




































AGORA International Journal of Economical Sciences, http://univagora.ro/jour/index.php/aijes 

ISSN 2067-3310, E-ISSN 2067-7669 

Vol. 18, No. 1 (2024), pp. 82-97 

 

82 
 

FACTORS AFFECTING THE TOTAL FOREIGN EXCHANGE 

RESERVE ADEQUACY OF THE CENTRAL BANK: TURKEY 

AND AZERBAIJAN 

 

G. JAMALZADE, A. SALDANLI, E. JAMALZADE 

 

Gunduz Jamalzade¹, Arif Saldanli², Elgiz Jamalzade³ 

¹ Karabuk University, Azerbaijan 

https://orcid.org/0000-0001-7523-7836, E-mail: gunduz.jamalzada@competition.gov.az     
² Istanbul University, Turkey 

https://orcid.org/0000-0001-9990-9510, E-mail: saldanli@istanbul.edu.tr   

³ Azerbaijan State University of Economics, Azerbaijan 

https://orcid.org/0009-0001-6927-0477, E-mail: elgiz-jamalzada@unec.edu.az    

 

Abstract: International foreign exchange reserves are widely acknowledged as a global 

medium of exchange that possesses a readily available characteristic. Official public assets, 

which are foreign assets kept and organized by the monetary authorities of countries, serve as 

a complement to foreign exchange reserves. Adequate levels of foreign exchange reserves are 

necessary for nations to meet their payment commitments and sustain the stability of their 

currency. The primary rationale for the Central Bank's decision to maintain liquid foreign 

exchange reserves is to establish a safeguard against any speculative assaults or fluctuations 

in the trade balance. The primary objective of this research was to ascertain the many elements 

that influence the sufficiency of the aggregate foreign exchange reserves in Azerbaijan and 

Turkey. The article examined the sufficiency of the gross foreign exchange reserves of the 

Central Bank of the Republic of Azerbaijan (CBAR) and the Central Bank of the Republic of 

Turkey (CBRT) based on the ideal reserve ratios recommended by the IMF. Following an 

extensive examination of theoretical and conceptual literature, this study aims to assess the 

sufficiency of the Gross Foreign Exchange Reserves held by the CBAR and CBRT. The 

proposed optimal reserve ratios are utilized to elucidate the reserve adequacy of these 

countries, while considering the theoretical relationship between the variables. To achieve this 

objective, a logit regression analysis was conducted using the data spanning from 2012 to 

2022. The results indicate that there is a positive and statistically significant relationship 

between interest rates and the overall adequacy of foreign exchange reserves. Considering the 

influence of interest rates on economic stability and financial performance, this outcome is 

anticipated. Furthermore, it was shown that the exchange rate variable exhibited a statistically 

significant negative impact on the preceding period. The present empirical study offers an 

overview of the various elements that influence the sufficiency of the aggregate foreign 

exchange reserves of Azerbaijan and Turkey. The findings of this study offer crucial insights to 

decision makers regarding the variables that must be considered when overseeing foreign 

exchange reserves.  

Keywords: Logit Model, Macroeconomic Indicators, Optimum Foreign Exchange 

Reserves 

https://orcid.org/0000-0001-7523-7836
mailto:gunduz.jamalzada@competition.gov.az
https://orcid.org/0000-0001-9990-9510
mailto:saldanli@istanbul.edu.tr
https://orcid.org/0009-0001-6927-0477
mailto:elgiz-jamalzada@unec.edu.az


Gunduz JAMALZADE, Arif SALDANLI, Elgiz JAMALZADE 

83 
 

INTRODUCTION 

Foreign exchange reserves are often regarded as a reliable sign of a nation's robust 

economic and financial framework, therefore playing a crucial role in safeguarding economic 

stability. The assessment of a country's foreign exchange reserves and the examination of the 

causes influencing these reserves are significant indicators that provide insights into the 

economic and political conditions of nations. 

Based on the criteria established by the International Monetary Fund (IMF), it is 

required that a nation's central bank maintains foreign exchange reserves that surpass the import 

index of said nation within a timeframe of three to six months (Wijnholds and Kapteyn, 2001). 

According to Mulder and Bussiere (1999), an alternative perspective posits that it is 

advantageous for a nation's foreign exchange reserves to exceed its short-term external debt. 

Alternatively, if the central bank's reserves are insufficient to cover short-term external debt, it 

will face a disadvantageous situation (Irefin and Yaaba, 2011; Cinel and Yamak, 2014; Lehto, 

1994). The Central Bank of the Republic of Azerbaijan (CBRT) has experienced a rise in its 

foreign exchange reserves compared to 2022, primarily attributed to the growth in natural 

resources. The decrease in the foreign exchange reserves of the Central Bank of the Republic 

of Turkey (CBRT) in recent years, as compared to the year 2022, has elicited significant public 

responses. One of the primary factors contributing to the decrease in foreign exchange reserves 

is the utilization of foreign currency sales, given the inherent volatility of the exchange rate. 

Given the aforementioned concerns, it is evident that doing research on the gross foreign 

exchange reserves maintained by central banks holds significant significance.  

The logistic regression model is a widely employed regression technique in the field of 

statistical analysis. The aforementioned model is employed for the purpose of quantifying the 

impact of independent variables and estimating the probability values associated with the 

dependent variable. The logit model is employed to quantify the impact of individual factors 

on the sufficiency of foreign currency reserves, while also providing probability values for the 

purpose of interpreting this impact. Upon the conclusion of the study, an analysis will be 

conducted on the elements that influence the foreign exchange adequacy of Turkey and the 

Republic of Azerbaijan, utilizing the framework of this particular model. Subsequently, the 

obtained results will be interpreted.  

 

Foreıgn exchange reserves and theır adequacy 

Definition and Composition of Foreign Exchange Reserves 

Reserves refer to foreign exchange assets that are held by a nation's monetary 

institutions. These reserves function as an insurance mechanism, ensuring the protection of the 

country during periods of international capital shortages (Park and Estrada, 2014). Previous 

research conducted by Elhiraika and Ndikumana (2007) has posited that the primary objective 

of central bank reserve accumulation is to address unforeseen imbalances in the balance of 

payments. However, more recent studies conducted by Cinel (2015) and Eren (2017) have 

attributed the preference for reserve levels to the reduction of costs incurred by countries during 

crises and as a preventive measure against potential crises (Jeanne and Rancière, 2011, pp. 

905–930). Reserves can be conceptualized as the aggregate value of international securities 

and gold that are kept by the central banks of republics, in addition to the aggregate value of 

assets that possess the potential for convenient conversion into foreign exchange reserves. 



FACTORS AFFECTİNG THE TOTAL FOREİGN EXCHANGE RESERVE ADEQUACY 

OF THE CENTRAL BANK: TURKEY AND AZERBAİJAN 

 

84 
 

Reserves are a component of the balance sheet that is subject to careful scrutiny by central 

banks due to its significant role in promoting stability during periods of financial imbalances. 

Reserve adequacy can be seen as a significant metric for assessing the vulnerability of financial 

and economic systems. 

Reserves refer to assets that are within the authority of a country's monetary institutions. 

These assets serve as political tools during periods of economic recession and downturn, and 

can be easily exchanged and utilized as international external payment instruments (Memiş et 

al., 2014). According to the International Monetary Fund (IMF), reserves refer to external 

assets that serve as a safeguard against potential adverse risks. These reserves are managed by 

monetary policy-making authorities as necessary, aiming to mitigate risks in the balance of 

payments and reduce instability in the foreign exchange market of a country (IMF, 2015, p. 

424). Based on widely accepted definitions, it may be inferred that reserves encompass the 

aggregate value of many assets held by a nation's central bank, including foreign currency 

equivalents and gold. 

The official reserves that are widely acknowledged in academic research and are 

incorporated into the balance sheet of central banks as reserves, are worldwide recognized 

based on the information accepted by the International Monetary Fund (IMF). These reserves 

comprise the following subcomponents: Convertible foreign exchange assets cover a variety 

of instruments such as International Standard gold, IMF Reserve Position, Special Drawing 

Rights (SDR) and other reserve items. The distribution of reserve components in the global 

reserve total as of March 2012 and 2022 is depicted in Chart 1.1. Upon comparing the eras, it 

becomes evident that the weights assigned to reserve components, with the exception of the 

IMF reserve position, underwent alterations towards the conclusion of the 10-year period. 

According to the data presented in Chart 1.1, it can be observed that foreign exchange reserves 

occupy a prominent position within the reserve composition, amounting to SDR 9077.3 million 

as of March 2022. In comparison to the year 2012, there was an increase in the proportion of 

SDRs and gold, whilst the share of foreign currencies experienced a gain in quantity but a fall 

in proportion. The aforementioned advancements exemplify the fluidity inherent in reserve 

components. 

 

Graph 1.1 2012 and March 2022 Official World Reserve Components 

                                         
Source: IMF 2022 Annual Report, Appendix, International Reserves1 

                                                      
1 Source: https://www.imf.org/external/pubs/ft/ar/2022/downloads/appendix.pdf. 

DÖVİZ 

%83,5 …

ALTIN …

IMF REZERV 

POZİSYONU …

SDR   …

2012 MART

DÖVİZ 

%79.6…

ALTIN 

%13.8 …

IMF REZERV 

POZİSYON…

SDR %5.5 …

2022 MART

https://www.imf.org/external/pubs/ft/ar/2022/downloads/appendix.pdf


Gunduz JAMALZADE, Arif SALDANLI, Elgiz JAMALZADE 

85 
 

Foreign currency assets that can be converted have the greatest level of liquidity and 

make up the largest portion of reserves. In contemporary circumstances, there are numerous 

justifications for nations to maintain a substantial proportion of their reserves in foreign 

currency. The primary factors contributing to this phenomenon are the limited profitability of 

gold in global markets, as well as the lack of substantial income generated by SDR and IMF 

reserve positions. Consequently, central banks maintain a substantial proportion of their 

international reserves, which are characterized as assets that are readily available for use in 

overseas markets. These reserves are denominated in foreign currency and are allocated to 

foreign markets subsequent to a thorough assessment of various investment vehicles, taking 

into consideration factors such as liquidity and return (IMF, 2014). 

Numerous nations accumulate their domestic currency as reserves for foreign 

exchange, however they exhibit a preference for foreign currencies such as the US dollar, euros, 

Japanese yen, Swiss francs, and British pounds (Eren, 2017). The primary rationale for 

assessing the reserves of these nations individually is their utilization as a reserve element 

within the global market system, thereby augmenting the influence of these countries over the 

market system. 

The US dollar has a substantial share of foreign exchange reserves due to many factors. 

One crucial aspect is that, although the disintegration of the Bretton Woods System, nations 

persisted in maintaining the US dollar as a reserve asset owing to their unwavering faith in the 

American economy. An further significant factor contributing to this phenomenon is the 

influence exerted by the US dollar on the global economy, stemming from its status as the 

exclusive superpower following the disintegration of the Soviet Union (Yaman, 2003, p. 13). 

Even nations that engage in the production of raw resources are compelled to establish their 

exchange rate policies in relation to the United States dollar, as this has a direct impact on their 

domestic markets. Simultaneously, a substantial proportion of manufacturing industry items 

are priced in dollars and sold in global marketplaces. 

The data presented in Figure 1.1 illustrates the progression of government foreign 

exchange reserves, as well as the utilization of the US dollar and the euro as reserves, from 

2012 to 2021, measured in billions of SDR. 

 

Figure 1.1. 2012 and March 2021 Official World Reserve Components 

 
Source: IMF Annual Report, 2012, 2022 

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Sum of

2012

Sum of

2013

Sum of

2014

Sum of

2015

Sum of

2016

Sum of

2017

Sum of

2018

Sum of

2019

Sum of

2020

Sum of

2021

Currency Euro U/S dollar Poly. (Euro) Poly. (U/S dollar)



FACTORS AFFECTİNG THE TOTAL FOREİGN EXCHANGE RESERVE ADEQUACY 

OF THE CENTRAL BANK: TURKEY AND AZERBAİJAN 

 

86 
 

It is evident that the value of the US dollar as a foreign exchange reserve will exceed 

$5 trillion by the conclusion of 2021. According to the provided data, the United States dollar 

constitutes 54.9 percent of the aggregate 9.2 trillion foreign exchange reserves, or over half of 

the total value of such reserves. The primary indicator of the significance of the US dollar in 

reserves is its representation of around 44 percent of total international reserves during the 

specified time. The euro, currently the second most prominent currency in foreign exchange 

reserves after the US dollar, has had a marginal gain in its exchange rate value relative to the 

US dollar during certain time periods (Figure 1.1). The dollar's devaluation during certain time 

periods and the rise in the euro's proportion of total reserves can be ascribed to the policy 

actions enacted by the United States in reaction to the ongoing global crisis. 

Gold, classified as a valuable metal, holds the distinction of being the oldest reserve 

element kept by nations according to global benchmarks. The inclusion of standard gold in a 

nation's reserve components may be attributed to several key factors. These include its capacity 

to serve as collateral, its low risk factor index, its function as a safeguard against crises, and 

the intention to enhance reserve diversification (Sümmeoğlu, 2010). 

 

Figure 1.2. March 2012 and 2022 International Standardized Gold and Share in Reserves 

 
Source: IMF Annual Report, 2012, 2022 

 

According to the data presented in Figure 1.2, the aggregate quantity of gold reserves 

maintained by the central banks of various nations falls within the approximate range of SDR 

1100–1500 billion in international reserves from 2012 to 2022. This range exhibits intermittent 

fluctuations, with certain periods seeing a temporary decrease, succeeded by subsequent 

periods of expansion. Consequently, the limited or nonexistent utilization of gold in the 

financial systems of nations leads to its displacement from the focal point of the monetary 

system (Yaman, 2003, p. 11). Conversely, in the present era, financial instruments like 

electronic money have gained significance and are increasingly utilized for cross-border and 

inter-individual transactions. Upon comparing the expenses associated with this approach to 

the expenditures incurred by gold, including storage and transportation, it becomes evident that 

the overall costs of gold are considerably elevated. Consequently, gold is regarded as a less 

favored financial instrument. 

1096,7

802,6 860,4 809,4
917,6

991,3 1010,4

1225,1

1479,3 1475,3 1582,2

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

0

250

500

750

1000

1250

1500

1750

2000

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Gold as Foreign Exchange Reserves Billion SDR(SOL) Gold/World Reserve Components (%)



Gunduz JAMALZADE, Arif SALDANLI, Elgiz JAMALZADE 

87 
 

The reserve position is a reserve resource established by the International Monetary 

Fund (IMF) in 1969. Every member country of the IMF is required to maintain a predetermined 

allocation of Special Drawing Rights (SDRs). The predetermined quota serves as a determinant 

of the financial contribution a member country must make to the International Monetary Fund 

(IMF), its allocation of financial resources, and its impact on the IMF's decision-making 

processes. Additionally, it serves as an indicator of the country's voting power and its economic 

standing relative to other nations. The significance of IMF quotas for countries is evident (Ṕnar 

& Erdal, 2011: 544-545). The determination of these quotas is based on Special Drawing Rights 

(SDRs), which serve as the International Monetary Fund's unit of account. As of March 2021, 

Turkey's International Monetary Fund (IMF) quota stands at about SDR 4.659 million (1 SDR 

= 1.4247 in October 2022), equivalent to USD 6.637 million. In contrast, Azerbaijan's allocated 

quota amounts to SDR 391.7 million, equivalent to around $559 million.  

Special Drawing Rights (SDRs) refer to a collection of currencies that are generated 

and made available by the International Monetary Fund (IMF) on the market as a distinct 

currency element. The money in question does not derive its value from any specific tangible 

resource or nation. The International Monetary Fund allocates reserve resources to all its 

members based on their quotas, with the aim of diversifying countries' reserves (Kester, 2001, 

p. 18). In a concise manner, this currency serves solely as a reserve element in transactions 

conducted between the International Monetary Fund (IMF) and the member nations of this 

union. Foreign Exchange Reserves Adequacy Indicators 

It can be argued that nations maintain reserves to mitigate potential expenses for diverse 

purposes, and the magnitude of these reserves is subject to variation according to the distinct 

structures of each country. Measuring the adequacy indicators of reserves is crucial for a 

country as it serves as a safeguard against potential national and international risks, mitigates 

the cost of a prospective crisis, and serves as an indicator of financial profitability. The 

measurement of reserve adequacy and the factors influencing reserve adequacy have been a 

subject of ongoing debate in numerous research due to advancements in international trade and 

the monetary system. This study aims to assess the reserve adequacy of two countries by 

employing widely recognized methodologies.     

 

Measuring the optimal adequacy of foreign exchange reserves : Turkey-Azerbaijan   

Nations that maintain high levels of reserves generally exhibit a more rapid recovery 

from the adverse consequences of financial crises compared to nations with lower levels of 

reserves. The reserve adequacy level, as defined by Heller (1966, p. 317), refers to the point at 

which the marginal benefit is equal to the marginal cost. Conversely, Bird and Rajan (2002, p. 

7) contend that there is no upper limit to the reserve adequacy level. Instead, they argue that 

the monetary authority consistently endeavors to augment the level of reserves. 

Various methodologies have been devised in academic literature to evaluate the 

sufficiency of reserves. The approach suggested by the IMF, which is universally applicable, 

involves calculating the ratios of reserves to imported goods and services, short-term external 

debt, and broad money supply (CBRT, 2011a). 

 



FACTORS AFFECTİNG THE TOTAL FOREİGN EXCHANGE RESERVE ADEQUACY 

OF THE CENTRAL BANK: TURKEY AND AZERBAİJAN 

 

88 
 

Ratio of short-term debt to international reserves  

The Short-Term External Debt (STED) method is employed by the monetary authority 

of a nation with the objective of maintaining adequate reserves to meet both domestic and 

foreign obligations that are scheduled to mature within a one-year timeframe. This 

demonstrates the government's capacity to meet its debt obligations (Wijnholds & Kapteyn, 

2001, p. 9). 

In terms of external debt stock, the Republic of Turkey occasionally attains the top 

position among emerging market economies (EMEs). In comparison to alternative alternatives, 

it is crucial to evaluate the short-term foreign debt approach with the reserves of these countries. 

According to the data presented in Figure 1.3, it can be observed that the utilization of all 

reserves in the years 2010, 2011, 2013, 2014, 2014, 2017, 2018, and 2020-2022 would not be 

adequate to meet the short-term debt obligations of the nation, as depicted in Figure 2.10. 

Turkey's creditworthiness in the foreign market and its CDS (Credit Risk Premium) are deemed 

to be very deficient and insufficient due to a gradual decrease in this ratio. 

 

Figure 1.3 CBRT Reserve / Short Term Debt Ratio in 2002 and 2022 

 
Source: CBRT 2023, (Access date: January 1, 2023) 

 

The values of the link between Azerbaijan's total reserves and short-term external debt 

up to one year for the periods 2004-2021 are presented in Table 1.1. This analysis was 

conducted using the CVD model to assess the reserve adequacy of Azerbaijan. During these 

time intervals, the mean value of the ratio between reserves and short-term debt exceeds 36. 

This substantial ratio can be attributed to the country's strategic emphasis on long-term 

borrowing rather than short-term borrowing. 

 

Table 1.1 Reserves / Short-Term Debt Ratio (Million USD)2 

History TP RESPARPD K1 (CVB) Reserve/CVB 

2004 3064,73 198,00 15,48 

2005 2872,77 290,00 9,91 

2006 4096,31 198,00 20,69 

                                                      
2 Source: https://www.cbar.az/page-40/statistical-bulletin 

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Sum of Reserves/KVB Sum of Greenspan-Guidotti Rule

https://www.cbar.az/page-40/statistical-bulletin


Gunduz JAMALZADE, Arif SALDANLI, Elgiz JAMALZADE 

89 
 

2007 6265,85 202,00 31,02 

2008 16812,27 356,00 47,23 

2009 20551,32 502,00 40,94 

2010 29661,35 422,00 70,29 

2011 40762,92 484,00 84,22 

2012 47110,02 572,00 82,36 

2013 51884,98 700,00 74,12 

2014 52542,41 1 900,00 27,65 

2015 40390,59 1 700,00 23,76 

2016 39142,98 2 200,00 17,79 

2017 43128,85 1 500,00 28,75 

2018 46975,79 2 100,00 22,37 

2019 54869,28 1 700,00 32,28 

2020 56510,45 1 600,00 35,32 

2021 59321,54 1 200,00 49,43 

 

Ratio of monetary aggregates to international reserves 

 The approach referred to as the broad money supply or monetary base approach, as 

described in the literature, involves comparing the amount of reserves with monetary 

aggregates to assess reserve sufficiency (Reedy, 2003, pp. 104–105). In the event of a financial 

crisis within a nation, it is not uncommon for residents to redirect their investment choices 

away from the domestic currency and towards assets denominated in other currencies. The 

literature does not reach a consensus on the specific ratio due to the significance of this 

relationship. However, it is widely acknowledged that the recommended range for a country's 

reserves is between 10 and 20% of its M2 (Cinel, 2015, p. 135). 

The declining trend of this ratio in Turkey since 2007 can be attributed to the consistent 

growth of the country's M2-defined money supply. Considering this methodology, Turkey has 

consistently maintained a ratio above 20% in all years except for 2020-2021, with an average 

of 30% from 2002 to 2022 (Figure 1.4). 

 

Figure 1.4 CBRT Reserve / M2 (USD) Ratio in 2002 and 2022 

 
Source: EVDS 2023, (Date of access: January 1, 2023) 

0

0,1

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0,3

0,4

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0,7

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022



FACTORS AFFECTİNG THE TOTAL FOREİGN EXCHANGE RESERVE ADEQUACY 

OF THE CENTRAL BANK: TURKEY AND AZERBAİJAN 

 

90 
 

The analysis of the country's reserve adequacy is conducted using the monetary base 

approach. This involves calculating the ratio of the total reserves held by the Central Bank of 

the Republic of Azerbaijan and the State Oil Fund to the M2 dollar values for the period 

spanning from 2002 to 2021. Each of the aforementioned ratios exceeds the commonly 

acknowledged ratio within the method (10–20%) and has consistently surpassed the arithmetic 

mean of 4 from 2002 to 2021 (see Figure 1.5). 

 

Figure 1.5 2002 and 2021 AC Reserve / M2 (USD) Ratio 

 
Source: ACMB 2023, (Accessed February 16, 2023) 

 

Adequacy of international reserves to cover country imports 

The methodology employed in assessing the sufficiency of foreign exchange reserves 

relies on the evaluation of international reserves in relation to the yearly import volume. The 

conventional methodology for assessing reserve adequacy posits that a nation ought to maintain 

sufficient reserves to meet its import requirements, under the assumption of no capital inflows 

or outflows. Despite the commonly acknowledged guideline of 3 months, the existing reserves 

of numerous developing nations have been sufficient to meet imports for a much longer 

duration (IMF, 2000; Wijnholds and Kapteyn, 2001). 

The utilization of this methodology in the context of Turkey demonstrates that the 

overall reserves are enough. However, during the period from 2017 to 2022, there has been a 

noticeable decrease in the nation's international reserves, which has hindered its ability to cover 

its import expenditures. The decrease in the 3-month import payment ratio, which serves as an 

indicator of adequacy, particularly when it drops below 2%, exhibits similarities to the global 

crisis experienced between 2004 and 2008, hence suggesting the potential occurrence of a 

future catastrophe (see Figure 1.6). The fall in question can be ascribed to various variables, 

encompassing global health concerns, conflicts in nations with which the country has close 

ties, and recent variations in exchange rates. Furthermore, the economic position was 

exacerbated by the earthquake disasters that occurred in the country in 2023. Collectively, these 

elements give rise to a concerning predicament for the nation's economic prospects. 

 

 

 

0

1

2

3

4

5

6

7

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021



Gunduz JAMALZADE, Arif SALDANLI, Elgiz JAMALZADE 

91 
 

Figure 1.6 3-Month Import Coverage Ratio of CBRT Reserves in 2002 and 2022 

 
Source: TurkStat 2023, (Date of access: January 3, 2023) 

 

The Republic of Azerbaijan has experienced a notable growth in the ratio of reserves to 

quarterly imports since 2009. Furthermore, the reserves held by the Republic of Azerbaijan are 

deemed adequate to meet its yearly import requirements for an extended period, as depicted in 

Figure 1.7. Azerbaijan possesses ample resources to fund its imports, encounters no difficulties 

in financing imports, and maintains financial stability. 

 

Figure 1.7 AC Reserves and Annual Imports in 2002 and 2021 

 
Source: ACMB and SOFAZ 2023, (Accessed February 16, 2023) 

 

Taking into account all the aforementioned methods for assessing the amount and 

sufficiency of the CBRT reserves, it can be concluded that reserves are sufficient for all 

specified years according to the import approach. However, other ways exhibit variations on a 

year-by-year basis, and in the majority of cases, reserves are insufficient for the period of 2020-

2021. Based on the aforementioned methodologies employed to assess the level and sufficiency 

of the reserves of the Republic of Azerbaijan, it is evident that the reserves are deemed 

insufficient for some years (2005-2006) as indicated by the import approach, although they are 

deemed sufficient for all years according to alternative techniques. 

 

0

0,5

1

1,5

2

2,5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

0

15000

30000

45000

60000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021



FACTORS AFFECTİNG THE TOTAL FOREİGN EXCHANGE RESERVE ADEQUACY 

OF THE CENTRAL BANK: TURKEY AND AZERBAİJAN 

 

92 
 

Factors Affecting the Adequacy of Foreign Exchange Reserves: Turkey-Azerbaijan  

The evolution and patterns of global foreign exchange reserves are contingent upon 

various criteria. The size and structure of foreign exchange reserves can be influenced by 

various factors, including a nation's economic growth, levels of exports and imports, policies 

implemented by central banks, and volatility observed in international financial markets.  

The phenomenon of international investment flows entails the influx of foreign 

investment into a nation, which contributes to the augmentation of foreign currency reserves, 

whilst the outflow of foreign investment from a nation leads to a reduction in foreign exchange 

reserves. Nevertheless, elevated interest rates have the potential to augment foreign exchange 

inflows by enhancing the appeal of a nation's currency, so bolstering its foreign exchange 

reserves. Simultaneously, an expansion in the money supply heightens the likelihood of 

inflation within the nation, potentially leading to investor withdrawal and subsequently 

reducing the country's foreign exchange reserve (Kaya, 2012). 

The escalation of external debt of Turkey throughout the year 2022 resulted in a 

reduction of foreign exchange reserves. The primary determinant of Azerbaijan's reserve stock 

is the volatility of oil prices and the magnitude of oil sales inside the nation. There exists a 

consistent linear correlation between fluctuations in oil prices and the aggregate reserves of the 

Republic of Azerbaijan over many time periods. Notably, the escalation in oil prices emerges 

as the primary factor contributing to the expansion of these reserves. 

Elevated interest rates enhance the appeal of a nation's currency and augment its foreign 

exchange reserves. As of March 19, 2021, the Central Bank of the Republic of Turkey initiated 

a reduction in the interest rate from 20.50%. By the initial quarter of 2023, the percentage had 

attained 8.50%. Azerbaijan has a low interest rate of 8.75%. The presence of low interest rates 

restricts the degree of interest from foreign investors in the country, hence posing challenges 

in augmenting foreign exchange reserves. The inflation rates in Turkey have exhibited 

significant volatility throughout the past two decades. Simultaneously, the presence of elevated 

inflation rates and the expansion of the money supply in Turkey exert a mitigating influence 

on the level of foreign exchange reserves. An examination of the inflationary trends in the 

Azerbaijani economy from 1996 to 2001 indicates that the devaluation of the manat currency 

resulted in a rise in inflationary pressures. 

The presence of domestic political problems and uncertainties has the potential to 

diminish the confidence of foreign investors in a nation, thus resulting in a decrease in foreign 

exchange reserves. Countries' foreign exchange reserves are impacted by foreign policy 

tensions. The challenges encountered by nations in their interactions with trading partners 

result in a reduction of foreign exchange reserves. The imposition of sanctions in the global 

sphere also has an impact on the foreign exchange reserves of nations. Investments in nations 

result in a reduction of foreign exchange reserves through the imposition of trade volume 

restrictions on countries. An instance of this is the Nagorno-Karabakh conflict, which has had 

an impact on Azerbaijan's foreign exchange reserves. Another instance is to the strained 

relationship between Turkey and the United States around the S-400 missile system. The 

imposition of sanctions by the United States results in a decline in trade volume and a drop in 

foreign exchange reserves (Demir 2020).  



Gunduz JAMALZADE, Arif SALDANLI, Elgiz JAMALZADE 

93 
 

Logit Method 

The current stage of the study involved an examination of the logit technique, which is 

represented by quantitative preference models. The literature encompasses a regression method 

that is constructed upon two dependent variables and exhibits linearity through the application 

of transformations. Statistical approaches are employed to elucidate the likelihood of a 

phenomenon. The validity of the logit technique is contingent upon the binary nature of the 

dependent variable. The fundamental concept underlying the logit technique entails applying a 

logarithmic transformation to the probability of the dependent variable's occurrence, followed 

by conducting regression analysis to ascertain the association between the independent 

variables (óakmakyapan, 2011). The logit approach reveals the link between the dependent 

variable and the independent variable when the dependent variable is binary, meaning it can 

take two distinct values. This model is typically employed when the value to be estimated 

occurs in two distinct states. 

𝜬𝒊 = 𝑬(𝒀 = 𝟏(𝑿𝒊)) =
𝟏

𝟏 + 𝒆 − (𝜷𝟎 + 𝜷𝟏𝑿𝒊)
 

Pi = Independent Variable 

Xi=Data 

i=Probability of making a choice 

e=2.72 

Analysis of Factors Affecting the Total Foreign Exchange Reserve Adequacy of the 

Central Bank of Azerbaijan-Turkey : Logit Method 

The objective of employing the logit approach in the empirical investigation is to assess 

the impact of the identified macroeconomic indicators on the magnitude of foreign exchange 

reserves, hence leading to the emergence of two distinct values for the dependent variable. The 

data utilized in this study were acquired from many reputable sources, including the Central 

Bank of the Republic of Turkey (CBRT), the Data Distribution Site (DDS), the Central Bank 

of the Republic of Azerbaijan (CBRT), the Turkish Statistical Institute (TurkStat), the World 

Bank, and the OECD. The analysis utilizes data spanning from 2012 to 2022. The study 

considers several aspects to analyze changes in foreign exchange reserves at the factor scale. 

However, certain components are disregarded due to the study's multilinear nature. In this 

study, the explanatory variables used to assess the impact of macroeconomic indicators on the 

level of foreign currency reserves are X1 (interest rates), X2 (inflation rates), X3 (gross national 

product), X4 (real exchange rate), and X5 (unemployment rates). The selection of the logit 

regression model for the explanatory variables is determined in the following manner: Logit 

(Y)= β0+ β1X1+ β2X2+ β3X3+ β4X4+ β5X5+𝜀 In the given regression equation, the dependent 

variable, denoted as Y, represents the total foreign exchange reserve adequacy. The coefficients 

of the constant term and the explanatory variables are denoted as β0, β1, β2, β3, β4 and β5 

respectively. The model's coefficients represent the impact of each explanatory variable on the 

overall adequacy of foreign exchange reserves. A categorical variable, known as an indicator 

variable, typically has two distinct values, typically 0 and 1. In this scenario, we can employ 

the numerical value "1" to denote that the overall foreign exchange reserve is sufficient, 

whereas "0" can be used to indicate that it is insufficient. For our study, we will utilize the 

dependent variable as follows: The variable Y is equal to 1, indicating the presence of factors 

that influence the adequacy of the total foreign exchange reserves of Azerbaijan and Turkey. 



FACTORS AFFECTİNG THE TOTAL FOREİGN EXCHANGE RESERVE ADEQUACY 

OF THE CENTRAL BANK: TURKEY AND AZERBAİJAN 

 

94 
 

Conversely, the variable Y is equal to 0, suggesting the absence of factors that affect the 

adequacy of the total foreign exchange reserves of Azerbaijan and Turkey. 

 

Table 1.2 Logit Model Analysis Results of the Established Model 

Variable 
Estimated 

Parameter 

Standard Error 

of Parameters 

Wald 

Statistics 
Significant(p) 

Odds 

Ratio 

Fixed 

Term 
55,365 71,650 0,597 0,440 - 

X1 3,177 0,177 17,454 0,000 24,070 

X2 -0,230 0,193 1,424 0,233 0,795 

X3 0,000 0,000 2,645 0,104 1,000 

X4 -51,894 34,225 2,299 0,129 0,000 

X5 -0,019 0,017 1,233 0,267 0,981 
 

 

 

logit(p) = β0+ β1X1+ β2X2+ β3X3+ β4X4+ β5X5 

Here, p represents the probability value and ranges from 0 to 1. The formula includes the 

constant term, denoted as β0, β1, β2, β3, β4, and β5, as well as the coefficients X1, X2, X3, 

X4, and X5, correspondingly. 

Logit(p)= 55,365+ (-3,177xX1)+(-1,232xX2)+(0,446xX3)+(-0,454xX4)+(0,139xX5) 

The model's performance was assessed using the log-likelihood approach. The 

adequacy of the model was assessed. A model's fit to the data improves as the log-likelihood 

value increases. The calculation of the log-likelihood value involves taking the logarithm of 

the probability values that have been determined. The value has the potential to be negative. In 

order to evaluate the adequacy of the model, it is crucial to compare the log-likelihood values 

of many models and choose the model with the highest value. It was determined that the log-

likelihood value of the model is -53.68. This finding suggests that the model possesses a 

satisfactory level of fit to the data. 

The logit regression model coefficients utilized for evaluating the impact on foreign 

exchange reserve sufficiency are displayed in the table. Furthermore, in order to assess the 

statistical significance of each variable, the Wald statistic and p-value are provided. In 

hypothesis testing, the Wald statistic is computed by dividing the coefficient by the standard 

error. The P value is a statistical measure derived from the hypothesis test of each coefficient, 

ranging from 0 to 1. A decrease in the P value indicates a higher level of statistical significance 

in the impact of the independent variable on the dependent variable. The odds ratio quantifies 

the ratio at which a one-unit increase in an independent variable results in a corresponding 

change in the probability of the dependent variable. The study revealed that the coefficient of 

the fixed variable was 55.365. The baseline value for foreign exchange reserve sufficiency is 

determined by holding other factors constant. The variable of interest rate (X1) exhibits the 

most significant impact on the adequacy of foreign exchange reserves. The coefficient of the 

variable is evaluated to be 3.177, with a p-value of 0.000, indicating its statistical significance 

inside the model. This finding suggests that, while controlling for other variables, a one-unit 

rise in interest rates would result in a 24.070-fold increase in foreign exchange reserve 



Gunduz JAMALZADE, Arif SALDANLI, Elgiz JAMALZADE 

95 
 

adequacy. The coefficient associated with the inflation rate variable (X2) is -0.230, and the 

corresponding p-value is 0.233. These results indicate that the coefficient lacks statistical 

significance inside the model. Consequently, if all other factors remain same, a one-unit rise in 

inflation rates would result in a 0.795-fold reduction in FX reserve adequacy. However, this 

impact does not have statistical significance. The coefficient for the GDP variable (X3) is 

0.000, and the p-value is 0.104, indicating that it lacks statistical significance in the model. 

Consequently, when all other factors remain unchanged, a one-unit rise in GDP does not impact 

the sufficiency of foreign exchange reserves. The coefficient for the exchange rate variable 

(X4) is -51.894, and the p-value is 0.129, indicating that there is no statistically significant 

relationship in the model. This suggests that, while controlling for other variables, a one-unit 

increase in the exchange rate during the preceding period does not impact the adequacy of 

foreign exchange reserves. The empirical analysis reveals that the coefficient associated with 

the unemployment rate variable (X5) is -0.019, while the p-value is 0.267, indicating a lack of 

statistical significance within the model. Consequently, while keeping other factors unchanged, 

a one-unit rise in unemployment rates is associated with a 0.981-fold reduction in foreign 

exchange reserve adequacy, but this impact is not statistically significant. 

 

CONCLUSIONS  

Based on the findings of our literature review, it is suggested that in order to enhance 

reserve adequacy in Turkey, it would be advisable to augment the central bank policies 

pertaining to the diversification and expansion of rediscount credits. These credits are primarily 

utilized by exporting firms and are converted into US dollars. Additionally, it is recommended 

to incorporate under-pillow scrap gold within the country's central bank reserves and the 

financial system. In order to mitigate the potential risks associated with currency rates and 

decrease reliance on natural resource revenues, Azerbaijan aims to diversify its investments 

across other sectors. 

The data indicate that interest rates have a substantial impact on the overall adequacy 

of foreign exchange reserves (p<0.05), whilst other variables do not show statistical 

significance. The odds ratio for total FX reserve adequacy improves by 24.070 when the 

"Interest Rates" variable increases by one unit. However, the impact of other factors on total 

FX reserve adequacy is not statistically significant. 

The analysis demonstrates that interest rates exert a substantial impact on the overall 

adequacy of foreign exchange reserves. This finding suggests that the implementation of 

interest rate policies can serve as a viable strategy for enhancing the sufficiency of the foreign 

exchange reserves in Azerbaijan and Turkey. The impact of other variables on the overall 

adequacy of foreign exchange reserves is not statistically significant. Nevertheless, the p-value 

associated with the exchange rate variable exhibits statistical significance, hence necessitating 

a more comprehensive examination of its impact through the inclusion of a longer temporal 

scope.  

 

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