Azerbaijani Manat shows potential: Big Mac index highlights future strength [COMMENTARY]

The esteemed magazine "The Economist" has released its latest "Big Mac" Index, revealing that as of July this year, the Azerbaijani manat is undervalued by 36.4% against the US dollar. This substantial discrepancy suggests that the current exchange rate of the manat is significantly below its intrinsic value.

According to the index, six months ago, the manat was undervalued by 38.6% at the beginning of 2024. This current indicator suggests that the manat is slightly weaker now compared to earlier in the year.

In his comment to Azernews, economist Khalid Karimli explained that the Big Mac index reflects purchasing power rather than exchange rate changes. He noted that while the index indicates differences in purchasing power, it does not directly measure currency depreciation or appreciation. For instance, the price of a Big Mac in the US is around $5.71, while in Azerbaijan it costs approximately 9.7 manats, suggesting a disparity in purchasing power.

The index also shows that the same product can vary in price between different regions within a country. The Big Mac index is more about the cost of living and purchasing power rather than direct exchange rate measurements.

In January, the "Big Mac" index indicated that a Big Mac cost 5.95 manats in Azerbaijan and 5.69 dollars in the United States, which implied an expected exchange rate of 1.05 USD/AZN. The actual exchange rate at that time was 1.70, reflecting a 38.6% depreciation of the Azerbaijani manat.

By July, the price of a Big Mac had risen to 6.15 manats in Azerbaijan while remaining at 5.69 dollars in the US. This resulted in an expected exchange rate of 1.08 USD/AZN, showing a 36.4% undervaluation compared to the real exchange rate of 1.70 manats.

To understand the "Big Mac" index, it's important to know its origins and functionality. Introduced by "The Economist" in 1986, the index uses the price of a Big Mac in various countries to compare currencies and gauge their relative value. This comparison helps determine if a currency is overvalued or undervalued based on purchasing power parity.

With McDonald’s operating over 30,000 restaurants across 112 countries, the Big Mac serves as a universal product for this comparison. The cost of a Big Mac varies due to factors such as rent, ingredient costs, and labor, which differ from country to country. The index helps to assess whether the current currency value is "fair" by comparing the price of a Big Mac in the US to that in other countries.

Finally, it's important to note that the US dollar has become a safe haven for investors starting in 2022, amidst high inflation and geopolitical tensions. The US Federal Reserve raised interest rates significantly to combat inflation. Currently, the dollar is weakening against most currencies due to anticipated rate cuts by the Fed. The manat, being pegged to the dollar, fluctuates in accordance with changes in the US dollar. The index also highlights the Taiwan dollar as significantly undervalued and the Swedish krona as overvalued compared to their real values.

The "Big Mac" index highlights that the Azerbaijani manat is currently undervalued by 36.4% against the US dollar. While this suggests that the manat's nominal exchange rate is lower than its purchasing power parity, it also presents a potential opportunity for future growth. The undervaluation indicates that there is room for the manat to strengthen as economic conditions improve and as Azerbaijan continues to enhance its economic fundamentals.

This undervaluation can be seen as a sign of future potential, reflecting that the manat may be positioned for appreciation as market conditions stabilize and improve. Additionally, Azerbaijan’s strategic economic policies and ongoing investments in various sectors are likely to contribute positively to the strengthening of the manat. The country’s rich natural resources, growing economic diversification, and active engagement in international trade are all factors that can support the manat's value in the long run.

Therefore, while the current index reflects a temporary undervaluation, it also suggests a promising outlook for the Azerbaijani manat. As Azerbaijan continues to build on its economic strengths and enhance its market position, the manat is expected to align more closely with its real value, offering an optimistic perspective for future currency stability and growth.