Personal Debt Crisis Bites in Azerbaijan

The sudden devaluation of Azerbaijan's currency has hit ordinary people hard, and two recent suicide cases have been blamed on mounting debt.

The crisis has led to accusations that the banks are breaking the law by passing on the higher cost of consumer debt to their customers.

The country's central bank announced the devaluation on February 21, setting a new exchange rate making the manat 35 per cent lower against the US dollar than its previous value. The move was prompted by contagion from Russia's economic problems and by the falling global price of oil, of which Azerbaijan is a major exporter. The central bank indicated that it could not carry on supporting an artificially strong exchange rate, as it had spent 1.1 billion dollars in foreign currency reserves doing so in January alone.

The manat has enjoyed relative stability and this steep devaluation came out of the blue, so Azerbaijanis rushed to exchange or spend their local currency, and shop prices started rising.

Among the worst hit are those who have taken out bank loans, the value of which is set in dollars when the contract is signed, even though repayment is in manats. The effect of devaluation is that borrowers must now pay a third more to cover the cost of monthly repayments.

Jabrail Hasanov, a 39-year-old father of three from the town of Sabirabad, was found hanged from a bridge over the river Kura on March 6. The Azadliq newspaper reported that he left a suicide note explaining that he was unable to repay his loans.

The newspaper reported another case four days later which it also linked to money troubles, in which a father of three named as Alim Qasimov hanged himself at a factory in the town of Khirdalan.

According to a report on ANS television, the total sum of outstanding debt in Azerbaijan reached 1.3 billion dollars in February and was likely to rise in the coming months.

Many borrowers are feeling the pinch.

"I work on a construction site," Soltan Ahmedov, 43, said. "I get 450 manats [a month]. Of that sum, 170 manats goes on loan which I took out in the national currency. Six months ago, I took out a loan of 2,000 dollars to refurbish my apartment. I was repaying 190 dollars a month, which came out a little under 150 manats, but now it's 200 manats," he said. "How am I supposed to live on the remainder…? There's a lot of talk about economic development, but why doesn't the average citizen feel the effects?"

Ahmedov was interviewed while taking part in a March 15 demonstration against "robbery and lies" in the capital Baku, organised by opposition parties and attended by several hundred people.

The central bank is under fire for allowing the financial sector to bump up monthly loan repayments. Critics argue that Azerbaijan's civil law code states that in cases like this, borrowers should continue repaying loans at the exchange rate prior to devaluation.

In response, the bank says this clause can be "interpreted in various ways", and it has recommended that the constitutional court issue a ruling on the matter.

A spokesman for the constitutional court told the Qafqazinfo.az website that it might look into the legalities, but it could only do so if the central bank or another bank formally asked it to.

Supreme Court judge Asad Mirzaliyev told the Publika.az website that in his view, the civil code is perfectly clear - loan repayments should continue to be made at the old manat/dollar rate.

"It's unlawful to demand repayment of loans at the present exchange rate," he told the website. "Supposing the dollar's value had fallen - would the banks then accept repayment at that [cheaper] exchange rate?"

Mirzaliyev stressed that his comments were not a formal ruling.

Zohrab Ismayil, chairman of the Association for Promoting a Free Economy, a group that campaigns for civil rights and against corruption, told IWPR that the current crisis stemmed from the way monetary and banking policy had been run in Azerbaijan.

"Bank lending policy in Azerbaijan is wrong. For example, in many [non-eurozone] European countries, loans are granted only in the local currency," he said. "Azerbaijan, however, dollarised its economy, like a number of Arab countries. And it's possible to take out loans in dollars. In one sense, this can certainly be viewed as a sign of financial freedom. But it increases the demand for foreign currency."

The central bank has pledged to continue intervening to maintain the manat within a "corridor" around the new rate, rather than allowing it to freefall as has happened in some of Azerbaijan's neighbours.