Published October 2026, Pg. 64-72

Section: Young scientists and specialists

UOT: 339.743+336.748

DOI: 10.37474/0365-8554/2026-10-64-72

Exchange rate policy and currency risk in azerbaijan – in the context of economic resilience

A.N. Mahmudov - Azerbaijan State University of Economics

This paper examines the relationship between exchange rate policy, currency risk, and economic resilience in Azerbaijan – a resource-rich open economy whose macroeconomic performance is deeply intertwined with hydrocarbon revenue cycles. Using a qualitative, descriptive research design grounded in secondary data from official governmental and international institutional sources, the study analyses four key indicators over the 2015–2024 period: the Real Effective Exchange Rate (REER), the trade balance, lending interest rates, and the Non-Performing Loan (NPL) ratio. These dynamics are interpreted through the conceptual lenses of “Dutch Diseaseˮ and “Original Sin”, which link resource dependence and foreign-currency balance-sheet mismatches to systemic financial fragility. The twin devaluations of 2015 exposed these fragilities dramatically: the manat depreciated by approximately 50 % over the year, triggering a surge in NPLs to 21 %, a contraction in the banking sector, and a sharp deterioration in real household incomes. The paper traces how currency risk transmitted into interest rate and credit risk through the risk premium and balance sheet channels, creating reinforcing feedback loops that undermined financial sector stability. In the post-crisis period, macroprudential reforms, the accumulation of combined official reserves of approximately USD 71 billion by end-2024 – equivalent to about 41 months of imports – and the decline of deposit dollarisation from above 70 % to below 40 % have measurably strengthened the economy’s capacity to absorb external shocks. The findings suggest that genuine economic resilience in Azerbaijan requires not only adequate foreign exchange buffers but also structural economic diversification, expansion of non-oil exports, and the progressive development of domestic capital markets. Accordingly, the paper identifies the development of domestic currency-hedging instruments, the pursuit of an explicitly counter-cyclical fiscal policy drawing on sovereign wealth fund resources, and the strengthening of domestic productive capacity as the key policy priorities for durable macroeconomic resilience.

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