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’
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.
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.
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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