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THE EFFECT OF NAIRA DEVALUATION ON SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA

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THE EFFECT OF NAIRA DEVALUATION ON SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA

 

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Nigeria with abundance of resources like crude etc is deemed blessed. Her vast resources in commercial quantities have placed her on a high pedestal among oil producing nations in the world. Her oil and gas industry which has been widely described as the nation’s financial lifeline has helped her attain this enviable position. There are several journals to this and about its role and significance in the Nigeria of today. This has birthed the segmentation of the four key economic segments in Nigeria which are oil-related activities, the public sector (Governments and parastatals - that remains heavily dependent on oil derivatives), the organized private sector, and the informal sector (World Bank 2002).
The first segment of the economic activity is heavily based upon and centered on oil. The most dominance of this sector is shown by the share of oil revenues that accrues as a percentage of exports since oil now accounts for more than 80 percent of the country’s export earnings/income.   In recent times, the drop in oil prices has left nations like Nigeria who run an oil based economy with undiversified economies in economic crises. This challenge brought about by exchange rate fluctuations is eventually leading to the devaluation of the Naira. This has affected the demand and supply sides of the economy. The government of the day in Nigeria usually relies on foreign exchange reserve generated from crude oil to manage excessive volatility in exchange rate and recently crude oil prices have dropped drastically. This has tremendous implication for foreign exchange earnings.
The capacity of the Central Bank of Nigeria (CBN) to fund foreign exchange market has being called to question. Low level of foreign exchange reserve induces free movement of exchange rate. Issues are also on the rise on the demand side. There has being a high demand for foreign exchange in the last five (5) years as a result of factors like, heavy dependence on imported finish products, the  industrial sector’s dependence on imported raw materials with other inputs, reversal of capital flow by investors and high speculative demand which has caused uncertainty in the foreign exchange market (CBN report, August 2013). Therefore, the increased foreign exchange demand in the face of unstable supply is leading to volatility in exchange rate.  
Devaluation originally refers to a sharp fall in currency within a fixed exchange rate .In 1960 after independence Agriculture, which used to be the pivot of the economy, showed greater decline. This came as a result of the discovery of crude oil with its value to the economy of the whole world. The revenue from crude oil appeared to have helped the Nigerian economy with impact towards social and economic development than agriculture. This has led to the sudden neglect for agricultural activities. The impact of this is thus; the contributions of agriculture to the Gross Domestic Product were Negligible! The retrogressions are thus; contribution of agriculture to the Gross Domestic product fell 39.9 percent between 1971 to 1974 to 18 percent with occasional rise. Within this period the Nigeria devaluation was very high. Currency devaluation is a macro-economic fiscal policy which dwells on deliberate reduction in the value of local currency with the purpose of increasing gain in tradable items. Cost of Goods and services are cheaper in a nation where currency is devalued compared to another where there is no currency devaluation. Reduction in prices of goods or services can help stimulate trading activities in a country with overall purpose of enhancing economic growth and development to help alleviate poverty.
The Babangida led administration’s currency devaluation became popular in Nigeria when in 1986 he came up with the Structural Adjustment Programme. This came as a policy designed to help achieve a realistic exchange rate for the naira that was over-valued then. This posed an unhealthy threat  to the economic growth and development of our Nation, Nigeria because overvalued currency further worsens balance of payment problem( Todaro,1989). On the basis of this, the nation was encouraged to embrace tthe devaluation policy as prerequisite for economic recovery.   Campbell (2004), in his work, looks at currency devaluation as a deliberate downward adjustment in the official exchange rate established by a government against specified standard or another currency. The concern of the above scholastic discourse simply mean that devaluation of currency is about stimulating exports and lowering importation of goods and services, for the achievement of balanced growth, with the general goal of alleviating poverty.  
1.2 STATEMENT OF THE PROBLEM
Nigeria as a developing economy is still import dependent. Her high dependency on goods and services from foreign countries may likely bring about more negative impacts than positive impacts as a result of devaluing the naira. Although, some financial and economic analysts have praised the Monetary policy Committee (MPC) of the Central Bank of Nigeria for taking a bold step to devalue the naira late 2014, but the question still remains- has the government done enough to create the enabling environment for businesses to produce locally and achieve more foreign exchange? Without a doubt, devaluation if properly managed can be used as a fiscal policy tool to discourage imports, achieve balance of payment as well as encourage and promote businesses, but Nigeria is not there yet, as most Small and Medium Scale Businesses still depend on goods and services from other countries to still be in business.  
The implication of the devaluation of the naira is that imports will become more expensive. An import dependent economy like Nigeria cannot afford to devalue her currency because the country is not producing a product that would attract buyers from other countries and SMEs are not well equipped by the government to produce these products.   Majority of SMEs still depend on goods and services from China, UK, USA etc, since importing tends to be cheaper than producing locally. The over dependence of SMEs on foreign products is suicidal as a drop in the value of Naira will result to higher cost of sales, and other operational/manufacturing costs. SMEs will have to spend more money to buy goods and services from other countries. This can result in inflation, low patronage of goods and services and resultant collapse of small and medium businesses.  
1.3 OBJECTIVES OF THE STUDY
The main aim of the study is to examine the effect of the devaluation of the naira on small and medium scale businesses in Nigeria, using mini importers in Lagos state as a case study. Specific objectives of the study are:
1.   To assess the dependency level of SMEs on foreign goods and services.
2.   To determine the effect of the naira devaluation on financial performance of SMEs in Nigeria.
3.   To examine the effect of the naira devaluation on import volume of SMEs in Nigeria.
4.   To examine the effectiveness of the naira devaluation in encouraging the growth of indigenous small and medium scale business in Nigeria.  
1.4 RESEARCH QUESTIONS
In-order to achieve the objectives of the paper and guide the study accordingly, the following research questions were formulated:
1.   How dependent are SMEs in Nigeria on Foreign goods and services?
2.   How does devaluation of the naira affect financial performance of SMEs in Nigeria?
3.   What effects does the naira devaluation have on import volume of SMEs in Nigeria?
4.   Have the devaluation of the naira been effective in encouraging the growth of indigenous small and medium scale businesses in Nigeria?  
1.5 RESEARCH HYPOTHESES
The following hypotheses were formulated for the study:
1.   Ho: SMEs dependence on foreign goods and services is high.
      Hi: SMEs dependence on foreign goods and services is Low.
2.   Ho: There is no significant relationship between the naira devaluation and financial performance of SMEs in Nigeria.
      Hi: There is a significant relationship between the naira devaluation and financial performance of SMEs in Nigeria.
3.   Ho: There is no significant relationship between the naira devaluation and import volume of SMEs in Nigeria.
      Hi: There is a significant relationship between the naira devaluation and import volume of SMEs in Nigeria.                      
4.   Ho: The devaluation of the naira has not been effective in encouraging the growth of indigenous small and medium scale businesses in Nigeria.
      Hi: The devaluation of the naira has been effective in encouraging the growth of indigenous small and medium scale businesses in Nigeria.  
1.6 SIGNIFICANCE OF THE STUDY
The study is significant as it would add to existing literature on Naira devaluation and how it affects small and medium scale enterprises and the economic growth of Nigeria. It will serve as a guide to further research, academic work and as a self-help study material for those who might wish to firsthand knowledge about naira devaluation. It is also hoped that Nigeria policy makers will find it’s a helpful material in the formulation and implementation of policies on devaluation of naira and how it facilities growth in Nigeria.  
1.7 SCOPE AND LIMITATIONS OF THE STUDY
The study covers the effect of devaluation of the naira on small and medium businesses in Nigeria, using responses from selected mini importers of electronic gadgets such as laptops, ipads, phones, television and general wares in Lagos state as a case study. Every research study comes with a constraint. For the purpose of achieving stated objectives for the study, the researcher confronted both financial and time constraints. Funds to print and distribute questions coupled with tight lecture schedules were the limitations for the study.  
1.8 DEFINITION OF TERMS
SME: Small and Medium Scale Enterprise.
Naira: The Currency of Nigeria. Devaluation:Devaluation on modern monetary policy is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged.
Exchange rate: an exchange rate between two currencies is the rate at which one currency will be exchanged for another.
Import: An import is a good brought into a jurisdiction, especially across a national border, from an external source
Export: The term export means shipping the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" and is based in the country of export whereas the overseas based buyer is referred to as an "importer
Balance of Payment: The balance of payments (BOP) of a country is the record of all economic transactions between the residents of a country and the rest of the world in a particular period (over a quarter of a year or more commonly over a year).
CBN: Central Bank of Nigeria
E-Commerce: Electronic commerce, commonly known as E-commerce or e-Commerce, is trading in products or services using computer networks, such as the Internet.
Jumia: An e-commerce site for buying and selling electronic gadgets and general wares.
Abadie: An e-commerce website mainly for buying foreign and indigenous products in Nigeria.

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