BAKU, Azerbaijan, February 10. The International Monetary Fund (IMF) recommends a correlation between the interest rate of the Central Bank of Azerbaijan and rates on bank loans, Trend reports, referring to the International Monetary Fund (IMF),
According to the information, the report was prepared based on the results of consultations following Article IV of the Agreement "On the Establishment of the IMF," held by the head of the Fund's mission in Azerbaijan Anna Bordon in November 2023 in Baku.
"Despite recent inflationary instability, bank loan rates have historically remained quite constant, both in manat and foreign currency. This suggests considerable changes in inflation-adjusted (real) interest rates. However, the correlation coefficient did not show an improvement in the transmission of central bank rates to manat rates: from July 2019 to September 2022, it was nearly zero (0.01), and from October 2022 to October 2023, it even became negative (-0.3). A similar tendency is evident in the case of the link between the Central Bank refinancing rate and deposit interest rates: the correlation coefficient went from almost nonexistent before September 2022 to substantially negative (-0.78) subsequently," the fund's research notes.
According to the IMF, Azerbaijan has seen a considerable interest rate differential in the banking industry for many years. This significant difference between deposit and lending rates is higher than the norm for upper-middle-income countries. Azerbaijan's average annual deficit between 2013 and 2020 was 8.2 percentage points, compared to 6.6 percentage points for upper-middle-income nations and nearly 5 percentage points for Asian countries.
The huge disparity in interest rates poses dangers for medium-term economic growth. This spread, which represents the flow of capital from savers to borrowers, has a considerable impact on consumer and company spending, which is crucial in deciding the path of economic growth and price stability. In the context of a competitive and efficient financial system, a large range of interest rates may imply financial sector inefficiencies and low competitiveness. Higher lending rates raise the risk premium, limiting credit demand, but lower deposit rates reduce savings. These dynamics indicate the high cost of capital in the economy, and, as a result, economists at the Fund believe they may hamper the process of financial development.
The spread takes into account market competition, interest rate risk, risk aversion, market structure, transaction volumes, and interest rate differentials. Additional research examines credit risk, taxation, financial instruments, regulatory issues, accounting standards, and other aspects. The IMF acknowledges that wide interest rate differentials are a barrier to achieving inflation targets.
According to common knowledge, the fundamental cause of big interest rate differences is the banking sector's strong concentration, which reduces banks' incentives to pass on changes in deposit and lending rates.
The authors of the paper state that banking concentration in Azerbaijan is expanding, particularly in deposits, assets, and capital. At the same time, the lending sector is substantially less concentrated, as seen by a lower loan-to-GDP ratio than in neighboring countries.
"Countering the growing tendency of bank concentration is critical to promoting competition and preventing the formation of monopolistic activities in the banking sector," the IMF notes.
The IMF underlines that the CBA has taken measures, but more work is required. Initial signs point to a better transfer of the Central Bank's interest rate to bond and government securities yields. However, improvements in deposit and lending interest rates have been modest, and IMF analysts anticipate that additional measures will be required to remove this bottleneck in the monetary transmission chain.
Stay up-to-date with more news on Trend News Agency's WhatsApp channel
