The Effect Of Naira Devaluation On Small And Medium Enterprises In Nigeria

Project and Seminar Topics with material for Banking and Finance

Project and Seminar Topics with material for Banking and Finance


Abstract


This study was carried out on the Effect of Naira Devaluation on small and medium scale enterprises in Nigeria, using Lagos state as the case study. Naira devaluation simply means the official lowering of the value of the Naira within a fixed exchange rate system (Wikipedia).The ordinary least squares (OLS) was used for estimating the unknown parameters in a linear regression model.

It is the best and unbiased estimator and gives efficient results.The data used in this study was obtained from secondary sources. Annual data series are employed for the estimation of the model. All the time series data employed are gathered from the Central Bank of Nigeria (CBN) Statistical Bulletin, National bureau of statistics (NBS) and sources of information.

There was a positive and insignificant showing that naira devaluation does not have a significant effect on small and medium enterprises in Nigeria. The result also showed that SMEs output has positive and insignificant impact on the economy of Nigeria where naira devaluation according to the result does not have an effect on the economy of Nigeria. The study further recommended that Nigeria as a country needs to step up its productive capacity in producing goods and services needed both locally for domestic consumption and abroad for export.


Table Of Contents


Preliminary Page(s)

  • Title
  • Declaration
  • Approval
  • Dedication
  • Acknowledgement
  • Abstract
  • Table of Content

Chapter One:

Introduction

  • 1.1. Background of the study
  • 1.2. Statement of the general problem
  • 1.3. Aims and objectives of the study
  • 1.4. Research questions
  • 1.5. Research hypotheses
  • 1.6. Significance of the study
  • 1.7. Scope of the study
  • 1.8 Limitation of study
  • 1.9. Definition of terms

Chapter Two:

Literature Review And Theoretical Framework

  • 2.1 Theoretical Literature Review
  • 2.2 Theoretical framework
  • 2.2.1 The classical Growth theory
  • 2.2.2 Harod- Domar Growth theory
  • 2.2.3 The Neo-Classical Theory
  • 2.3 Effect of Devaluation on SMEs in Nigeria
  • 2.4 The reasons for Naira Devaluation
  • 2.5 Implication of ‘continued’ naira devaluation
  • 2.5 SMEs in Nigeria
  • 2.6 Challenges facing small and medium scale industries.
  • 2.6.1 Infrastructural Inadequacies
  • 2.6.2 Poor Management Structure
  • 2.6. 3 Lack of Access to Affordable Financing
  • 2.6.4 Lack of Accounting Records
  • 2.6.5 Risky and uncertain business
  • 2.6.6 Unstable macroeconomic variable
  • 2.6.7 Taxes and tariffs

Chapter Three:

Research Methodology

  • 3.1 Introduction
  • 3.2 Research methodology
  • 3.2.1 Method of estimation
  • 3.2.2 Coefficient of multiple determinations (R2)
  • 3.2.3 Adjusted coefficient of multiple determination
  • 3.2.4 F-Statistics
  • 3.2.5 T-Statistic
  • 3.2.6 Durbin –Watson Statistic
  • 3.3 Nature and Source of Data
  • 3.4 Description of variables
  • 3.5 Model specification
  • 3.6 A Priori Expectation

Chapter Four:

Data Presentation And Analysis

  • 4.1 Presentation of Results
  • 4.2 Analysis of results
  • 4.3 Test of hypotheses
  • 4.4 Discussion of finding

Chapter Five:

Summary, Recommendations And Conclusion

  • 5.1 Summary
  • 5.2 Policy Recommendations
  • 5.3 Conclusion
  • References
  • Appendix

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 reason 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 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. 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 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 4
  • 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.


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.


Chapter Five


Summary, Recommendations And Conclusion

5.1 Summary

This study was undertaken to examine is to examine the effect of Naira devaluation on the development of small and medium scale enterprises and the economy. To achieve this objective, the study employed the ordinary least square (OLS) regression technique in estimating the specified model. The results of the regression analysis are summarized thus:

There is a positive and insignificant showing that naira devaluation does not have a significant effect on small and medium enterprises in Nigeria. The result also showed that SMEs output has positive and insignificant impact on the economy of Nigeria where naira devaluation according to the result does not have an effect on the economy of Nigeria. Further examination of the result showed that interest rate has a negative and insignificant relationship with the economy. It further stressed that inflation has a negative and significant relationship with the economy of Nigeria. While it finally showed that exchange rate has a negative and insignificant relationship with the economy of Nigeria.


5.2 Policy Recommendations

Based on the results obtained, the following recommendations have been made:

  1. Nigeria as a country needs to step up its productive capacity in producing goods and services needed both locally for domestic consumption and abroad for export.
  2. If the productivity increases and Nigeria produces home made goods to replace the foreign goods, then the large dependence on imports and foreign goods should reduce.
  3. There is a vast unemployment in virtually all fields of life in Nigeria, for the impact of devaluation to be favourable, both public and private sector should suffice a way of employing more personnels into its services thereby reducing unemployment which will improve productivity, reduce dependence and improve the standard of living.
  4. Finally, the negative and insignificant relationship between exchange rate and the economy of Nigeria calls for government effort towards improving the quality of the local currency.

5.3 Conclusion

This study was carried out to examine is to examine the effect of Naira devaluation on the development of small and medium scale enterprises and the economy. Theoretical literatures on impact of SMEs on economic growth have focused on challenges facing the sector which have hindered its progress with respect to job creation and output.In conclusion, history has proved quite effective in identifying the importance of devaluation amid economic crisis in an economy, which tends to contribute to finding possible solution to such economic crisis at the long run. The interesting question that arises what happens in the short run? The argument for devaluation is that, the pain can occur relatively quickly. A big currency devaluation instantly hits consumer purchasing power and reduces wages, purchases of foreign goods quickly fall because prices of foreign goods quickly soar etc. Therefore, Nigeria will only become a better economy in the near future with a mega improved public and private sector and possibly, requests from international investors seeking to invest in Nigeria, will be trooping into the country in the nearest future.

The results obtained have not proved otherwise naira devaluation have a significant effect on small and medium enterprises in Nigeria. The result also showed that SMEs output has an insignificant impact on the Nigerian economy. Further examination showed that interest rate has a negative relationship with the Nigerian economy. Also, the result showed that naira devaluation affects small and medium scale enterprise development while exchange rate turns out to be negatively related with the Nigerian economy affecting small and medium scale enterprises.


The Effect Of Naira Devaluation On Small And Medium Enterprises In Nigeria


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