ANNUAL REPORT 2012 THE CENTRAL BANK OF THE REPUBLIC OF AZERBAIJAN THE CENTRAL BANK OF REPUBLIC AZERBAIJAN 2 0 12 ANNUAL REPORT THE CENTRAL BANK OF THE REPUBLIC OF AZERBAIJAN 2012 ANNUAL REPORT TABLE OF CONTENTS FOREWORD – GOVERNOR OF THE CENTRAL BANK 4 I. GLOBAL ECONOMIC PROCESSES IN 2012 6 II. ECONOMIC GROWTH IN AZERBAIJAN AND ITS SOURCES 10 2.1. Aggregate demand 10 2.2. Aggregate supply 12 2.3. Expectations of economic activity 12 2.4. Inflation 13 2.5. Employment 15 2.6. Balance of payments 15 III. MONETARY AND EXCHANGE RATE POLICY, MONETARY CONDITIONS 20 3.1. Monetary policy 20 3.2. Exchange rate policy and international competitiveness 21 3.3. Money supply 22 3.4. Institutional framework of the monetary policy 23 IV. FINANCIAL MARKETS 25 4.1. FX market 25 4.2. Money market 26 4.3. Interbank market 27 V. FOREIGN EXCHANGE RESERVES MANAGEMENT 28 VI. BANKING SYSTEM AND FINANCIAL STABILITY 29 6.1. Development path and institutional development of the banking system 29 6.2. Liabilities of the banking system 30 6.3. Structure of assets of the banking system 31 6.4. Capital of the banking sector 32 6.5. Financial performance of the banking sector 33 6.6. Risks of the banking sector 34 6.7. Bank supervision 34 2 VII. MORTGAGE LENDING 36 VIII. CENTRALIZED CREDIT REGISTRY 38 IX. PAYMENT SYSTEMS 39 9.1. Ensuring sustainable and efficient operation of the payment systems 39 9.2. Development of the National Payment System 39 X. CASH CIRCULATION 42 10.1. Meeting the economy’s cash demand 42 10.2. Cash management 43 XI. HUMAN RESOURCES MANAGEMENT 45 XII. COMMUNICATION OF THE CENTRAL BANK 47 XIII. INTERNAL AUDIT 49 XIV. INFORMATION TECHNOLOGIES OF THE CENTRAL BANK 50 XV. INTERNATIONAL RELATIONS OF THE CENTRAL BANK 52 XVI. THE CENTRAL BANK`S 2012 FINANCIAL STATEMENTS 54 3 Foreword FOREWORD In 2012, the economy of Azerbaijan consistently displayed a high level of sustainability and a firm stance unwavered by the onset of complex global economic adversities, as the non-oil sector became a key factor that drove economic growth further up, and the national foreign exchange reserves were steadfast on a upwards path. The non-oil sector’s high growth rate was largely attributable to export expansions and investment rollouts, coupled with the government’s active spending designated to boost economic development. Continued enhancement of household welfare pushed the poverty rate further down, closing at 6%. Macroeconomic stability played an essential role in securing all of these accomplishments. Within the scope of its mandate, in 2012 the Central Bank pursued a policy of maintaining a low, single- digit inflation rate, while ensuring a stable exchange rate for the manat, conducive to a sustainable growth environment with an aim to preserving financial pace of the banking and financial industry. stability. A number of critical consolidation and Seeking to realize an adequate monetary and capitalization decisions were made for the industry. exchange rate policy, the Central Bank worked to The measures above helped the banking system achieve its priority monetary policy target of stable maintain its financial stability, and drive the capital prices and a single-digit inflation rate. The exchange adequacy ratio, a major function of the sector’s rate policy balanced the demand and supply on the overall sustainability, to a point considerably higher currency market during the year, whereby it secured than the required regulatory level. Banks kept their a strong footing for a stable rated manat. The low liquidity levels high and asset quality ratios in inflation rate, leaning on the stable manat, made positive ranges during the year. a positive contribution to the non-oil industry’s The banking system carried on with its regional international competitiveness with an improving coverage efforts through a network expansion with effect on the financial industry’s overall performance. a view to improving access to finance in 2012. Efforts were continued in 2012 to preserve public The regional market penetration included support confidence in banks, minimize systemic risks and to non-bank credit institutions, making them more build on governance and management capacities, active players on the lending market, so as to provide as well as to achieve a stronger financial stature. consumers with better access to alternative sources By advancing further the risk-based prudential of funding. supervision framework aligned with the Basel III As the nation’s mortgage lending program was standards for bank supervision enabled a supervisory continued in the reported year, it helped households 4 Foreword get fairer housing deals, triggering their economic opportunities was magnified by employing specialized activity. The practice of drawing on a pool of market instruments and geographic diversification in order to resources with a view to enhancing the scope of improve management efficiency. mortgage lending was carried over from the previous In addition, the Central Bank carried on with years. elaborate programs and projects designed to improve Interbank settlement systems, initiated and directed and modernize all of the functionalities supporting its by the Central Bank, remained stable and reliable operations, and build on institutional capacities, as components of the National Payment System. The per its 2011-2014 strategic plan. Said programs and country continued to migrate towards increased non- projects helped develop the Bank’s internal capacities cash circulation, seeking to catch up with developed in addition to ensuring that more effective approaches economies in the use of payment cards, well in line are employed to achieve goals and functions mandated with its overall goal of targeting broader business and by the law. household audiences for a wider spread of electronic Thus, the Central Bank was successful in 2012 payment services. as far as achieving the goals and conducting the The national economy’s cash demand was met in functions mandated by the law are concerned. The full and on time in 2012. Projects were continued to inflation rate remained in a single-digit range, the help harmonize cash management with best practices manat exchange rate stayed stable, money supply and standards. As part of the ongoing Regional climbed up in consistency with the economic growth Central Banking endeavour, a set of functionalities rate. The banking system preserved its function of a was identified that would back the operations of reliable financial intermediary, along with financial Regional Centers, with a management structure sustainability, and overall, the industry kept its aligned with uniform standards. advancement pace firm and progressed further up In a low yield rate environment that originated on its development path. Payment systems developed, from a magnitude of uncertainties reigning across their coverage expanded, the economy’s demand for the globe, the Central Bank defined the security cash satisfied, foreign exchange reserves managed of funds as a key priority of its foreign exchange effectively. reserves management. Yet, the scale of investment Elman Rustamov Chairman of the Central Bank of Azerbaijan 5 Global economic processes in 2012 I. GLOBAL ECONOMIC PROCESSES IN 2012 While global economy did continue to develop in 2012, certain vulnerabilities and exposures in the global financial system and fiscal instability risks still existed. Emerging economies showed steady growth rates as opposed to the diminishing economic activity in developed countries. The year 2012 was characterized with faster- paced re-balancing processes. Countries using a savings economic model experienced a decline in the aggregate surplus of the external sector, dropping down to as little as 1.7% of the worldwide GDP Source: WTO (against 3.1% in 2006). A gradual transformation of the savings model into a consumption model played Macroeconomic vulnerabilities and uncertainties a key role in the East Asian region. The surplus of resulted in an 18% decline of direct foreign China’s current account balance (CAB) spiralled investment (DFI) flows compared to previous years. down from 10% to 2.6% of the GDP over the last 5 The structure of DFI flows also changed considerably. years. A substantive decline of investments in USA and Eurozone reduced the share of developed countries (DC’s) in total investments. The gap between developed and developing countries was at its highest (Chart 3). On the other hand, the restructuring of pre-crisis investments with an efficiency downgrade was still underway, while new investments shifted more in the direction of start-up business and “green economy” facilitation. Source: IMF Although the world trade eased out of the negative quarters later in the year in terms of growth rate, it was still lower than in the previous periods. Eurozone’s continued recession had an adverse effect on the region’s imports. A number of countries, including Germany, India, Brazil, France, Japan started to substitute external demand channels of economic growth for domestic demand. On the other hand, the tendency to protect domestic markets grew Source: UNCTAD stronger. Thus, the number of the WTO’s disputed issues reached its highest in the past ten years in 2012. 6 Global economic processes in 2012 In 2012, the number of the unemployed went terms of economic growth. A set of stimulating up by 4 million people, thus reaching 198 million efforts managed to secure economic activity in these (International Labor Organization). This rise was countries to a certain extent as external demand driven primarily by the insufficient economic growth diminished. rate and inadequate laborforce qualification levels Lower than expected economic activity had a failing to meet business requirements. In addition, relatively stabilizing effect on commodity market a number of countries initiated greater tax benefits prices. Food prices rose by 0.7%, precious metal for return on equity, which descouraged investors prices went up by 1.7% on average in 2012.