The Impact of Currency Devaluation on The Banking Sector of Azerbaijan

Abstract

This master thesis aims to examine an empirical investigation of the impact of Azerbaijan national currency devaluation on the banking sector of Azerbaijan. We will identify how currency devaluation affects the performance of the banks in Azerbaijan. In recent decades, several developing countries have confronted volatility in national currency requiring major reforms in the financial sector and economy. Devaluation is considered a tool of central banks to regulate the national currency. The monetary authorities apply for devaluation in terms of enhancing the trade balance of countries. Macroeconomic equilibrium, price stability, financial and banking stability, sustainable economic growth, or sustained economic growth reflect the uppermost targets of monetary policy.

On the other hand, this study will determine the profitability of banks in Azerbaijan and analyze the devaluation impact for 2013-2018 years. However, the price shifts of oil-gas resources in 2014 sketched the financial institutions severely in Azerbaijan. In this thesis, the modification of the dependent and independent variables of the regression model will be tested by using the Panel Data Analysis Method.

Moreover, I decided to research this topic for my thesis, as my further plans are to continue my PhD degree and improve my career in this area. In this thesis, I will introduce a brief overview of the banking sector in Azerbaijan, and the effects of two devaluations by the Central Bank of Azerbaijan Republic in 2015. This thesis will check the effects of exchange rate fluctuations in Azerbaijan banking sphere by running balanced panel data for the period 2013-2018 years. The empirical findings of this study suggest that the changes in a foreign exchange rate have a statistically significant and adverse impact on the profitability of Azerbaijan banks.

Keywords: Azerbaijan, Banking Sector, Devaluation, Profitability

JEL Classification: E50, E58, G21, G23, G28, G34, Q49