Effects of Foreign Exchange on the growth of Small and Medium Enterprises in Nigeria

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Price: 2000 Naira (BSC, MSC)

ABSTRACT

The titled of this research work is the effects of foreign exchange on the growth of small and medium enterprises in Nigeria. The main aim of this study is to examine the Effects of Foreign Exchange on the growth of Small and Medium Enterprises in Nigeria as study of SME in Lagos State. Other specific objectives of this study are to examine the effect of exchange rate on the prices on commodities imported by SMEs, to examine the relationship between foreign exchange rate and economic development and to examine the effect of foreign exchange rate on the growth of small and medium scale enterprises in LAGOS state. The researcher has chosen SMEs in Lagos. Nigeria as the studied population in order to find a possible solution to which involve a total of 240 respondent. Therefore, using the Taro Yamane’s formula, the sample size to be used in this study is 150 SMEs which is gotten from the entire population of 240 respondent. The research made use of the following procedures in gathering data: Questionnaire, Interviews and Observations. The analysis was represented in tabular form for easy understanding and it consist the number of respondents and the corresponding percentage and chi – square was used as the statistical tools. The decision rule is Reject Null Hypothesis if calculated value of (X2) is greater than the critical value and accept Null Hypothesis if calculated value of (X2) is less than the critical value.

CHAPTER ONE

INTRODUCTION

1.1. Background of the Study

Nigeria exchange rate has had a chequered history. For over four decades, there has been inconsistencies in Nigeria’s exchange rate policies and lack of continuity in the exchange rate policies have worsened the unstable nature of the naira rate (Adeniran, Yusuf & Adeyemi, 2014; Gbosi, 2005).

Anigbogu, Okoye, Anyanwu and Okoli (2014) state that exchange rate management in Nigeria has evolved through various regimes. During the first decade of independence and for the early years of the 1970s, the IMF modified fixed exchange rate was adopted. After its collapse, the country moved to the adjustable peg regime, which pegged the naira to series of international currencies (1973 flexible and managed float regime was instigated under SAP in 1986.

The exchange rate is left to float freely and determined by market forces with the monetary authorities intervening intermittently in the FOREX market to ensure stability of the rate. The country returned back to a fixed regime from 1994 to 1998, where the naira was fixed at ₦21 to a dollar.

The democratic dispensation of 1999 re-ushered the flexible and managed float regime and has remained the system till present. Consequently, with the re-ushering of the flexible and managed float regime, Naira to Dollar exchange rate has continued to depreciate at an alarming rate both at the official and the parallel market. This also engendered the flourishing of rent seeking activities.

The consequences of the depreciation in the value of Naira could be seen in the external sector through protracted balance of payments disequilibrium, low export earnings coupled with high import bills which is largely due to high overvaluation of the exchange rate and unsavoury picture in the short term and long term capital account feeding into the monstrous body of foreign debt. The domestic economy is characterized by a huge presence of a government sector, low productivity in the real sectors, high inflation rate, decaying service sector, and shaky financial sector (Aliyu, 2007).

According to Omotosho (2015), the exchange rate is an important concept in economics and it connotes the prices at which currencies trade for each other. Its importance stems from the fact that it links the general price level within the economy with prices in the rest of the world while also affecting other prices within the system. To central banks, exchange rate is a key variable as it could be used as a target, an instrument or simply an anchor, depending on the monetary policy framework being operated in the economy Thus, exchange rate is at the core of any serious economic stabilization programme. The present economic situation of the country is volatile and this has serious economic implication on the SMEs’ sector as they rely more heavily on short term funding and this makes them more prone to the volatile economic situation (Uremadu, Ani and Odili, 2014). It is therefore important to empirically probe into the impact of exchange rate on the performance of small and medium enterprises in Nigeria.

Recently, the drop in price of oil globally has left nations like Nigeria who run an oil based economy without prior diversification of her economy in economic crises. This challenge brought about by exchange rate fluctuations is eventually leading to pressure on the government to devalue the Naira (Andre 2016). This has affected other sectors 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 as a result of the sustained drop in the oil prices in the global oil market. 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 decade as a result of heavy dependence on imported finished 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 2012).

Henry (2012), in one of his works examined the currency devaluation as a deliberate downward adjustment in the official exchange rate established by a government against specified standard or another currency. The above academic discourse simply mean that devaluation of any currency is about stimulating exports and reducing importation of goods and services, for the achievement of balanced economic growth, with the general goal of reducing the level of poverty.

1.2. STATEMENT OF THE PROBLEM

This study was informed by the observed economic shock in Nigeria that has seriously affected the Small and Medium Enterprises (SMEs) sector of the country, thus, putting her acclaimed position as the giant of Africa on balance in the global competitiveness. The economic malady was mid-wife by the unprecedented decline in the price of oil and the Naira-Dollar exchange rate depreciation, with the exchange rate volatility being more pronounced as it concerns the issues of macroeconomic financial stability. According to Omotosho (2015), the exchange rate is an important concept in economics and it connotes the prices at which currencies trade for each other. Its importance stems from the fact that it links the general price level within the economy with prices in the rest of the world while also affecting other prices within the system. To central banks, exchange rate is a key variable as it could be used as a target, an instrument or simply an anchor, depending on the monetary policy framework being operated in the economy Thus, exchange rate is at the core of any serious economic stabilization programme. The present economic situation of the country is volatile and this has serious economic implication on the SMEs’ sector as they rely more heavily on short term funding and this makes them more prone to the volatile economic situation (Uremadu, Ani and Odili, 2014). It is therefore important to empirically probe into the impact of exchange rate on the performance of small and medium enterprises in Nigeria.

1.3. Aims and Objectives of the Study

The main aim of this study is to examine the Effects of Foreign Exchange on the growth of Small and Medium Enterprises in Nigeria as study of SME in Lagos State. Other specific objectives of this study are

  1. To examine the effect of exchange rate on the prices on commodities imported by SMEs.
  2. To examine the relationship between foreign exchange rate and economic development.
  3. To examine the effect of foreign exchange rate on the growth of small and medium scale enterprises in LAGOS state.

1.4. Research Questions

The following are the research questions that guided this study;

  1. What is the effect of exchange rate on the prices of commodities imported by SMEs in LAGOS state?
  2. Is there a relationship between foreign exchange rate and economic development?
  3. What is the effect of foreign exchange rate on the growth of small and medium scale enterprises in LAGOS state?

1.5. Research Hypotheses

Hypothesis 1

H0: Foreign exchange rate does not have a significant effect on the growth small and medium enterprises in Nigeria

H1: Foreign exchange rate has a significant effect on the growth small and medium enterprises in Nigeria

Hypothesis 2

Ho: there is no significant relationship between foreign exchange rate and import volume of SMEs in Nigeria.

Hi: there is a significant relationship between foreign exchange rate and import volume of SMEs in Nigeria.

1.6. Significance of the Study

This study would help to improve on the already existing scholastic works on naira devaluation and its effect on the development of SMEs and the economy as a whole. Findings from this research would equally be beneficial to economists and policy makers in formulating policies on naira devaluation and its effect on both the economy and small businesses in Nigeria. It is equally expected that this work would also serve as a guide to researchers who would want to engage in further research on naira devaluation.

1.7. Scope of the Study

This study is on the effects of foreign exchange on the growth of small and medium enterprises in Nigeria in LAGOS as the case study.

1.8 Limitation of Study

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9. Definition of Terms

SME: small and medium scale enterprise. It is a non-subsidiary, independent firm which employs less than a given number of employees.

Naira devaluation: official lowering of the value of a country’s currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency.

Exchange rate: is the rate at which one currency will be exchanged for another

Import: To bring (goods or services) into a country from abroad for sale.

CBN: Central Bank of Nigeria

Balance of payment : The balance of payments, also known as balance of international payments and abbreviated BOP, of a country is the record of all economic transactions between the residents of the country and the rest of the world in a particular period (over a quarter of a year or more commonly over a year).

Balance of trade: The difference in value between a country’s imports and exports.

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