excess liquidity (Mr. Tomás J. T. Baliño, 1995).

As in many other countries, the ultimate goal of monetary policy in Azerbaijan is to achieve price stability (CBAR, about). In order to reach this goal, the Central Bank of Azerbaijan tries to affect the price level through the nominal exchange rate. To be more specific, the Central Bank of Azerbaijan attempts to influence the price level through the pegged exchange rate system to accomplish this purpose. And another main factor is inflation. Every year, the Central Bank of Azerbaijan makes a statement about the target inflation rate.

Another way to control inflation is to control the monetary base. Thus, the Central Bank attempts to ensure price stability through the monetary base and the central parity exchange rate regime, which can 8 statistically track daily changes.

However, economists and society are inquiring about the dollar exchange rate to manat. It is a massive trend in developing countries. Because these countries depend on imports, their production ability could be better; they must import certain products to meet the demand for specific products.

Of course, there are too many downsides to this policy. Due to the government or central bank's ongoing purchases and sales of the national currency, this system calls for huge reserves. Substantial currency reserves have the drawback that the enormous sums of money or capital being built might have undesirable economic side consequences, such as increased inflation. The monetary supply grows as there are more currency reserves, which raises prices. The effects of rising prices may be disastrous for nations trying to maintain stability.

Countries that adopt a currency peg experience a rise in the influence of foreign nations over their domestic affairs. This is so that another country may control its monetary policy. This frequently results in a contentious scenario. Take the attack on the pound sterling as an example. The British government had fixed its currency at the German Deutschemark at the time (Zurlinden, 1993). Domestic fears about inflation led the German Bundesbank to raise interest rates. The British want falling interest rates. The rates didn’t go down, however. The Bank of England was no longer in charge of its affairs, and the Bundesbank significantly impacted Britain’s internal issues. As a result, the British pound suffered greatly. A floating exchange rate system causes deficits to be automatically corrected. For example, a country will incur significant costs if it imports excessively. This will cause their economy’s money supply to decline, resulting in deflation. Their exports are competitive due to deflation, which makes their exports competitive.

So an increase in imports always increases exports. The system that is floating freely tends to reach equilibrium. But currency pegs sometimes overstate the state of disequilibrium. Consider that a peg between the dollar and the yuan is to blame for the significant current account and trade imbalances between the United States and China.

As a result, pegged currencies are more likely to experience disequilibrium. In the brief economic history of freely floating currencies, this has occurred on several occasions and is predicted to continue on several occasions in the future.

Before making the statement of the deputy, the president of the Azerbaijan Republic made a statement about the reserves of the Central Bank. During this interview, the two consecutive devaluations and the intervention of the Central Bank by selling its reserves were highlighted. It was also discussed that this intervention was not enough and that, eventually, devaluation was allowed to be forced to keep reserves. According to the shared data on the official website of the Central Bank of the Republic of Azerbaijan, at the beginning of 2015, the Central Bank, which had a reserve of 12 billion US dollars, had only 5 billion dollars in reserves at the end of the year. Dollar reserves fell by $7 billion in a year. In his interview, the 9 President stated that 10 billion in reserves were lost. These are huge numbers. In the following years, we can see that the reserves continue to grow. The Central Bank, which later switched to the floating exchange rate system, could keep the manat at 1.55 manat against the US dollar. Later, this level was determined as 1.70, which continues today. Of course, the Central Bank needs to keep its reserves on hand. It will only help to stay in a fixed exchange rate regime for a short time.

It was created by the author based on the data of the Central Bank of Azerbaijan

However, the manat's stability is critical for the local businesses and the population's welfare. Local enterprises can predict the prices of their products on the global market. They can forecast the quantities that will be requested at that price once they are aware of the precise pricing. They consider the minimum exchange rate level and use this information in their forecasts. As a result, they don't experience any fluctuation and are protected against currency losses. This gives them a significant edge over rivals who must take on similar risks and must consequently factor a risk premium into their costs.

But the main question is this: Are Azerbaijan and the economic situation of our country ready for this exchange rate policy? Everybody knows that the pegged exchange rate system won’t be around forever. Politicians always convey that the transition to a floating exchange rate system is inevitable in their statements. But is Azerbaijan suitable for choosing a floating exchange rate policy? First, we should look at the condition of diversifying the country’s exports

Created by the author based on data from the State Statistical Committee of the Republic of Azerbaijan

Because, in the floating exchange rate regime, the value of the national currency changes depending on the supply and demand for the national currency. Let's look at the foreign trade balance of Azerbaijan. We see that the part with the largest share in the foreign trade balance of Azerbaijan is the mining industry, or in other words, the oil sector (the statistics show the oil sector as the mining industry). If Azerbaijan follows a floating exchange rate policy in the current situation, the exchange rate of the manat will change accordingly as the oil price changes. This will lead to uncertainty. All of the country's 12 small and medium-sized entrepreneurs and the largest ones estimate their predictions according to the dollar-manat exchange rate stated by the Central Bank at the beginning of the year, which is vital for the economy's stability.

The economy’s diversification is essential for transitioning to the floating exchange rate system. If the economy is diversified, this is safe for the exchange rate and the economic environment. Diversification may also be achieved by including various investments in different sectors or industries. In any expected or unexpected crisis in that sector, the country's economy may collapse or experience a shock. And we shared this shock once in 2015. It is an undeniable fact that our economy is considered "resourcecursed", in other words, the Dutch disease (Babayeva, 2022). But what we are doing to get rid of this resource curse, or how effective we are, the answer to those questions is questionable.

b. Apponting The New Chairman Of The Management Board Of The Central Bank

The Management Board, the central administrative body, and the regional offices make up the Central Bank's organisational structure. The internal audit division is a part of the central administrative body, which also consists of other Management Board designated structural components. All organisational parts and entities that make up the Bank's central administrative body operate by laws that the Management Board has authorised.

In accordance with the Constitution of the Republic of Azerbaijan, the Governor and Deputy Governors of the Central Bank are chosen by the President of the Republic of Azerbaijan from among Management Board members, and members of the Management Board are nominated by the President of the Republic of Azerbaijan to the Milli Majlis of the Republic of Azerbaijan.

According to Article 24 of the Law (p. Law of the Azerbaijan Republic), the Central Bank's Chairman of the Management Board oversees the Bank's executive structure, chairs the Management Board, represents the Central Bank, divides duties and responsibilities among senior management, and addresses concerns that do not fall under the Management Board's purview.

The Management Board is in charge of running the Central Bank. Any country’s Central Bank is sometimes considered an independent branch of the separation of powers. Without any coercion from the government, the Central Bank must control the monetary system and work to achieve its primary goals. That’s why the independence of the Central Bank is one of the most significant factors. We can see the situation in which the Central Bank is under the influence of the government in Turkey. The main problems with wrong policies and wrong decisions are that the central bank is not independent; the government forces the central bank to make decisions according to its interests; and "nepotism" brings people who are not suitable for the position of the Chairman of the Central Bank.

In particular, the regime between 2008 and 2009 was very successful. The Central Bank of Azerbaijan's monetary policy direction was strictly expanded during the 2008-2009 global economic crisis (p. Money Policy in 2009). Rustamov, ex-chairman, supported a fixed exchange rate system against the US dollar 13 to maintain financial stability.

But now, the new Chairman of the CBAR is Taleh Kazimov. He has a Bachelor's Degree in Automation and Computer Engineering. He graduated from the London Business School, Harvard University, and a joint programme of Georgia State University and Azerbaijan State Oil Academy. He is the former Chief Executive Officer of PASHA Bank. PASHA Bank is a private bank and one of the biggest banks in Azerbaijan. He has extensive experience in the banking sector. But being the Chairman of the Central Bank is about more than just knowing the banking sector. The chairman of the Central Bank should be knowledgeable in many subjects, including macroeconomics, microeconomics, and the country's economic situation. The new chairman needs to gain experience in the macroeconomics field. This decision seems adventurous. How correct can such a decision be when the world economy is going through such difficult times?

The effectiveness of the Central Bank of Azerbaijan’s control measures will be evaluated in order to determine how well they have accomplished their goals. In order to determine the total impact on the economy, this review would focus on the intermediate goals of generating adequate monetary expansion and developing a safe and healthy financial system.

In 2015, the sharply falling oil prices and the fact that the oil price was assumed to be 50 dollars during the budget planning and the subsequent devaluation led to the most turbulent days of Azerbaijan's economy. That year, the narrow money (M1) volume decreased by 46%. A similar situation continued in 2016 and 2017 as a result of a series of processes after 2015. After 2018, when the price of oil rose above 55 dollars (prices), the process of full recovery in the economy strengthened relatively towards 2019. In 2020, the COVID-19 pandemic began, and economic stagnation started again worldwide. As a result of the pandemic, the economy took another hit, with the temporary stoppage of work in workplaces, reduced supply in the market, and restrictions on people going to work and other activities. Most economies entered a period of stagnation during this period. The economy of Azerbaijan did not differ from the economies of other countries. The increase in energy prices caused by the pandemic and subsequent global events, mainly the Russia-Ukraine war, led to rising inflation worldwide. As a result, Azerbaijan's inflation rate will be 6.66% in 2021 and 12.6% in 2022. According to forecasts, this situation will gradually improve only by 2024. In these periods, the most prominent part in the statistics of money aggregates is the part towards the end of 2019 and 2021. As a result of raising the minimum wage twice in 2019 and an increase at the end of 2021 in the M1 money aggregate, the situation in 2019 and the situation in 2022 are relatively different. In 2019, the inflation rate in the country was 2.71%, and in 2021, this indicator was 6.66%. Due to the influence of that decision, the inflation indicator is currently at 12.6%, and it is predicted to increase.

Another notable factor is that M1 shrinks at the end of each year. There are some logical reasons behind this growth. One of them is about behavioural economics. People think the New Year is the beginning of new things. They do not mind spending money during this time; they pay for their recreation or family members' presents because of the "New Year" and so on. Thence, economists take this into account when they reckon with macroeconomic calculations.

Created by the author based on the data of the Central Bank of Azerbaijan.

The enabling legislation has recently increased the CBAR’s authority over the banking and monetary systems. However, several other concerns that limit the Bank’s capacity to carry out its core purpose successfully are still largely unresolved. As is well known, the primary goals of this role are to ensure price stability, preserve the soundness of the financial system and ensure the monetary stability necessary for an effective payments system.

It is essential for the relevant government organs to:

It is impossible to switch from our current exchange rate policy, which we have used for 6-7 years, to the floating exchange rate system. It might not be expected to see any change in the central bank’s policies. Because up until now, the Central Bank has always attempted to make the proper judgments by 16 examining the system and the status of the country's economy and native currency. If the existing management board strives to make rational decisions, they would likely stay in these decisions.

But what should be done? Firstly, the government must take its hand off the economy. Our economy should be diversified into two, three, or more sectors. Otherwise, our national currency will be pegged to the oil price. Azerbaijan should get rid of the Dutch disease. Secondly, the Central Bank must build a healthy financial environment for businesses and households; that is to say, financial markets and interactions with financial markets must develop in our country.

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