Azerbaijan another country to introduce float

Azerbaijan has joined a string of countries that abandoned exchange rate pegs and adopted freely floating currencies this year. The manat nosedived, quickly losing more than 30 percent of its value.

Simon Quijano-Evans, the London-based emerging-market strategist at Commerzbank, told Bloomberg:

"The longer countries hold on to the peg, the more they drain their foreign-exchange reserves."

Earlier this month, it was Argentina which became another country to let its currency float freely. As reported by Bloomberg:

A year that began with Vietnam depreciating the dong has culminated in Argentina and Azerbaijan’s decisions to give up control of the peso and manat, respectively, in quick succession in December, with the currencies plummeting about 30 percent on their free-float debut.

Within the Central Asia and Caucausus region, Azerbaijan followed Kazakhstan in allowing its domestic currency to adjust to lower oil prices.

"It looks like Azerbaijan’s authorities are following Kazakhstan’s devaluation path," said Oleg Kouzmin, a former Russian central bank adviser who works as an economist at Renaissance Capital in Moscow. "After devaluing the currency once, some time ago, they concluded that the first move was not enough to tackle all the challenges of a weaker oil price environment."

Unfortunately for the credibility of the adjustment, the Central Bank of Azerbaijan had seemed to downplay the currency pressures earlier this month in its public pronouncements.

On December 17, it said:

The exchange rate of manat against the US dollar remains stable.

Four days later, an out-of-the-blue announcement came out:

Amid intensifying external economic shocks and in an attempt to compensate the balance of payments, buttress country’s forex reserves and improve international competitiveness of the national economy, the Management Board of the Central Bank decided to move to a free float.

The situation was not much different in the run up to the previous February devaluation. As The Guardian reports:

Just weeks before the February devaluation, the Azerbaijani president, Ilham Aliyev, called the manat “one of the most stable currencies in the world” and encouraged foreign nationals and companies to invest.

Residents of Baku were angry at the sudden announcement, according to The Guardian, and scrambled to convert their manats into foreign currency or durable goods.

"Azerbaijan has moved to a floating exchange rate but someone forgot to teach it how to swim," said Natiq Cafarli, an economist and member of the opposition Republican Alternative.

Well, such is the power of communication that a central bank can easily do more harm than good by mismanaging the way it speaks to the public about an exchange rate.