EFFECT OF THE NAIRA DEVALUATION ON SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA
Need help with a related project topic or New topic? Send Us Your Topic
DOWNLOAD THE COMPLETE PROJECT MATERIAL
EFFECT OF THE NAIRA DEVALUATION ON SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA
INTRODUCTION TO CHAPTER ONE
1.1 BACKGROUND OF THE STUDY
Nigeria is considered blessed due to its wealth of resources such as crude oil. Her substantial economic resources have elevated her to a high echelon among the world’s oil producing nations. Her oil and gas business, which has been described as the nation’s financial lifeline, has contributed to her fortunate position.
There are various periodicals dedicated to this, as well as to its function and significance in today’s Nigeria. This has resulted in the separation of Nigeria’s four core economic segments: oil-related businesses, the public sector (governments and parastatals – which remain strongly dependent on oil derivatives), the organised private sector, and the informal sector (World Bank 2002).
The first sector of the economy is primarily reliant on and centred on oil. The share of oil revenues that accrue as a percentage of exports demonstrates this sector’s dominance, since oil now accounts for more than 80% of the country’s export earnings/income.
The current collapse in oil prices has put nations like Nigeria, which runs an oil-based economy, in economic crisis due to an undiversified economy. This difficulty caused by currency rate swings is finally leading to the depreciation of the Naira. This has had an impact on both the demand and supply sides of the economy.
The current government in Nigeria often relies on foreign exchange reserves earned from crude oil to manage excessive volatility in exchange rates, and crude oil prices have recently decreased dramatically. This has far-reaching consequences for foreign exchange revenues.
The Central Bank of Nigeria’s (CBN) ability to fund the foreign exchange market has been put into question. A low level of foreign exchange reserves encourages the exchange rate to fluctuate freely. Demand-side issues are also on the rise. In the last five (5) years, there has been a high demand for foreign exchange as a result of factors such as heavy reliance on imported finished goods,
the industrial sector’s reliance 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). As a result, rising foreign exchange demand in the face of volatile supply is causing exchange rate instability.
Devaluation traditionally referred to a significant drop in currency within the context of a fixed exchange rate.Agriculture, which was formerly the backbone of the economy, experienced a severe decrease after independence in 1960. This resulted from the discovery of crude oil, which has a global economic worth.
Crude oil earnings appears to have aided the Nigerian economy more in terms of social and economic development than agriculture. This has resulted in a sudden disregard for agricultural activity.
As a result, agriculture’s contributions to the Gross Domestic Product were negligible! The retrogressions are as follows: agriculture’s share to GDP declined from 39.9% to 18% between 1971 and 1974, with rare increases. Nigeria’s devaluation was extremely high during this time period.
Currency depreciation is a macroeconomic fiscal policy that focuses on the purposeful depreciation of local currency in order to increase gains in tradable items. Goods and services are less expensive in a country where the currency has been depreciated than in another where the currency has not been devalued.
Price reductions for goods or services can assist promote commercial activity in a country, with the main goal of improving economic growth and development to help alleviate poverty.
When Babangida’s administration introduced the Structural Adjustment Programme in 1986, currency devaluation became popular in Nigeria. This was part of a policy to help obtain a more realistic exchange rate for the naira, which was overvalued at the time.
This constituted an unfavourable danger to Nigeria’s economic growth and development because an overvalued currency exacerbates the country’s balance of payment problems (Todaro,1989). As a result, the country was pushed to accept the devaluation programme as a prerequisite for economic recovery.
Campbell (2004) defines currency devaluation as a planned downward adjustment in a government’s official exchange rate established against a specific standard or another currency.
The foregoing scholarly discourse basically means that currency depreciation is about encouraging exports and lowering imports of goods and services in order to achieve balanced growth, with the overall goal of alleviating poverty.
1.2 STATEMENT OF THE PROBLEM
Nigeria, being a developing economy, is still heavily reliant on imports. Because of her reliance on goods and services from other countries, weakening the naira is likely to have more negative consequences than favourable consequences. Although some financial and economic analysts lauded the Central Bank of Nigeria’s Monetary Policy Committee (MPC) for taking the bold step of devaluing the naira in late 2014,
the question remains: has the government done enough to create an enabling environment for businesses to produce locally and earn more foreign exchange? Without a doubt, devaluation can be used as a fiscal policy tool to discourage imports,
achieve balance of payment, and encourage and promote businesses, but Nigeria is not there yet, as most Small and Medium Scale Businesses rely on goods and services from other countries to remain in business.
Imports will become more expensive as a result of the naira’s depreciation. Nigeria cannot afford to devalue her currency because the country does not produce a product that would attract customers from other countries, and the government does not adequately equip SMEs to produce these things.
The majority of SMEs continue to rely on goods and services from China, the United Kingdom, and the United States, because importing is less expensive than producing domestically.
Overdependence of SMEs on foreign items is dangerous since a reduction in the value of the Naira will result in higher sales expenses and other operational/manufacturing expenditures.
Small and medium-sized enterprises (SMEs) will have to spend more money to purchase goods and services from other nations. This can lead to inflation, decreased demand for goods and services, and the eventual failure of small and medium-sized firms.
1.3 OBJECTIVES OF THE STUDY
The study’s main goal is to investigate the impact of naira depreciation on small and medium-sized enterprises in Nigeria, utilising mini importers in Lagos state as a case study. The following are the study’s specific objectives:
To analyse SMEs’ reliance on imported goods and services.
To investigate the impact of the naira depreciation on the import volume of Nigerian SMEs.
To ascertain the impact of the naira depreciation on the financial performance of Nigerian SMEs.
To investigate the impact of naira depreciation in promoting the growth of indigenous small and medium-sized businesses in Nigeria.
1.4 RESEARCH QUESTIONS
The following research questions were developed in order to meet the paper’s aims and direct the study accordingly:
How reliant are Nigerian SMEs on foreign goods and services?
What impact does the naira depreciation have on the import volume of Nigerian SMEs?
How does the naira’s depreciation influence the financial performance of Nigerian SMEs?
Is the naira depreciation successful in encouraging the growth of indigenous small and medium-sized enterprises in Nigeria?
1.5 RESEARCH THEORIES
For the investigation, the following hypotheses were developed:
Ho: SMEs rely heavily on foreign goods and services.
Hi: The reliance of SMEs on foreign goods and services is low.
Ho: There is no substantial association between naira depreciation and SMEs’ import volume in Nigeria.
Hi: There is a considerable association between naira depreciation and SMEs’ import volume in Nigeria.
Ho: There is no significant association between naira depreciation and the financial performance of Nigerian SMEs.
Hi: The depreciation of the naira has a substantial impact on the financial performance of Nigerian SMEs.
Ho: The naira’s depreciation has had little influence on the growth of indigenous small and medium-sized firms in Nigeria.
Hi: The depreciation of the naira has aided the growth of indigenous small and medium-sized businesses in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
The study is noteworthy because it will add to the existing literature on Naira depreciation and how it affects small and medium-sized businesses as well as Nigeria’s economic growth. It will serve as a guide for additional research, academic work, and self-help study material for people who seek to get firsthand knowledge regarding the devaluation of the Nigerian naira.
It is also believed that Nigerian policymakers will find it useful in the creation and execution of policies on naira depreciation and how it promotes growth in Nigeria.
1.7 SCOPE AND LIMITATIONS OF THE STUDY
The study examines the impact of naira depreciation on Nigerian small and medium-sized firms, with replies from chosen mini importers of electronic products such as laptops, iPads, phones, televisions, and general wares in Lagos state serving as a case study.
Every research study has a limitation. The researcher faced both financial and time constraints in order to meet the study’s stated objectives. The study’s constraints included a lack of funds to print and distribute questions, as well as tight lecture schedules.
1.8 DEFINITION OF TERM
SME stands for Small and Medium-Sized Enterprise.
Nigeria’s currency is the naira.
Devaluation: A devaluation in modern monetary policy is a decrease in the value of a currency in relation to the commodities, services, or other monetary units that can be traded for that currency.
The rate at which one currency will be exchanged for another is referred to as the exchange rate.
Import: An import is a good carried into a jurisdiction from another country, typically over a national border.
Export: The term export refers to the shipping of commodities and services from a country’s port. The seller of such goods and services is known as a “exporter” and is based in the country of export, whereas the buyer is known as a “importer” and is based elsewhere.
Balance of Payments: A country’s balance of payments (BOP) is a record of all economic transactions between its citizens and the rest of the world during a specific period (usually a quarter of a year or a year).
CBN stands for Central Bank of Nigeria.
Electronic commerce, often known as E-commerce or e-Commerce, is the trade of goods or services using computer networks such as the Internet.
Jumia: An e-commerce platform for purchasing and selling electronic devices and other merchandise.
Need help with a related project topic or New topic? Send Us Your Topic
DOWNLOAD THE COMPLETE PROJECT MATERIAL