February 16, 2015 / 3:10 PM / in 2 years

UPDATE 2-Azeri central bank abandons currency peg to U.S. dollar

3 Min Read

(Updates with GDP growth figure)

By Nailia Bagirova

BAKU, Feb 16 (Reuters) - Azeribaijan's central bank said on Monday it had abandoned a peg between its currency, the manat, and the U.S. dollar and begun using a dollar-euro basket to manage the exchange rate of the manat, which has been under pressure from a slump in oil prices.

The central bank said in a statement it would still take part in the currency market and that it would target a corridor for the manat against the dual-currency basket. The manat has been pegged at just over 0.78 per dollar since mid-2011.

A central bank official told Reuters the basket would probably be split 30 percent in euros and 70 percent in dollars, in line with Azerbaijan's exports. The corridor will be set at a level to allow the bank to intervene when it sees fit.

"It will be a steady process. If we free the manat at once, prices could jump. One manat will cost 1 euro this year," said the official, who did not wish to be named since he was not authorised to talk to the media.

Azerbaijan has been less affected than other former Soviet states by an economic crisis in neighbouring Russia, but its economy depends on oil, leaving it exposed to price swings on global energy markets.

The Azeri bank has spent heavily in recent months to defend the manat, which has been effectively pegged to the U.S. dollar at just over 0.78 manat per dollar since mid-2011. The intervention has eaten into its foreign-currency reserves.

Those reserves fell by $1 billion in January to $12.68 billion as it tried to defend the value of the manat. It had spent nearly $1.13 billion defending the currency in December.

Vakhid Akhmedov, a lawmaker from the ruling party, told Reuters that the decision to abandon the peg was expected.

"The central bank cannot sell $1 billion every month to support the manat. It will also allow to stimulate domestic exports," Akhmedov said.

Analysts say the South Caucasus republic's 4.4 percent economic growth target for this year is at risk because it envisages oil at $90 a barrel. Brent crude is now trading near $60 a barrel.

Oil and gas account for 95 percent of the country's exports and 75 percent of government revenues.

Azeri gross domestic product grew by 4.4 percent in January 2015 year-on-year, although it fell in current prices to 3.6 billion manats ($4.6 billion) from 4.4 billion a year ago as oil prices declined, the State Statistics Committee said on Monday.

The oil sector grew by 3.1 percent and the non-oil sector by 5.5 percent.

The government projects annual inflation at 2.3 percent this year, up from 1.4 percent in 2014. (Additional reporting and writing by Margarita Antidze; Editing by Larry King)

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