THE EFFECT OF NAIRA DEVALUATION ON SMALL SCALE ENTERPRISES AND THE ECONOMY ( A CASE STUDY OF SMEs IN LAGOS)

CHAPTER ONE

INTRODUCTION

1.1.BACKGROUND OF THE STUDY

Naira devaluation simply means the official lowering of the value of the Naira within a fixed exchange rate system (Wikipedia). Devaluation or depreciation of a country’s currency is usually triggered when the country is experiencing an adverse Balance of Payment or of Trade (BOP/BOT) crisis or by worsening economic conditions transmitted into the domestic economy from the foreign market (World Bank 2000). A lot has been said about the devaluation of the naira in recent times and its implications on the economy. Nigeria as a nation is a country blessed with so much enormous natural resources and is equally a nation that thrives on importation as she imports virtually 55% of commodities consumed locally. others previous administration especially the Babangida administration that oversaw the devaluation of the naira as a result of one reson or the other has in one way or the other come back to haunt the economy and development of Nigeria as a result, the present government of Nigeria has insisted that they would not devalue the naira giving reason of the masses poverty level and considering the harm it may cause on the already volatile economy and the Nigerian populace

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 GENERAL PROBLEM

The developing economy of Nigeria is an import reliant economy where virtually everything is being imported into the country. Talks of naira devaluation for an import reliant economy may become a tool for encouraging local production and reduce importation of finished products  if adequate polices are put on ground before depreciating the naira, but has the government made efforts in putting these policies on ground to make the Naira devaluation a tool that can speed up local production?.

Devaluation of the Naira without adequate policies being put on ground would be dangerous as small medium scale businesses would have to pay more to import finished products from other countries. This would definitely lead to inflation which would by extension adversely patronage of these small scale enterprises that help to drive the economy.

1.3. AIMS AND OBJECTIVES OF THE STUDY

The main aim of this study is to examine the effect of Naira devaluation on the development of small and medium scale enterprises and the economy. Other specific objectives of this study are

1. To examine the effect of naira devaluation on the prices on commodities imported by SMEs in LAGOS state.
2. To examine the relationship between naira devaluation and economic development.
3. To examine the relationship between SME growth and economic growth and development.
4. To examine the effect of naira devaluation on the development of small and medium scale enterprises in LAGOS state.
5. To examine the effect of naira devaluation on the financial performance of small businesses in LAGOS state.
6. To examine the relationship between naira devaluation and import volume of SMEs

1.4. RESEARCH QUESTIONS

The following are the research questions that guided this study;

1. What is the effect of naira devaluation on the prices of commodities imported by SMEs in LAGOS state?
2. Is there a relationship between naira devaluation and economic development?
3. What is the relationship between SME growth and economic growth and development?
4. What is the effect of naira devaluation on the development of small and medium scale enterprises in LAGOS state?
5. What is the effect of naira devaluation on the financial performance of small businesses in LAGOS state?
6. Is there a relationship between naira devaluation and import volume of SMEs in Nigeria?

1.5. RESEARCH HYPOTHESES

Hypothesis 1

H0: Naira devaluation does not have a significant effect on small and medium enterprises in Nigeria

H1: Naira devaluation has a significant effect on small and medium enterprises in Nigeria

Hypothesis 2

H0: Naira devaluation does not have an effect on the economy of Nigeria.

H1: Naira devaluation has an effect on the economy of Nigeria.

Hypothesis 3

H0: there is no significant relationship between SME growth and economic development of Nigeria.

H1: there is a significant relationship between SME growth and economic development of Nigeria.

Hypothesis 4

H0: there is no significant relationship between naira devaluation and import volume of SMEs in Nigeria.

H1: there is a significant relationship between naira devaluation and import volume of SMEs in Nigeria.

Hypothesis 5

H0: naira devaluation does not affect small and medium scale enterprise development.

H1: naira devaluation affects small and medium scale enterprise development.

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 effect of naira devaluation on small scale enterprises and the economy with small and medium scale enterprises in LAGOS as the case study.

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.

1.8. 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.