TheImpacts of Exchange Rate Fluctuations results from Devaluation inAzerbaijan
Inthe present globalized world, the impact of downward currency ratefluctuations on the economy has far reaching consequences. Currencyfluctuation means the rise and fall in the value of a given currencycompared to another (Genc, and Artar, 2014). Almost all countries areengaged in international trade, and conditional on their degree ofengagement, they face different levels of risks associated withvariations of the exchange rate of their currencies (Genc and Artar,2014). For countries, firms or individuals whose principal businesstransactions are in domestic currency, fluctuations in the exchangerate should not pose a significant risk if their activities do notdepend on imports. Conversely, the ones whose businesses are notlimited to domestic market are highly responsive to any variation incurrency rates. Exchange rate fluctuations influence volume ofimports and prices of a product that are imported. Imagine a scenariowhere a country thrived on imported goods! Potatoes will be used as avariable to get a deeper understanding of how the devaluationinfluences import volumes and retail price.
TheStatement of the problem
Economicgrowth is one of the areas directly impacted by currency exchangerate variations in any country’s economy. Depending on an economyof a country, the weight of impacts on the mentioned area varies.Azerbaijan’s currency fluctuation can spell doom for its citizenswho depend mostly on imported products. One of the changes in theexchange rate that might impact the volume of imports is thedevaluation of currency, which is the reduction in the exchange valueof one’s country national currency (Genc, and Artar, 2014).
Theamount of research related to Azerbaijan economy is quite scarce, anda majority of them are focused on the oil sector economy (theexchange rates fluctuation and its effects on the export prices). Onthe other hand, this research contributes to the literature byanalyzing impacts of very recent exchange rate fluctuations onimports and retail market price, taking potatoes as the variable.
Rationalefor the study
Azerbaijan,one of significant oil and gas exporters in the world, is verydependent on imported goods. As the exchange rate theory inMacroeconomics dictates, variations in the exchange rate of currencyhave an impact on the cost of foreign goods. Let’s assume twoscenarios Azerbaijan used to import goods in 2014 when its valueagainst the dollar was just 40. In 2015, its currency is devalued,and the price of the new value is 50 against the dollar. This wouldmean that the dollar becomes expensive by 10units, and that will betranslated in the purchase price of imports and back to the domesticmarket. The Azerbaijan will either increase more cash to buy importsor reduce its amount.
Consequently,the change in the cost of imported goods is reflected in its pricewhich leads to change in demand for these products (Ali, Johari, andAlias, 2014). The vulnerability of Azerbaijan’s economy makes thisdiscussion a paramount undertaking.
ThePurpose of the study
Toinvestigate the Impacts of exchange rate fluctuation results from thedevaluation on Azerbaijan Imports specifically potatoes. The researchintends to prove that devaluation of Azerbaijan currency results inhigh exchange rates. Thus, making importation of potatoes expensiveand consequently increasing their retail price.
TheSignificance of the study
Thegovernment through the ministry of finance and the central bank ofAzerbaijan will benefit from the findings of this research as theywill get an insight into how currency devaluation makes the nationvulnerable to price inflation, particularly those of everydayconsumer products. And as a result, they will put necessary macropolicies to counter the devaluation of Azerbaijan currency. Also,when the information becomes public knowledge, it will promotenational cohesion in trying times as citizens will understand that itis not the government fault that prices have increased, but forces ofsupply and demand are in play. The study will also provide literaturereview for further studies in the same area in the future.
To get a clear insight on how the recent devaluation of Azerbaijani national currency has an impact on potato imports.
To investigate how exchange fluctuation rates affect the market price of retail potatoes.
To study the general effects of Azerbaijani national currency fluctuation on its economy.
What are the causes of currency devaluation?
Has the import volume of potatoes varied due to change in exchange rates?
Has the retail price of potatoes changed?
Thedocument is divided into four parts the introduction which introducesthe problem under study, the literature review which details theprevious research, the gap that exists and how they complement thisstudy. Then, the study will describe the methods and procedures ofdata collection and how it is expected to be analyzed to produceuseful information.
Theliterature review begins discussing the broad perspective of theexchange rate fluctuation on an economy, narrowing down to issuesspecifically related to the topic.
Scopeof Prior Studies
ExchangeRate and Economy
Theexchange rate is one of the fundamental features of any economy, andalmost all parts of the economy share some burden of itsfluctuations, a huge number of academic studies have addressed thetopic so far. Given that all countries have an economy engaged inforeign transactions, currency gyrations impact all of them, but todifferent degrees. In developing countries, output growth andinflation are strongly influenced by the unexpected changes in theexchange rate of currencies according to Kandil and Mirzaie’sresearch (2005). By dividing exchange rate fluctuations intounanticipated and anticipated ones, the authors found out thatimpacts of anticipated changes in a currency did not appear to be assignificant for the economy as those of unanticipated ones (Ayen, 2014).
Moreover,when you consider the importance of GDP as an economic indicator forcountries and the theoretical relationship between GDP and exchangerate, many researchers attempted to analyze the direct effects ofchanges in a currency rate on GDP(Nawaz, 2012).Two distinct conceptual views exist about the relationship: oneimplying that a real appreciation of a domestic currency increasesoutput growth since it reduces the cost of imports second implying areal appreciation decreases aggregate demand since it weakens theinternational competitiveness of domestic goods which affect netexports of a country. From the above statement an economist canunderstand the vice versa effects would result in expensive importsand cheap exports. Thus, there will be high exports volumes comparedto imports. This element can clearly be elaborated by Naija.
Najia(2013) studies the link between exchange rate variations and tradebalance of Saudi Arabia and realizes that in the long-runrelationship between the variables mentioned above is significant butnot in the short run. Additionally, Hsu(2011)emphasizes the importance of the right exchange rate regime tomitigate the unwanted consequences of variations in the exchangerate. The mentioned relationship is very crucial to an economy of acountry. Thus, various theories and analytical approaches were usedin studies to explain impacts of changes in the exchange rate ontrade balance. Chronologically, four main approaches are mainlyemployed in the literature to show the relationship as mentionedearlier: Standard Theory, Elasticity, Keynesian Absorption, andMonetary approach (Dhakir, Fuadah, and Mohammad 2014).
Anotherstudy that reinforces the importance of equilibrium is Edward (1989)paper which analyzes the misalignment of the real exchange rates withits equilibrium level. It claims by real examples of countries thatare having an inappropriate exchange rate may lead to crisis. Havingthe same inappropriate exchange rate may result in undesired andcostly results for economic conditions of any country. Also, thepaper analyzes the reasons for having the inconsistent exchange rate,such as macroeconomic policies that are not in line with rates.Therefore, the paper also comes up with the solution of thedevaluation to maintain the equilibrium level. Moreover, countriesshould focus on setting appropriate monetary policies to shift from anominal exchange rate to the real exchange rate(Kandil, 2008)
Obviously,exchange rate fluctuations either positive or negative lead toInflation. Take for instance Iran has a lot of sanctions anddifficulties. Edward (1989) finds that either a decrease or anincrease in the exchange rate leads to inflation. Given that Iran issaddled with a lot of sanctions and difficulties, scholars made ananalysis of the effects of the exchange rate fluctuation on CPI andthus, the inflation rate. Findings pointed out that in long termchanges in the exchange rate cause a greater impact on the inflationrate which then leads to a smaller CPI, meaning that economy getshurt because of fluctuations(Naghdi and Kaghazian, 2015)
Currencyvalue and Imports
Otherthan the inflation rate and CPI, apparently, changes in exchange rateimpact imports and exports of countries. In the article by Shaheen(2013), the author analyzes the effects of the variations of theexchange rate on imports and exports of Pakistan for ten years. Theresearch suggests that the devaluation of the currency significantlydecreased imports, however, did not have such a tremendous effect onexports. On the other hand, research suggested that in 10 years, evenwhen exchange rates were highly volatile, exports did not increase,but imports diminished quite significantly.
Also,according to Genc and Artan (2014), there is a correlation betweenthe exchange rates, import and exports. If an optimal exchange rateis reached, then markets will perform more effectively. As a result,the desired output is achieved. A lot of research done before hasindicated that there is a correlation between these variables.However, the article is focused on the selected emerging countries,and the data had been collected for the period of 1985-2012. Theauthors conclude that in the short-term, the significant effect ofthe exchange rate on import and exports cannot be observed however,in the long-term, there is a positive correlation between them.
Theliterature review in general states that currency fluctuation affectsnot only the volume of imports but also the economy. Though, thereseems to be little or no effects in the short run, in the long term,there can be consequences. Also, inflation has been cited as a resultof uncontrolled currency depreciation. The review advocates fornecessary policies to be put in place which will help deal withissues relating currency fluctuation. It is thus necessary for thegovernment together with their central bank to come with policieswhich maintain equilibrium between imports and currency fluctuations(Gurbanov,2014)
Itis evident that most research has been directed on how the economy ishurt by exchange rates. The journal reviews have put a theory thatdevaluation of a country’s currency negatively affects its importvolume as they become expensive to procure, but the study has notgone beyond that. This research concurs with their findings, that adevaluation of currency adversely affects a country’s economy,especially one that depends on high consumer goods importation. Thisresearch goes further to study how these effects are translated inlocal markets and how consumers respond to them. The study intends toprove that a devaluation of currency not only reduces volume ofimports but also results in increased retail prices. Holding otherfactors constant, it expected that scarcity in commodities wouldresult in increased prices. In a country like Azerbaijan, whichenjoys vast mineral resources, may not feel the impact within a shortspan but in the long run, there will be far-reaching consequences.There is also a gap of research in how currency devaluation affectsimports in Azerbaijan. Most researchers have conducted research,mainly which deal with how oil export is affected by currencyfluctuations, but little attention has been given to its imports,ironically to a country which imports most of the consumer goods.Azerbaijan exports might be earning the country a lot of income, butproper balance and check, need to be put in place which considers thelong-term consequences of depreciating currency.
Theresearch will be conducted through analyzing both secondary andprimary data. It will get the import volumes and fluctuation currencydata from government records. On the other hand, the retail pricechanges of potatoes will be manually collected through closedquestionnaires.
Theprimary data will be gathered from 40 regular consumers and 40 retailsellers of potatoes. Consumers and retailers will be middle-classcitizens of Zagatala and Baku town. Also, though not activelyinvolved other participants of the research are the authorities whowill grant permission.
Theresearcher will first seek relevant permission before proceeding withthe research. After permission has been issued, the collection ofprimary data will begin. Primary data will be collected by the use ofquestionnaires whose intentions are to find out, how a change incurrency value has affected the volume of potatoes they purchase andprices.
Theresearch will consist of 40 retailers and 40 consumers. In Baku town,20 people will be chosen same as Zagalata through random sampling.The sample will consist of every fifth homestead owner in aparticular resident settlement that the researcher will choose. Onthe other hand, the retailers will be selected randomly, butproximity distance between two retailers should be 2 km radius.
Thework will be done in duration of 4 weeks. Each week, ten consumersand ten retail sellers will be given questionnaires and which will bepicked in the evening. The research will begin first in Baku, andthen, later on, Zagatala. Regarding secondary data, details will bedownloaded from relevant websites and if they are not accessible theywill be retrieved from a relevant source. Then the data will beanalyzed in two weeks and the findings presented to relevantauthorities.
Theresearch chose Baku, as it is Azerbaijan capital and would reflectwhat major cities have implemented as it is a lead market. On theother hand, the study settled for Zagalata since it is remote withintentions to investigate if remoteness has any effect on the price.Also, the research chose to use a closed questionnaire to avoidvaried answers which will be difficult to analyze. Also, the use ofsecondary data was convenient as this research relied upon past data.The low number of respondent was convenient because of time andfinancial constraints.
Twotypes of data collection methods were used. Secondary data, to getthe imports data and exchange rate variations. Primary data wascollected in the retail market to see how different merchants adjustprices due to push factors of imports. The import data will be fit inan excel sheet against currency rate and month. Then, Azerbaijancurrency value which was considered to be stable say in the year 2014and imports of that value will be picked. Consequently, a graph withtwo variables will be plotted, on the y-axis-currency value and thex-axis-amount of imports in a month.
Thena control experiment will be plotted on that graph: import amount andcurrency which are considered stable. After plotting, a straighthorizontal line will be drawn to give the assumption of what thegraph would look like if there were no currency fluctuations. Forclarity, imports will be represented in bars while the currencyfluctuations will be represented by a plotted line. Then comparisonon how the volume of imports of potatoes changed with the change incurrency value will be made. Afterward, the variations will be noteddown.
Theprimary data from questionnaires filled by consumer and retail shopowners on whether the currency value fluctuations affect the retailprice will be sorted first. In the sorting process, thequestionnaires with significant response errors will be discarded.Then the reliable data will be categorized. For example, those whobelieve that a currency value affects the retail price, those thatdon’t feel the effects and those who are not aware. After that thedata will be assigned numerical values to facilitate statisticalrepresentation. The data will be transferred to computer storage tofacilitate computation of data using statistical package for socialsciences (SPSS). Statistical information that this research intendsto get is mean, standard deviation and percentage. Finally, data willbe presented in a suitable academic interpretation for betterunderstanding. Hopefully the data analysis results will prove thehypothesis of the research that currency fluctuations significantlyaffect the import volumes of potatoes and retail prices
Thegovernment through the ministry of finance and the central bank ofAzerbaijan will benefit from the findings of this research as theywill get an insight into how a currency devaluation makes the nationvulnerable to price inflation, particularly those of everydayconsumer products. And as a result, they will put necessary macropolicies to counter the devaluation of Azerbaijan currency. Also,when the information becomes public knowledge, it will promotenational cohesion in trying times as citizens will understand that itis not the government fault that prices have increased, but forces ofsupply and demand are in play. The study will also provide literaturereview for further studies in the same area in the future.
Limitationof the Study
• Respondentsmight be non-responsive.
• Respondentsmight be busy, remember these are people who have their dailybusiness.
• Thereis also a problem that the researcher will be a stranger askingquestions.
Theresearcher will seek permission from the relevant authorities beforeproceeding with the study. The permits will help in reducing thesuspicion of the respondent making the research smooth and easy. Theresearch will not infringe on individual right such as privacy. Alsono respondent will participate in the research without their consent.It is the intentions of the research to ensure that the respondentswill remain anonymous. Thus any questionnaires with respondentdetails will be shredded with immediately. Guard against plagiarism,research fraud behave according to the customs of the society and anappropriate code of conduct expected of a serious education andsocial science researcher (Orodho, 2009).
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