EFFECT OF THE DEVALUATION OF THE NAIRA ON THE OPERATIONS OF SMALL AND MEDIUM SCALE BUSINESSES
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Economic theory posits that naira devaluation will likely improve a nation’s trade balance; however, there are different schools of thought with divergent explanations of how devaluation improves trade balance (Rawlins and Praveen 1993). Developing countries often face a major decision in reducing large trade deficits and in order to achieve this, they are faced with challenging policy decision of whether to devalue exchange rate or embark on internal/external debt financing. Empirical literature on developing and transition economies have established that currency devaluation will lead to improvement in trade balance in the long-run (Agbola 2004, Rawlins and Praveen, 2000; Musila and Newark, 2003; Bahmani-Oskoee and Ratha, 2004). Evidences from existing literature examined the effect of currency devaluation (depreciation) on trade balance using the marshall-lerner (M-L) condition; this implies that devaluation will improve in the long-run given that the sum of the absolute values of export and import demand price elasticities exceeds unity. The aim of this paper is to examine whether a long-run relation exists between the trade balance and nominal effective exchange rate in Nigeria.
Nigeria with abundance of resources like crude oil among others 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 literatures 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.
In 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 been 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.
Devaluation 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. to what level?
Currency 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.
The 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. On the basis of this, the nation was encouraged to embrace the devaluation policy as prerequisite for economic recovery.
Campbell (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
Nigeria 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.
The 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.
Majority of SMEs still depend on goods and services from China, UK, USA among other nations 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. It is against this backdrop that this study intends to examine the effect of Naira Devaluation on the operations of SMEs in Kaduna State
1.3 Research Questions
In-order to achieve the objectives of the paper and guide the study accordingly, the following research questions were formulated:
1. What effects does the naira devaluation have on the growth of SMEs in Kaduna State?
2. What effects does the naira devaluation have on Economic Growth in Kaduna State and the relationship between naira devaluation and Economic Growth in Kaduna State?
3. What effects does naira devaluation have on trade balance for 1994 -2016?
1.4 Objectives of the Study
The main aim of the study is to examine the effect of the devaluation of the naira on the operations of small and medium scale businesses in Kaduna State, Nigeria. Specific objectives of the study are:
1. To assess the effect of naira devaluation on the growth of SMEs in Kaduna State.
2. To examine the effect of the naira devaluation on the economic growth and the relationship between naira devaluation and economic growth
3. To empirically investigate the quantitative impact of naira devaluation on the trade deficit
1.5 Research Hypotheses
The following null hypotheses were formulated for the study:
1. Naira devaluation does not have any significant effect on the growth of SMEs in Kaduna State
2. Naira Devaluation does not have any significant effect on the economic growth in Kaduna State and there is no a significant relationship between the naira devaluation and economic growth in Kaduna State
3. Devaluation will not significantly succeed in improving the trade balance deficits in the Nigerian economy.
.1.6 Justification of the study
The 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 in Kaduna State
It will serve as a guide to further research, academic work and as a self-help study material for those who might wish to first-hand knowledge about naira devaluation.
It 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 of the Study
The study covers the effect of devaluation of the naira on the operations of small and medium businesses in Kaduna State consisting of three Senatorial zones with 23 Local Governments Area. Three Hundred and four (324) SMEs in the state were sampled for the study. Kaduna State was selected as the study area because is a microcosm of ethnicity, religion and entrepreneurship for most old regional capital cities in Nigeria.
1.8 Limitations of the Study
In the process of carrying out this project work, the researcher was confronted with many challenges and limitations which are as follows:
Time:There was time constraint for the research project and within the time specified, the normal lecturer were also in progress, therefore, the researcher was faced with a lot of stress to combine the research work with her personal affairs and running from one lecture to another. The effect of this work was that the period the researcher was supposed to spend on findings and data collection was limited and as a result more quality work was hindered.
Finance:The researcher was also faced with financial problems. Researcher work is very tedious because it requires running from one place to another in search of information, books, Journals, paper and reports must be consulted but are not always available within, there was the need to travel to gather some of the materials which involved money. Also the researcher printed questionnaires which were distributed to the SMEs in Kaduna State across all the 23 Local Governments which also involved money.
Quality of Information:The analysis of the data in chapter four is based on the information provided by the respondents and data collected CBN, NBS, IFS and World Tables.. After administering questionnaires, it was expected that the information needed will be provided by both literate and illiterate entrepreneurs. The illiterate were reluctant to provide some of the important information needed. This was on the ground that such information is very secret, and it is called industrial espionage. This challenge also affected the quality of information provided for the research findings. However, it was complemented by secondary data source
1.9 Organization of the Study
The research will be organized into five chapters and the highlight of each chapter is as follows:
Chapter one of this study presents the introduction, statement of the problem, Research Questions, Research Objectives, Research Hypothesis, Significance of the study, Scope of the study, Limitations of the study and organization of the study
Chapter two reviewed related literatures on conceptual Framework, theoretical framework, Empirical review of related Literatures and Gap in the literature. It will tells us how other authors view variables used in this study as concepts, theories were reviewed in this chapter and one related to the aim of this study was adopted to back this study and finally ten to fifteen related studies were analyse critically and empirically review to support the current and existing literature of this study.
Chapter three will give adequate knowledge on the methodology of the work. It will presents Study area, theoretical framework, model specification, description of variables, sources and method of data collection, population of the study, sample size and sampling technique, data analysis and testing of Hypothesis
Chapter four deals with the presentation and analysis of data collected. analysis of secondary data, analysis of primary data, testing of the hypothesis formed in chapter one of the study and reveals the finding of the work.
Chapter five will highlights the finding, summary of the findings, conclusion, recommendation, contribution to knowledge and suggestion for further studies
.