The Effect of the Naira Devaluation on Small and Medium Scale Enterprises in Nigeria
CHAPTER ONE
OBJECTIVE 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:
- To assess the dependency level of SMEs on foreign goods and services.
- To examine the effect of the naira devaluation on import volume of SMEs in Nigeria.
- To determine the effect of the naira devaluation on financial performance of SMEs in Nigeria.
- To examine the effectiveness of the naira devaluation in encouraging the growth of indigenous small and medium scale business in Nigeria.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
INTRODUCTION
Devaluation is a decline in the value of a country’s currency in relation to other major international currencies, usually brought about by the actions of monetary authority or any significant drop in a currency’s international exchange rate authority (Duncan, 2008). On the other hand, depreciation is the decline in value of a currency caused by the effects of market forces without monetary authority/government intervention (Reinhart, 1995; Akinlo and Odusola, 2003). In view of these definitions, the first branch of related literature examines how devaluations affect export growth. The standard argument justifying devaluations is that they reduce the relative cost of exports in international markets and therefore improve export growth (Nguyen and Seiichi, 2007). Forbes (2002), however, suggests that devaluations may not necessarily have the desired effect if the demand for exports is relatively inelastic or if imported inputs are a large component of production, although in the year following depreciation, firms show significantly higher growth in market capitalization, but significantly lower growth in net income (when measured in local currency). The economic theory behind the use of exchange rate devaluation as a means of improving trade balance is that a decline in the value of a nation’s currency makes exportable cheaper relative to other countries’ exports; it was also envisaged that it would help increase the volume of Nigeria’s exports. On the other hand, the devalued currency would make imported goods more expensive thereby decreasing imports into Nigeria which would then help in adjusting the trade imbalance with other countries (Akinlo, 1996). It has been argued that the demand for a country’s products in the international market depends on the prices and the nature of the demand. The common view among economists is that devaluation of the currency help tradable to attract additional demand in the world market because they appear cheaper compared to similar or substitute products (Reinhart, 1995). In recent times, a great deal of theoretical thought has been given to the idea that devaluation improves the level of investment, output levels and exports and decreases imports in the devaluing country (Pham and Nguyen, 1999; Nguyen and Seiichi, 2007). Bahmani-Oskooee and Kandil (2009) in their study of the Middle East and North Africa countries also suggest that unanticipated devaluations affect output positively in the short run but tend to be contradictory in the long run as the cost of imported inputs negates all gains derived in the short run. Kim and Ying (2007) on the other hand assert that in pre-crisis situations devaluation was expansionary for East Asian countries.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought to a critical analysis of the effect of the naira devaluation on small and medium scale enterprises in Nigeria.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain a critical analysis of the effect of the naira devaluation on small and medium scale enterprises in Nigeria.
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of faced by small and medium scale enterprises due to naira devaluation.
Summary
This study aimed at havinga critical analysis of the effect of the naira devaluation on small and medium scale enterprises in Nigeria. Four objectives were raised which included: To assess the dependency level of SMEs on foreign goods and services, to examine the effect of the naira devaluation on import volume of SMEs in Nigeria, to determine the effect of the naira devaluation on financial performance of SMEs in Nigeria and to examine the effectiveness of the naira devaluation in encouraging the growth of indigenous small and medium scale business in Nigeria.
Conclusion
Based on the above findings pertaining to the objectives of the study the following conclusions are drawn. While devaluating a currency can seem like an attractive option, it can have negative consequences. By making imports more expensive, it protects domestic industries that may then become less efficient without the pressure of competition. Higher exports relative to imports can also increase aggregate demand, which can lead to inflation. From the discussion in this paper, it is a reality that devaluation seems more doom than good. Since then, the whole nation has been thrown into panic with everyone wondering how the naira devaluation will impact the economy. These are just the harsh realities of the present economic situation we find ourselves in Nigeria. However, there’s always a way out for every challenge if given proper thought and creativity. It is believed that the current government and its economic team will consult widely in finding lasting solution to the dwindling Nigeria economy.
Recommendation
Driven by the findings in this research, SMEs in Nigeria have a long way to go for the sector to be relevant, focused, productive enough, and play the crucial role it is expected to in relation to contributing to the growth and development of the economy of Nigeria. The challenges and problems of the SMEs in Nigeria are hydra-headed and hence can only be effectively tackled by a multi-dimensional and concerted approach by all stakeholders i.e. the governments (Federal, State and Local) and their agencies and parastatals, banks, regulatory authorities, tax authorities, SMEs (owners and management), the employees of SMEs, multilateral and bilateral agencies and donors. It entails the government to create an enabling environment that is appreciably devoid of corruption and bureaucracy, and at the same time, motivating and entrepreneurially friendly. It has to be a two-pronged approach for the government efforts to be effective in recreating a conducive environment in which SMEs can thrive and blossom. Arising from the findings from the study and related studies earlier carried out, the Nigerian government should:
- Review the current import tariffs to encourage local production of goods.
- Promote tax holidays and other incentives to encourage investment in local manufacturing.
- Make policy that FDI are channeled on manufacturing/productive industries with 100% local raw material content and repatriation of capital shall be after ten years moratorium.
- Provision of social infrastructure like power, transportation and water.
- Government should create agency for quality assurance and encourage local industries to export finished goods.
REFERENCES
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- Agboli, M. and Ukaegbu, C. C. (2006) Business Environment and Entrepreneurial Activity in Nigeria: Implications for Industrial Development, Journal of Modern African Studies, 44(1), pp 1–30.
- Ajayi, D.D. (2007) Recent Trends and Patterns in Nigeria’s Industrial Development, Council for the Development of Social Science Research in Africa, Africa Development, 32(2), pp 139–55.
- Ajibefun, I. (2008) Technical Efficiency Analysis of Micro-enterprises: Theoretical and Methodological Approach of the Stochastic Frontier Production Functions Applied to Nigerian Data, Journal of African Economies, 17(2), pp 161-206.
- Ajibefun, I.A. &Daramola, A. G. (2003), “Efficiency of Microenterprises in Nigerian Economy” AERC Research Paper 134, African Economic Research Consortium, Nairobi.
- Akinlo, A.E. (1996), “The Impact of Adjustment Programme on Manufacturing Industries in Nigeria, 1986-1991: A Sample Study” African Development Review, Vol. 16, pp 73-93.
