ABSTRACT
This paper examines the effect of
naira devaluation on the performance of small and medium scale enterprises in
Nigeria. The study examines the continuous devaluation of exchange rate of
naira on the quality and quantity of output of small and medium scale firms. It
also evaluates the effect of naira devaluation on the performance of small and
medium scale enterprise in Nigeria. The methodology for this study is
chi-square method and it will basically explains the effect of naira
devaluation on the performance of small and medium scale enterprise in Nigeria
and the questionnaire method was used to gather data. The data were analyzed
using tables and figures. Based on the hypotheses tested, it discovered that
exchange rate devaluation has no significant effect on the quality and quantity
of goods small and medium scale enterprises. It also discovered that exchange
rate devaluation affects exportation of made in Nigeria goods. It was
recommended that small and medium scale enterprises in Nigeria should be encouraged
by the government by giving incentive and subsides to small scale enterprise
and improving the technological and infrastructural development so as to
increase the sectors contribution to gross domestic product and employment
within the country. Finally, it was concluded that exchange rate is a crucial
variable and small and medium scale enterprise is expected to be the moving
force in the drive towards industrialization.
TABLE OF CONTENTS
Title
Page
Certification
Dedication
Acknowledgements
Abstract
Table
of Contents
Chapter
One: Introduction
1.1
Background
to the Study
1.2
Statement
of the Problem
1.3
Objectives
of the Study
1.4
Research
Questions
1.5
Research
Hypothesis
1.6
Significance
of the Study
1.7
Scope
of the Study
1.8
Limitation
of the Study
1.9
Definition
of Terms
Chapter
Two: Literature Review
2.1 Introduction
2.2 Theoretical Concept of Naira Devaluation
2.3 Theoretical Framework for Naira Devaluation
2.4 The Objectives of Exchange Rate
2.5 Types of Exchange Rate
2.6 Factors affecting Rate of Exchange
2.7 Devaluation of Naira in Nigeria
2.8 Factors that can affect Small and Medium
Scale Enterprises
2.9 Small and Medium Scale Enterprises in Nigeria
2.10 The Effect of Naira Devaluation on the
Performance of Small and Medium Scale Enterprises in Nigeria
2.11 Challenges of Naira Devaluation in Nigeria
Chapter
Three: Research Methodology
3.1 Introduction
3.2 Research Design
3.3 Sources of Data
3.4 Research Instrument
3.5 Reliability and Validity of Research
3.6 Population of the Study
3.7 Method of Data Collection
3.8 Data Representation
3.9 Sample Size
3.10 Sampling Techniques
Chapter
Four: Presentation and Analysis of Data
4.1 Introduction
4.2 Presentation of Data
4.3 Analysis of Data
4.4 Hypotheses Testing
Chapter
Five: Summary of Findings, Conclusion and Recommendations
5.1 Summary of Findings
5.2 Conclusion
5.3 Recommendations
References
Appendix I: Cover Letter
Appendix II: Questionnaire
CHAPTER
ONE
INTRODUCTION
1.1
Background
to the Study
Following the devaluation of the naira in 1986, a policy
induced by the structural adjustment (SAP), the subject of exchange rate of
fluctuation has become a topical issue in Nigeria.
This is because it is the goal of every economy to have a
stable rate of exchange with its trading partners in Nigeria. This goal was not
reached in spite of the fact that the country embarked on devaluation to
promote export and stabilize the rate of exchange. The failure to realize this
goal subjected the small and medium scale enterprises in Nigeria to the
challenge of a constantly devaluation exchange rate. This was not necessitated
by the devaluation of the naira but the weak and narrow rising import
productive base of the enterprise and the rising import bills also
strengthening it. In order to stem this development and ensure a stable exchange
rate the monetary authority put in place number of exchange rate policies.
However, very little achievement was made in stabilizing
the rate of exchange rate fluctuation persisted in macro-economic management,
exchange rate policy as an important tools derives from the fact that changes
in the rate of exchange have significant implications, for a country’s balance
of payment position and even its income distribution and growth. It is not
surprising since it behavior is said to determine the behavior of several other
macro-economic variable (Oyejide, 1985). It is even more so for Nigeria which
had embarked on a course of rapid economic growth attendant high import
dependency.
The small and medium scale enterprise plays a catalytic
role in a modern economic and has many dynamic benefits that are crucial for
economic transformation. In an advanced country the scale and medium scale
enterprise is a leading sector in many respects. It is a question for
increasing productivity in relation to import substitution and export
expansion, creating foreign exchange earning capacity, raising employment,
promoting the growth of investment of a faster rate than any other sector of
the economy, as well as wider and more efficient linkage among different
sectors (Fakiyesi, 2005). But the Nigerian economy is under-industralizes and
it capacity utilization is also low. This is in spite of fact that small and
medium scale enterprise is the fastest growing sector since 1973/1974 (Obadan,
1994). The enterprise has become increasingly dependent on the external sector
for import of non-labour input (Okigbo, 1973). In the ability to import,
therefore, can impact negative on small and medium scale production Oyegide
(1985) posited that the breakdown of the Brelton wood system induce variability
in the rate of exchange worldwide; Nigeria inclusive. Umubanwer (1995) has
noted that three adverse consequence of this on ability to import. Devaluation
which further aggravates the situation has not significantly affected economic
performance in the positive direction in Nigeria (Ojo, 1990). The impact of
fluctuation in exchange rate on small scale output has not receives adequate
attention. This paper attempts to give attention to the issue.
1.2 Statement of the Problem
This research work is meant to emphasize on the issue of
fluctuating exchange rate on the small and medium scale enterprise. Some of the
problem which cause the fluctuation of exchange rate on the small and medium
scale enterprise can be seen below.
The exchange rate of the naira was relatively stable
between 1975 and 1979 during the oil boom or (regulatory require). This was
also the situation prior to 1990 when agricultural products accounted for more
than 70% of the nation’s gross domestic product (GDP) (Ewa, 2011: 78). However,
as a result of the development in the petroleum oil sector in 1970, the share
of agriculture in total export declined significantly while that of oil
increased.
Furthermore, more small and medium companies are faced
with the problem, not recognizing the fact that devaluation in exchange rate
adversely affect output of the small and medium scale enterprise. This is
because Nigeria small and medium scale enterprise is highly dependent on import
of input and capital goods. This is in spite of the fact that small and medium
scale enterprise is the fastest growing enterprise since 1973 (Obadan, 1994).
This enterprise has become increasingly dependent on the external enterprise
for import of non-labour input. The impact of effect of Nigeria devaluation on
the performance of small and medium scale enterprise output has not received
attention.
Instabilities of foreign exchange rate is also a problem
to small and medium enterprise; however, instability to import therefore can
impact negatively on small scale production, furthermore, Jhingen (1997),
emphasized that effect of naira devaluation cause uncertainty and impede on
international trade.
Thus uncertainty in trade transaction post a lot of
problems such as inflation, which determine the internet balance of a country,
it has also tended to undermine the international competitiveness of non-oil
export and make planning and projection difficult at both micro and macro
levels of the economy, some small and medium scale enterprise have been
strangled out as a result of low dollar naira exchange rate.
1.3 Objectives of the Study
In a highly import dependent economy like Nigeria, the
naira exchange rate has become one of the most widely discussed topic in the
country today. This is not surprising as this topic has had a lot of impact on
the small and medium scale enterprise. It as therefore the objective of this
study to evaluate the effect of naira devaluation on the performance of small
and medium scale enterprise in Nigeria.
1.
To
determine if the continuous devaluation of exchange rate of naira have an
impact on the quality and quantity of output of small and medium scale firms.
2.
To
evaluate the effect of naira devaluation on the performance of small and medium
scale enterprise in Nigeria.
3.
To
know the effect of exchange rate devaluation on Nigeria imports and exports.
1.4 Research Questions
1. To what extent has exchange rate
devaluation affect the importation of input and capital goods?
2. Has exchange rate devaluation have on the
quality and quantity at goods small and medium scale by Nigeria enterprise?
3. To what extent has exchange rate
devaluation affect the exportation of made in Nigeria goods?
1.5 Research Hypotheses
The
hypothesis of the study includes the null hypothesis as ‘Hi’
Hypothesis One
Ho: Exchange rate devaluation has no effect on the importation
of input and capital goods.
Hi: Exchange
rate devaluation has effect on the importation of input and capital goods.
Hypothesis
Two
Ho: Exchange rate devaluation has no significant effect on the
quality and quantity of goods small and medium scale by Nigeria enterprise.
Hi: Exchange rate devaluation has significant effect on the
quality and quantity of goods small and medium scale by Nigeria enterprise.
Hypothesis
Three
Ho: Exchange rate devaluation do not affect exportation of
made in Nigeria goods.
Hi: Exchange rate devaluation affects exportation of made in
Nigeria goods.
1.6 Significance of the Study
The study
would identify the strengths and weakness of exchange rate policy and
management, identify those parts that are mostly affected by instability in
exchange rate provide the general public with adequate information on the
foreign exchange transaction and its impact on the small and medium scale
enterprises. In general, the study benefits the following:
1.
The
government will benefit as it will enable them ascertain the extent of the
variation of exchange rate affect the quality of input and capital goods
imported into Nigeria by small and medium scale enterprises, the government can
make policies that will help Nigerian small and medium scale enterprise prosper
in the business.
2.
The
small and medium scale enterprise will be much aware of the impact of the
exchange rate devaluation on their enterprise.
3.
To
the students, it will be a work base for future research.
4.
To
the public it will be a thorough understanding of the exchange rate devaluation
and having taken appropriate measure will lead to a stable economy.
1.7 Scope of the Study
This study
takes and insight into the effect of naira devaluation on the performance of
small and medium scale enterprises in Nigeria, the research work is limited to
the exchange rate and devaluation of naira on small scale enterprise in
Nigeria.
1.8 Limitation of the Study
1. Increased shopping cost of international
buyers.
2. Raise in airfares for major international
routes.
3. Increased in the cost of imported products.
4. Increase to the cost of goods and services.
5. Greater difficulty in paying external
debts.
6. Investors would require higher returns to
compensate for the inflation.
7. The CBN may raise interest rates for fight
off inflation.
1.9 Operational Definition of Terms
1. Exchange Rate: This is the price of one country’s
currency in terms of another.
2. Foreign
Exchange: Foreign exchange is a means of payment for international
transaction; it is made up of currencies of another countries that are freely
acceptable in setting international transactions.
3. Dutch
Auction System (DAS): This is a method of exchange rate devaluation through
auctions where the bidders pay according to their bid rate.
4. Exchange
Control: This is a foreign exchange arrangement in which the government
purchase all coming foreign exchange and is the only source from which foreign
exchange can be purchased legally.
5. 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.
6. Exchange
Rate: An exchange rate between two currencies is the rate at which one
currency will be exchange for another.
7. Import:
An import is a goods brought into a jurisdiction, especially across a
nation border from an external source.
8. Export:
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”.
9. Policy:
Is a term which describes the principal objective of any industrial. It can
also be defined as the modes of thought and the body of principles laid down to
underlie and to guide the activities of a firm or other organization towards
declared or known objectives.
10. Production:
This can be describe as a place where activities take place things of value
is created, such as services provided in hospitals, university, polytechnics,
insurance firms and so on.
11. Transaction:
Transaction can be defined as business between two or more person.
12. Performance:
This can be describe as the effectiveness of any country or any enterprise.
13. Development: Development means the growth of an
enterprise or the increment of a firm.
14. International
Trade: This is the transaction between two countries, e.g. Nigeria and USA.
15. Small
Scale Enterprise: This can be defined as a small business as a
manufacturing outfit employing less than ten people or whose investment in
machinery and equipment does not exceed six hundred thousand naira.
16. Medium
Scale Enterprise: This can be define as a business which is a little bigger
than the small scale business or enterprise that has more than one hundred
employees.
17. Industrialization:
Industrialization is a place where raw material are put together to become
finished good or when input are become output.
18. Macro-Economic:
This can be defined as a relating to the entire economy including the
growth rate, money and credit, exchange rates, the total amount of goods and
services produced, total income earned.
19. Monetary:
Monetary is refer to as pertaining to, or consisting of money.
20. Enterprise:
An emperies can be defined as a company, business, organization or other
purposeful endeavour.
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