Azerbaijan Strengthens Monetary Resilience Amid Global Pressures
Taleh Kazimov, governor of the Central Bank of the Republic of Azerbaijan, has outlined the nation’s efforts to strengthen its monetary framework amid global economic uncertainties. In a recent discussion on Azerbaijan’s economic diversification and banking system modernization, Kazimov emphasized the country’s strategic approach to maintaining stability while promoting growth in non-energy sectors.
Monetary Framework and Global Risk Mitigation
Azerbaijan’s economy remains highly open, with trade turnover reaching 79.8% of GDP in 2025, according to Kazimov. He explained that energy price fluctuations impact the economy through three distinct channels. A $10 increase in oil prices adds approximately $1.2 billion to the current account, while a $50 rise per thousand cubic meters of gas contributes about $900 million. However, these benefits are counterbalanced by secondary effects, such as increased import costs from energy-importing nations, which can raise partner inflation by 0.67% with a 10% oil price hike. The nominal effective exchange rate plays a critical role in absorbing this pressure.
The third channel involves the valuation of strategic assets, which Kazimov noted offsets other risks when netted together. To underpin this stability, the central bank relies on three pillars. First, exchange rate stability serves as the primary nominal anchor, keeping expectations within a 4% corridor. Second, an interest rate corridor with standing facilities ensures predictable policy transmission. Third, a buffer stock of strategic reserves reached $85.8 billion by end-June 2025, exceeding 125% of GDP and covering nearly 400% of broad money.
Modernization Priorities and Financial Strategy
The Central Bank’s primary objective remains price stability, with inflation projected to stay within the target range at 6.1% by end-2026 and 5.8% by end-2027. Since September 2022, the interbank money market has been developed from the ground up, with AZIR (the overnight unsecured benchmark) becoming the secondary operational target. The average spread to the policy rate is now about four basis points, reflecting improved market functioning. The European Bank for Reconstruction and Development’s issuance of floating-rate notes tied to AZIR further validates these efforts.
The modernization strategy prioritizes strengthening interest rate passthrough to market rates, deepening capital and money markets through AZIR-linked instruments, and enhancing forecasting via data analytics and AI. He highlighted communication as an often-overlooked fourth priority, stressing that credibility is a central bank’s most valuable asset. The Financial Sector Development Strategy 2024-2026 demonstrates measurable progress, with an execution rate of 81.8% in 2024 and 85.6% in 2025. Reforms targeting interest-rate transmission, financial stability, payment infrastructure modernization, digital innovation, and a green taxonomy mark these achievements.
Economic Diversification Progress
Azerbaijan continues to diversify its economy, with non-oil sectors accounting for roughly 70% of activity. Between January and June 2025, construction contracted by 13%, while transport and logistics expanded 8%, information and communication rose 7.5%, and non-oil industry grew 4.1%. Kazimov described this as a deliberate reallocation toward tradable sectors that generate foreign exchange. Investment in the non-oil sector increased 5.5% during the first half of the year, driven by a 20.8% surge in private-sector investment that offset a 3.8% decline in public investment.
Monetary policy supports diversification by providing stable prices, a stable exchange rate, and a sound banking system. What we can do is provide the conditions: stable prices, a stable exchange rate, a sound banking system, and a market capable of transforming long-term savings into productive investment. Structural reforms outlined in the 2027–2030 economic agenda will ultimately determine the pace of diversification. The governor emphasized that the central bank’s role is to ensure macroeconomic and financial stability as the foundation for broader structural transformation.
