1.1 BACKGROUND TO THE STUDY
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.
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.
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.
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.
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.
(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
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.
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.
of SMEs still depend on goods and services from China, UK, USA etc, since
importing tends to be cheaper than producing locally. The overdependence 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
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 determine the effect of the naira
devaluation on financial performance of SMEs in Nigeria.
To examine the effect of the naira
devaluation on import volume 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.
1.4 RESEARCH QUESTIONS
to achieve the objectives of the paper and guide the study accordingly, the
following research questions were formulated:
How dependent are SMEs in Nigeria on
Foreign goods and services?
How does devaluation of the naira
affect financial performance of SMEs in Nigeria?
What effects does the naira
devaluation have on import volume of SMEs in Nigeria?
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
following hypotheses were formulated for the study:
SMEs dependence on foreign goods and services is high.
SMEs dependence on foreign goods and services is Low.
There is no significant relationship between the naira devaluation and
financial performance of SMEs in Nigeria.
There is a significant relationship between the naira devaluation and financial
performance of SMEs in Nigeria.
There is no significant relationship between the naira devaluation and import
volume of SMEs in Nigeria.
There is a significant relationship between the naira devaluation and import
volume of SMEs in Nigeria.
The devaluation of the naira has not been effective in encouraging the growth
of indigenous small and medium scale businesses in Nigeria.
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
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.
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 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.
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
Small and Medium Scale Enterprise.
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.
an exchange ratebetween two currencies
is the rate at which one currency will be exchanged for another.
An import is a
good brought into a jurisdiction, especially across a national border, from an
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
Central Bank of Nigeria
commonly known as E-commerce or e-Commerce, is trading in products or services using computer
networks, such as the Internet.
An e-commerce site for buying and selling electronic gadgets and general wares.
An e-commerce website mainly for buying foreign and indigenous products in