EFFECT OF NAIRA DEVALUATION ON SMALL AND MEDIUM SCALE

ENTERPRISES IN NIGERIA

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

1
 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

2
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.

3
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

4
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

5
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

6
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.

7
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.

8
 CHAPTER TWO

LITERATURE REVIEW AND THEORETICAL FRAMEWORK

2.1 Theoretical Literature Review

Development strategists have advocated the aggressive use of small and

medium scale Enterprises (SMEs) to accelerate economic growth, especially in

developing countries of the world (Daodu,1997). Most African countries are

basically agricultural societies, and as observed by Osinowo (1997), with little

capital to invest, it seems obvious that the process of industrialization should be

based on the development of the SMEs to link agricultural production with

manufacturing activities. According to Arewu and Adeyemi (2011), Small and

Medium Enterprises have been considered as the engine of economic growth, and

that the major advantages of the SMEs is their employment potential at low capital

cost. This is because the SMEs are relatively more labour-intensive than large

enterprises. Furthermore, Aremu (2004), contends that the role SMEs play in any

country is always in consonance with the country’s level of development. Adeyemi

and Badmus (2001), in agreement with Aremu (2004) opine that there is high

incidence of poverty in Nigeria, argued that only adequate financing of small and

medium scale enterprises will reduce Nigeria’s unemployment level. On the belief

that jobs can be massively created through the development of SMEs, Gunu (2004)
9
and Aremu (2010) posit that finance to small and Medium Scale Enterprises will

provide more income, savings and employment.

The need to promote the industrial sector has continued to be a major concern

of most governments worldwide, especially developing countries like Nigeria. With

the growth of SMEs, Olorunshore (2002) and Egban (2004), believed that the

Nigerian economy will have the potential of being competitive in the global market.

In recognition of these potential roles of SMEs, successive governments in Nigeria

have continued to express policy measures and programme to achieve industrial

growth and development. In recognition of SMEs contribution to Nigerian economy,

the strategies and initiatives to promote SMEs development featured prominently in

most of the government’s economic development plans with a view to nurturing

further growth of the sector. According to Ogwuma (1995), a clear path for

accelerating the development of SMEs has been charted through the establishment

of agencies such as DFRRI, NDE, NAPEI etc, although the challenges before these

establishments are daunting.

10
2.2 Theoretical framework

In the course of this research, some theoretical frameworks have been developed and

they include:

2.2.1 The classical Growth theory

The classical theories laid the foundation for a number of growth theories

.Early economist stressed the importance of land (natural resources) and labour

(human resources) in economic growth. The foundation for classical growth theory

was laid by Adam Smith who posited a supply side driven model of growth and his

function was as follows:

Y=f(L, K, T)…….2.1

Where Y –Output

L –Labour

K –Capital

T-Land so that output was related to labour, capital and land input.

Consequently, output growth (gy) was driven by population growth (gl) investment

(gk) and land growth (gt) and increase in overall productivity (gf).

11
 Therefore, gy =f (gf, gk,gl, gt)….2.2

The classicist argued that growth was self reinforcing as it exhibited

increasing returns to scale .As population grew to occupy the Freeland so did the

output. After all the lands are occupied, output will grow slower than population.

With new labour added to fix land which decreases land labour ratio, each labour

had less land to work with. This means marginal product of labour will decline and

real wages will fall. Moreover, he view savings as a creator of investment and hence

growth, therefore, he saw income distribution as being one of the most important

determinants of how fast or slow a nation would grow. He also posited that profits

decline not because of decreasing marginal productivity but rather because the

competition of capitalists for workers bid wages upward (Todaro, 2009).

Smith also emphasized about division of labour which come from two sources, first

the savings and capital accumulation and second, the extent of the market. The

saving in capitalist system is regarded as a very important requirement for economic

growth. This is so because savings creates investment and hence economic growth.

2.2.2 Harod- Domar Growth theory

Harod and Domar assigned a key role to investment in the process of

economic growth. They lay emphasis on the dual character of investment; firstly, it

creates income and secondly, augments the productive capacity of the economy by

12
increasing its capital stocks. The former is regarded as the ‘‘Demand Effect’’ and

the later, the” Supply Effect” of investment (Taylor, 1991).

To them, every economy must sell a certain portion of its national income to replace

worn-out or impaired capital goods. However, in order to grow, new investments

representing net additions to the capital stocks are necessary. The following

equations were formulated;

Net saving (s) is some portion of s, of national income (Y) such that we have the

simple equation S=sT…(1)

Net investment (I) is defined as the change in the capital stock (K) and can be

represented by Dk such that I=dK…(2)

Since capital stock ,K, bears a direct relationship to total national income or output,

Y as expressed by the capital output ratio, K, it follows that K/y=K or dk/dy=K or

dk=kdY…(3)

Finally because net national savings S, must equal net investment, we can write

this equality as S=I..(4) but from equation 1 we know that S=sT, and from equation

2 and 3,we know that I=dk=kDY.

This can also mean S=sT=kDY=DK=I or simply sT=kDY…(5)

13
Dividing both sides of the equation S first by Y and then by K, we obtain the

following expressions

DY/Y=S/K…(6)

Equation 6 which is the simplified version of the famous equation in the Harod-

Domar theory of economic growth states simply that the rate of growth of GDP

(DY/Y) is determined jointly by the net national savings ratio, and the national

capital-output, K. More specifically, it says that in the absence of government, the

growth rate of national income will be directly or positively related to the savings

ratio and inversely or negatively related to the economy’s capital-output ratio.

2.2.3 The Neo-Classical Theory

The neo-classical growth model, also known as the exogenous growth model or

Solow-Swan growth model is a term used to sum up the contributions of various

authors to a model of long run economic growth within the framework of neo-

classical economics. This theory developed independently by Robert Solow (1956)

and Robinson (1997), was the first attempt to model long run growth analytically.

The enterprise of the standard neoclassical growth model is an aggregate

production function of the form

YE=f (KE,LE ,AE )…2.3

14
Where Y is output, K is labour and A is an index of technology or efficiency. The

model posits that f has the usual neo-classical properties characterized by constant

returns to each input and a positive and constant elasticity of substitution.

Technological change replace investment (growth of K) as the primary factor

explaining long term growth, and its level was assumed by Solow and other growth

theorists to be determined exogenously that is, independently of all other factors

including inflation (Todaro,2009)

The neo-classical economists believe that to raise an economy’s long run trend

rate of growth requires an increase in the labour supply and an improvement in the

productivity of labour and capital. This model assumes that countries use their

resources efficiently and that are diminishing returns to capital as labour increases.

The main stream of neo-classical growth theory held that increase in savings rate

will bring about a temporary increase in aggregate output in the short run but in the

long run, output will adjust to a new level and savings accumulation will only affect

aggregate output and not its growth rate (Omojimite, 2010).

2.3 Effect of Devaluation on SMEs in Nigeria

The continued volatility in the Naira will prove disastrous to the SMEs.

Although the Central Bank of Nigeria (CBN) has implemented several measures to

slow the devaluation, it appears none of the measure has worked thus far. There

15
appears to be panic in the forex market either due to real concerns or fears spread by

speculators. It appears as thus, the world economic crisis and fall in the oil price is

hitting the Nigerian economy with unyielding vigour. The full ripple effects of the

current devaluation of the Naira will eventually be felt throughout the Nigerian

economy as the country is a net importer of product as opposed to a net exporter.

Majority of the basic goods (consumables and non-consumables) sold in are

imported from overseas (Ojo, 1984). Therefore as the Naira continues to free fall,

the wholesalers and retailers of goods will have to adjust the prices of their products

upwards to reflect the amount being paid for these goods. The problem is that this

devaluation will eventually curtail foreign investments and if the current trend

continues, it will truly give any investor a pause before investing in because it

appears that at the current rate of volatility of the Naira there is no investment in that

will produce a good return on investment (Obadan, 2003).

Although the Governor of the CBN has been doing his best to curtail the free

fall of Naira, we believe that more has to be done because the continued devaluation

of the Naira will have a far reaching negative impact than the havoc the collapse of

the capital markets has ripped on the Nigerian economy. If the current situation is

not checked we might be viewing stagflation in our future because Nigerian

economy doesn’t seem to be growing but prices for goods will skyrocket due to

importers passing the increased prices to consumers (Ogwuma, 1995). Countries

16
devalue their currencies only when they have no other way to correct past economic

mistakes or problems forced on them by unforeseen circumstances. In the case of

the precipitous decline in crude oil prices has significantly limited the amount of

foreign currency that Nigeria receives from the sale of petroleum. Since majority of

the goods utilized in the country are imported, the demand for foreign currency

appears to be exceeding the rate at which the country. Foreign reserve is being

replenished (Mambula, 2002).

Therefore, as Nigeria is concerned, it is expected to step up its measures on

scaling through this problem of continued devaluation or possibly face a danger of

resulting into an economic crisis which will further dim the value of the Naira in the

international market thereby chasing both foreign and local private investors away

and also contribute to high demand for foreign currency which is used to purchase

goods that are not manufactured domestically thereby depleting the country’s

foreign exchange reserves and stagnating or resulting to a decline in the growth of

the economy (Mainoma, 2005). On a concise note, the effects can be briefly

summarized to be the following: Rise in airfares for major international routes;

increase in the cost of imported products; increase to the cost of goods and services;

greater difficulty in paying external debts; investors would require higher returns to

compensate for the inflation and the CBN may raise interest rates to fight off

inflation (Lall, 1992).

17
 Devaluating a currency is decided by the government issuing the currency,

and unlike depreciation, is not the result of nongovernmental activities. One reason

a country may devaluate its currency is to combat trade imbalances. Devaluation

causes a country's exports to become less expensive, making them more competitive

on the global market. This in turn means that imports are more expensive, making

domestic consumers less likely to purchase them. While devaluating a currency can

seem like an attractive option, it can have negative consequences (Akingunola,

2011). By making imports more expensive, it protects domestic industries who may

then become less efficient without the pressure of competition. Higher exports

relative to imports can also increase aggregate demand, which can lead to inflation.

Whether deliberate or as a result of market climate, currency devaluation reduces

the price of a country's domestic output. This has the potential to benefit the

economy by helping to increase its export volume (Azende, 2011). The decision to

devalue the Naira, according to CBN governor, Godwin Emefiele, is mainly directed

at curbing negative speculations on the nation’s currency, particularly by the banks

which have reportedly been putting so much pressure on the naira. In real terms, the

devaluation amounts to 8.38% of the Naira. Further explaining the rationale for the

decision, Emefiele said the level of excess liquidity in the banking system made the

step imperative (CBN, 2008).

18
 To achieve this, the naira had to be devalued by moving the mid-point of the

official window of the foreign exchange (forex) market by 100 basis points from

12percent to 13 percent. In doing so, the CBN hopes to tighten the monetary policy

framework by allowing some flexibility in the exchange rate, as well as stem

speculative activities and depletion of foreign reserves which, as at October, had

fallen to N37.1trillion.With this devaluation, business parameters in the country are

likely to be adversely affected. Inflation will increase, while the purchasing power

of the people will reduce (Akingunola, 2011). It is also likely to fuel unemployment.

Even though this devaluation may signal the commitment of the CBN to assert its

operational independence to foreign investors, the greater worry is that the much-

expected expansion of the economy may be far away, considering the far-reaching

negative implications of currency devaluation, such as increased cost of production,

with its resultant lower profit margins for companies and higher cost of services and

goods especially imported ones. This will inevitably affect the general wellbeing of

the people (Omojimite, 2010). The impacts and Effect of devaluation can be

summarized as follows:

 Exports cheaper: A devaluation of the exchange rate will make exports more

competitive and appear cheaper to foreigners. This will increase demand for

exports

19
  Imports more expensive. Devaluation means imports will become more

expensive. This will reduce demand for imports

 Increased Aggregate Demand (AD): Devaluation could cause higher

economic growth. Part of AD is (X-M) therefore higher exports and lower

imports should increase AD (assuming demand is relatively elastic). Higher

AD is likely to cause higher Real GDP and inflation.

 Inflation is likely to occur because: Imports are more expensive causing cost

push inflation. The high import prices would reduce demand for foreign goods

and curtail our expenditure of foreign exchange to service a high import bill.

Inflationary consequences of devaluation can be mitigated by the use of

additional fiscal and monetary controls to mop up domestic liquidity

 Improvement in the current account: With exports more competitive and

imports more expensive, we should see higher exports and lower imports,

which will reduce the current account deficit.

 Increased Employment Opportunities: With an increased demand from

exports, local industries will require more hands to meet up with its improved

production.

2.4 The reasons for Naira Devaluation

20
 Almost all the countries of the world have devalued their currencies from time

to time to achieve certain economic objectives. Following are the main reasons why

a country like Nigeria would adopt to devalue its currency:

 To Encourage Exports: Devaluation policy is adopted to increase the exports

of the country. As the currency of any country is devalued, the commodities

of that country become cheaper for the other countries and they increase their

demand.

 To Discourage Imports: As the currency of any country is devalued the

other countries goods becomes costly to import from that country. So the

people reduce their demands for foreign goods.

 To Correct Balance of Payment: When the balance of payment of any

country is unfavorable the devaluation policy is adopted. When the currency

is devalued, the value of imports increases but the value of exports will be

greater than the value of imports; we will say that the balance of payment is

favourable. An improvement in the current account on the Balance of

Payments depends upon the Marshall Lerner condition and the elasticity of

demand for exports and imports.

Therefore, Nigeria may wish to devaluate its Naira so as to combat trade

imbalances. Devaluation causes a country's exports to become less expensive,

21
making them more competitive on the global market. This in turn means that imports

are more expensive, making domestic consumers less likely to purchase them.

Although, as Abolaji (2014), a Lagos economist, said on a daily trust newspaper that

“devaluation made sense as it aimed to boost local industries by keeping import

prices high. But this is not the case in Nigeria because we depend on imports. We

import virtually everything we need in this country, from toothpicks to cars.” From

another observation in 2014, a weak local currency could trigger inflation, said

Denja Yaqub, from the Nigeria Labour Congress (NLC), adding: “People will have

to pay more for goods and services.”

2.5 Implication of ‘continued’ naira devaluation

Individuals, firms or organization tends to experience varying impact of the

money devaluation in an economy, as such the only economic agent that may remain

safer from the Naira devaluation action are the ones who held on to assets rather than

the Naira. People who have houses, lands, stocks, domiciliary accounts, foreign bank

accounts and so on are the ones who would hardly feel the pain of Naira devaluation.

While devaluating a currency can seem like an attractive option, it can have negative

consequences. By making imports more expensive, it protects domestic industries

who may then become less efficient without the pressure of competition. Higher

exports relative to imports can also increase aggregate demand, which can lead to

inflation. Whether deliberate or as a result of market climate, currency devaluation

22
reduces the price of a country's domestic output. This has the potential to benefit the

economy by helping to increase its export volume. The decision to devalue the Naira,

according to CBN governor, Godwin Emefiele, is mainly directed at curbing

negative speculations on the nation’s currency, particularly by the banks which have

reportedly been putting so much pressure on the naira. In real terms, the devaluation

amounts to 8.38% of the Naira. Also, chances are that if the Naira continues to lose

value, the labour union will demand for a salary increase and the cost of things in

Nigeria such as food, books, housing and so on will also increase thereby leading to

a drastic reduction in the level of investment from the private sector, which will

certainly affect the public sector as well and also, reduce the standard of living of

the citizens by inducing hardship upon them. The impacts of devaluation can be

summarized as follows;

 Exports become cheaper: A devaluation of the exchange rate will make

exports more competitive and appear cheaper to foreigners. This will increase

demand for exports.

 Imports more expensive. Devaluation means imports will become more

expensive. This will reduce demand for imports.

 Increased Aggregate Demand (AD): Devaluation could cause higher

economic growth. Part of AD is (X-M) therefore higher exports and lower

23
 imports should increase AD (assuming demand is relatively elastic). Higher

AD is likely to cause higher Real GDP and inflation.

 Improvement in the current account: With exports more competitive and

imports more expensive, we should see higher exports and lower imports,

which will reduce the current account deficit. 5. Increased Employment

Opportunities: With an increased demand from exports, local industries will

require more hands to meet up with its improved production.

2.5 SMEs in Nigeria

Nigeria remains a country with very high potential but an equally high inertia

to develop. The country is blessed with abundant supply of enormous human

resources, agricultural, petroleum, gas, and large untapped solid mineral resources

(Obadan, 2003). Since her independence from British rule in 1960, the country has

gone through decades of political instability and this has brought with it a climate of

social tension and an unpredictable market for business. The successive forceful

takeover of government by the use of military coup and the indigenization policy of

the late 70’s has put off investors who hitherto saw the country as a large and

growing market. Due to the nature of these governments, there is perceived

corruption, policy instability, poor infrastructural development and lack of

accountability of public funds. For these reasons, the World Bank described Nigeria

24
as a paradox (World Bank, 1996). This is also true for most Sub-Saharan African

countries as industrial production has declined or stagnated over the past decades

(Lall, 1992).

According to Mambula (1997), since its independence, the Nigerian

government has been spending an immense amount of money obtained from external

funding institutions for entrepreneurial and small business development programs,

which have generally yielded poor results. Unfortunately these funds hardly reach

the desired business because they may be lost to bureaucratic bottle necks and end

up in accounts of public office holders. Despite these setbacks, the role of small

business owned by middle class Nigerians, set up by individual savings, gifts and

loans and sometimes sustained by profit cannot be ignored. According to Asmelash

(2002), countries that have made economic breakthroughs in the last two decades

demonstrated beyond doubt that the development of entrepreneurship has been the

sine qua non of economic growth and development. According to Asmelah (2002),

the significant role SMEs play in development is acknowledged world over. He cited

the work of Schell, (1996), who noted that in developed countries such as the USA,

where big corporations are dominant, SMEs still play enormous role in the country’s

economy.

Also, according to the report of the Indian working group on science and

technology for Small- and medium-scale enterprises, SMEs occupy an important and

25
strategic place in economic growth and equitable development in all countries.

Constituting as high as 90% of enterprises in most countries worldwide, SMEs are

the driving force behind a large number of innovations and contribute to the growth

of the national economy through employment creation, investments and exports.

Owing to the success of the Asian tigers, interest is running high globally particularly

in developing countries that are in the rat race to meet up and reduce the economic

and development gap. Chinese and foreign experts estimated that SMEs are now

responsible for about 60% of China's industrial output and employ about 75% of the

workforce in China's cities and towns (Schell, 1996). These SMEs creates jobs for

workers who have been laid off from state-owned enterprises due to the steady

transition from communism to a market based economy.

According to Cook and Nisxon (2000), interest in the role of small and

medium-sized enterprises (SMEs) in the development process continues to be in the

forefront of policy debates in developing countries. Owing to the relevance of

SME’s, in 2006, the government of Taiwan launched a $61 million "branding"

initiative, which was aimed to push the economy from being production-based to

knowledge-based. According to the report in EE Times Asia in August 2006, the so-

called "Branding Taiwan Plan" is a seven-year program designed to help promising

small-to-medium enterprises (SMEs) in developing their own brand, according to

the Taiwanese government. This was initiated with the full consciousness of the

26
ability of SMEs to drive the economy particularly in the medium term. Small

businesses employ 72,000,000 people (Asmelash, 2002). More than 90 per cent of

the industries in Indonesia, Philippines, Thailand, Hong Kong, Japan, Korea, India

and Sri Lanka are small enterprises (Fadahunsi and Daodu 1997).

A 2004 survey conducted by the Manufacturers Association of Nigeria

(MAN) revealed that only about ten percent (10%) of industries run by its members

are fully operational. Essentially, this means that 90 percent of the industries are

either ailing or have closed down. Given the fact that manufacturing industries are

well-known catalysts for real growth and development of any nation, this reality

clearly portends a great danger for the Nigerian economy. The acting director-

general of the association, Mr. Jide Mike, who disclosed this fact, attributed the

cause of this sorry state to such factors as poor infrastructure, multiple taxes imposed

on manufacturers in Lagos state by all tiers of government and the difficulty in

accessing finance. He noted, “The debris of dilapidated manufacturing concerns

across the country is the outcome of years of harsh operating conditions”. Jide

(2012), also remarked, “In addition to policy somersault, funding remains a

challenge to all stakeholders in the manufacturing sector, the several palliatives,

including the Small and Medium Industries Equity Investment Scheme (SMIEIS)

and other sector-specific incentives notwithstanding”. He added, “In summary, 30

percent of industries in Nigeria have closed down. About 60 percent are ailing

27
companies and only 10 percent operate at sustainable level”. The acting director-

general of MAN (manufacturing association of Nigeria) emphasized that low

capacity utilization has undermined the competitiveness of manufacturing

industries, whose fortunes have been worsened by the impact of globalization. He

recalled that at Nigeria’s independence in 1960, the manufacturing sector’s

contribution to national Gross Domestic Product (GDP) was 3.8 percent and that

despite the discovery of oil, manufacturing contributed as much as 9.9 percent to the

GDP from 1975 to 1981 when capacity building was above 70 percent. Jide (2012),

however regretted that the story is different today as the manufacturing sector is back

at the independence level as it contributed a mere 4.7 percent to GDP in 2003 while

industrial capacity utilization dropped to a paltry 48.8 percent in 2003.

The above is indeed not encouraging as it is representative of the fate of the

manufacturing sub-sector of the SMEs. It was said that the large manufacturing

companies are even better off given that those of them, which have international

affiliation do get succor and support from their parent companies or technical

partners overseas. The support and services the multinationals get from their parent

companies could be driven by the profit repatriation, expansion of their overseas

market and other motivations but overall, the Nigerian economy benefits if only

through employment generation. President Olusegun Obasanjo in his address on

March 01, 2002 at the commissioning of the headquarters of SMEDAN (The Small

28
and Medium and Development Agency of Nigeria) in Abuja also noted that there

was a great disconnection between the SMEs and the large companies in Nigeria,

pointing out that the multinational companies dominated business in the country

even in the area of finished products. Because of these and other debilitating

problems, only about 10 percent of SMEs in Nigeria are into manufacturing.

In Nigeria, empirical report shows that an estimate of about 70% of the

industrial employment is held by SMEs and more than 50% of the Gross Domestic

Product is SMEs generated (Odeyemi, 2003). Given the seminal role of SMEs to the

economy of Nigeria, various regimes of government since independence in the

1960s, have focused on various programmes and spent immense amount of money

with the primary goal of developing this sector, these have however not yielded any

significant results as evident in the present state of the SMEs in the country

(Mambula, 1997). SMEs are generally very susceptible and only a certain number

of them manage to survive due to several factors such as difficulty in accessing

credits from banks and other financial institutions; harsh economic conditions which

results from unstable government policies; gross undercapitalization, inadequacies

resulting from the highly dilapidated state of Infrastructural facilities; astronomically

high operating costs; lack of transparency and corruption; and the lack of interest

and lasting support for the SMEs sector by government authorities, to mention but a

few (Oboh 2002; Okpara 2000; Wale-Awe 2000).

29
 The situation is equally prevalent in the Nigerian economy where commercial

banks often prefer to lend to government, trade in foreign exchange (FOREX), and

financing buying and selling. A banker in Nigeria aptly put such preferences that

“the banks are not a charity, hence why should they take risks with SMEs when they

can make good money elsewhere”. These preferences and tendencies of the

commercial banks have worsened the lack of financing for SMEs which has also

affected the economic growth. The Financial systems in every country play a key

role in the development and growth of the economy, although the ability to play this

role effectively and efficiently largely depends on the degree of development of the

financial system. The traditional commercial banks which are key players in the

financial systems of nearly every economy, have the potential to pull financial

resources together to meet the credit needs of SMEs, however, there is still a huge

gap between supply capabilities of the banks and the demanding needs of SMEs. In

Nigeria, the situation is even more prevalent as noted by Olutunla and Obamuyi

(2008).

SMEs in Nigeria have not performed creditably well and hence have not

played the expected vital and vibrant role in the economic growth and development

of Nigeria. However, the role played by SMEs, notwithstanding their development,

is everywhere constrained by inadequate funding and poor management. The

unfavourable macroeconomic environment has also been identified as one of the

30
major constraints which most times encourage financial institutions to be risk-averse

in funding small and medium scale businesses (Ogujiuba 2004). Financial systems,

the world over, play fundamental roles in development and growth of the economy.

The effectiveness and efficiency in performing these roles, particularly the

intermediation between the surplus and deficit units of the economy, depends largely

on the level of development of the financial system. It is to ensure its soundness that

the financial sector certainly the most regulated and controlled by the government

and its agencies. (Allen 1994). SMEs play very important roles in developing

economies, and assisting them is a task which ranks high in the priorities of the

governments. This position is corroborated by other studies which identified

financial support as one of the main factors responsible for small business failures

in Nigeria (Abereijo & Fayomi, 2005; Okpara & Pamela, 2007).

2.6 Challenges facing small and medium scale industries.

According to Okpala and Eze, (2011) the myriad of problems facing the

smooth sail of small business in Nigeria have contributed to the said reality of several

entrepreneurs closing shows daily. Despite Nigeria’s huge human and natural

resources on document, small and medium scale business still lags behind their

counterparts in many countries. Also, Nigeria with its huge natural and human

resources cannot be compared with the progress of small and medium scale business

31
in countries like: Malaysia, India and South Africa. Below are the various factors

confronting and hindering this progress;

2.6.1 Infrastructural Inadequacies

This is due to lack of sufficient infrastructure, inadequate provision of

essential services such as; telecommunications, good roads, electricity and water

supply which constitute one of the greatest constraint to small business development.

Most, all medium scale industries resort to private provision of this infrastructure at

great expense.

2.6.2 Poor Management Structure

Poor management affects small and medium scale industries adversary, most small

business are one-man business. This hinders effective control and planning.

2.6. 3 Lack of Access to Affordable Financing

The banking sector tends to be unknown in meeting the credit requirement of small

and medium scale industries. A senior banker in Nigeria was once quoted as saying,

“the banks are not charity, so why should they take risk with small and medium scale

industries when they can make good profit elsewhere”? The banks also regard many
32
small and medium scale industries as high risk ventures because of absence of

succession plan in the event of the death of the proprietor.

More worrisome is the inability of small and medium scale industries to adequately

tap available finance from the capital market.

Access to finance allows small and medium scale industries to undertake productive

investments to expand their business and acquire the latest technologies thus

ensuring their competitiveness and that of a nation as a whole. Despite their

dominant numbers of importance in job creation, small and medium scale industries

traditionally have faced difficulty in obtaining formal creditor equity. This is because

the maturity of commercial bank loans extended to small and medium scale

industries are often limited to a period far too short to pay for any sizeable

investment.

2.6.4 Lack of Accounting Records

Many small businesses do not keep proper records of their transactions. This

hinders the activities of the enterprise. This lack of Accounting records makes it

difficult for credit or investor to assess the credit worthiness of potential small and

medium business potentials.

2.6.5 Risky and uncertain business

33
 The risky uncertain business environment leads to the fear that small firms

will not be able to repay debts and this is reinforced by a history of small and medium

scale industries non-payment.

2.6.6 Unstable macroeconomic variable

Another major concern that is very worrisome in Nigeria is lack of stable

macroeconomic variables. This has over the years reduced the entrepreneur’s

confidence in doing business in small and medium scale as they are unable to have

stable financial plans and budgets.

This has in turn brought inefficiency and technological backwardness. The

Nigerian economy suffers distortions by inflation, high interest rates and exchange

rate instability culminating in cost escalation. Statistic has it that, the moving average

inflation for 2004 was 19.15% whilst the 12 Month or period to period inflation was

12% (June 2003 – July 2004) and 13% (August 2005 – August 2004). Bank interest

rates has also remained comfortably high as most banks interest lend at 22.5% apart

from about 3% duly charge flat and upfront tagged appraisal and management fee.

With the value of naira on the downward trend, it is nearly impossible for a small

scale business to make any impact on the Nigerian economy. Government must

continue the current reform policies especially the target to reduce inflation and

34
interest rate to a single digit. Government must pursue other policies that would

support the entrepreneur for the small scale business operator to make impact in the

economy.

2.6.7 Taxes and tariffs

Entrepreneurs in Nigeria are saddled with all sort of unimaginable taxes and

tariffs due to the absence of a unified and gazette tax regime amongst the 3 tiers of

government, each of them especially the state and local government intending to

enact all forms of obnoxious and draconian tax laws to raise money at the taxies of

the investing entrepreneur.

Amongst these taxes are;

i. Warehouse permit

ii. Radio/Television license fees

iii. Mobile advertisement tax

iv. Water borehole tax

v. Generator tax

vi. Fuel tax

35
vii. Environmental protection tax

Viii. Land use charge

ix. Capital gain tax

Also inclusive are the company income tax, stamp duty charges withholding

tax value added tax. The resultant effect of these deductions on the cost of production

need not be over emphasized.

The decentralization of tax roles amongst these three tiers of government, will surely

lead to reduced taxes and a more efficient and effective taxing system.

36
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

The purpose of this chapter is to describe methodology used in the collection

of data for the study. In attempting the study of any relationship, the most important

step a researcher takes is expressing the relationship in mathematical form. That is,

to specify the model with which the economic phenomenon will be empirically

explored. The process is referred to the maintained hypothesis formulation. Thus

involves the determination of both the dependent and explanatory variables which

will be included in the model.

3.2 Research methodology

The fundamental objective of this study is to examine the effect of Naira devaluation

on small and medium scale enterprises in Nigeria

3.2.1 Method of estimation

37
 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 following tests would be use to analyze the regression results.

(i) Coefficient of multiple Determination

(ii) Adjusted Coefficient of Multiple Determination

(iii) F- Statistic

(iv) T- statistic

(v) Durbin- Watson statistic

3.2.2 Coefficient of multiple determinations (R2)

This otherwise known as the squared multiple correlation coefficients. It is

denoted by R2 with subscripts the variables whose relationship is been studied. R2

shows the percentage of total variation of dependent variable (Y) explained by the

regression due to change in the independent variables

(X1, X2, X3, ………………….Xn)

R2=b1Ex1y+b2Ex2Y

38
 Ey2

The value of R2 lies between 0 and 1. The higher the R2 the greater the percentage

of the variation is Y explained by the regression plane, that is the goodness of fit of

the regression plane to the sample observation.

3.2.3 Adjusted coefficient of multiple determination

It is the proportion of variability in a data set that is accounted by the statistical

models. It is calculated by taking into account the degree of freedom which is clearly

decreasing as new freedom is introduced into the function. The expression for the

adjusted coefficient of multiple determinations is

R2 = 1- (R2) n1

n-k

Where:

R2=the adjusted coefficient of multiple determination

R2=the unadjusted multiple correlation coefficient

n=number of sample observation

k=number of parameters estimated from the sample.

39
3.2.4 F-Statistics

This is a statistical test in which the test statistics has an F-distribution under

the null hypothesis. It is use to test the overall significance of the regression result

.F-statistic is used to find out whether the explanatory variables(x1,x2…….xn) do

actually have any significant influence on the dependent variable.

The F ratio for the overall significance of a regression is given

as:

F* =R2/(k-1) =
R2 N-K

(1-R2)/(N-K) 1-R2 K-1

Where: K=number of bi’s including the intercept bo

N=number of observations in the sample.

3.2.5 T-Statistic

The t-statistics tests for the statistical significance of the parameter estimates.

The two –tail test of the null hypothesis at 5 percent level of significance is reduced

to the following rules:

(a) If the observed t* is greater than 2 (or smaller than 2), we reject the null

hypothesis.

40
 (b) If on the other hand, the observed t* is smaller than 2(but greater than -2), we

accept the null hypothesis.

The T –statistic is given as

T*-bi

S (bi)

Where: bi=parameter estimates

S (bi) =standard error of estimates

3.2.6 Durbin –Watson Statistic

This test for the presence of auto-correlation .Auto-correlation refers to the

relationship, not between two or more different variables, between successive values

of the same variables. Denoted as “d” the list accompanies the empirical d* where

the value with dI and du in the Durbin – Watson tables and their transformation (4-

dI) and (4-du), where dI and du refer to the lower and upper limit or the value of the

“d” statistic.

The Durbin –Watson statistic is of the form;

D=En(et –et-1)2

En et2

T=1
41
The d lies between 0 and 4.First , if there is no auto-correlation ,P=0 and d =2.Thus,if

from the sample data, we find d*=2,we accept that there is no auto-correlation.

Secondly, if P=1and d=0.Wehave perfect positive auto-correlation. Therefore, if

d*<0, there is some degree of positive auto-correlation, which is stronger than the

closer d*is to zero.

Lastly, if P=1 and d=4, we have perfect negative auto- correlation which is stronger

the higher the value of d*.

3.3 Nature and Source of Data

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.

3.4 Description of variables

For this study, we shall be making use of six variables; Gross domestic

product, interest rate, SMEs output, commercial bank total credit, inflation and

exchange rate. Gross Domestic product, which is the measure of economic activity,

will be denoted as Y.Y here is the dependent variable as the parameter estimates will

42
determine its value. Small and medium scale enterprise output is denoted by SMEso.

This the total quantity of output produces by SMEs in the economy. Commercial

bank total credit is denoted by CBTC. This is the total amount of money the

commercial bank gives to SMEs. Interest rate is denoted INTR. This is the amount

the commercial bank charge the SMEs for borrowing from them.

Inflation is denoted by INF. It affects GDP such that a continuous rise in price

level in the economy causes a decrease in the gross domestic product. Small and

medium scale enterprise output (SMEso), commercial bank total credit (CBTC),

interest rate (INT) and inflation (INF) and exchange rate are the independent

variables.

3.5 Model specification

This model is an eclectic approach which encompasses the three theories that were

stated in chapter two in this project work.

Y=f (SMEO, CBTC, INT, INF EXCH) - (1)

Where;

Y=Gross domestic product

SMEso=Small and medium scale enterprise output

CBTC=Commercial bank total credit

43
INT =Interest rate

INF=inflation

EXCH = exchange rate

Equation (1) can be transformed into log-linear for estimation. It is therefore written

as:

Y=b0 +b1SMEO +b2Cbtc +b3Int+b4Inf +EXCH + U - (2)

3.6 A Priori Expectation

The regression line is expected to have a positive intercept represented by a

constant term. The positive constant term means that holding all other variables

constant, there will be an increase in gross domestic product by the value of the

constant term (b0).

The coefficient of SMEso, which is b1, should be positive. This implies that SMEso

is positively related to gross domestic product such an increase in SMEso will lead

to an increase gross domestic product.

The coefficient of CBTC which is b2 should have a positive sign as CBTC is

positively related to gross domestic product. An increase in the CBTC will bring

about an increase in gross domestic product.

44
 The coefficient of INT which is b3 should be negative. This is so because a

higher interest rate will lead to a fall in gross domestic product.

Lastly, there is a negative relation between inflation and output such that an increase

in inflation will lead to a fall in output. Lastly, there is a negative relationship

between exchange rate and Gross Domestic Product (GDP).

45
 CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1 Presentation of Results

The empirical results of the estimated regression model of this study are

presented in the table shown below:

Table 1 Empirical results

Dependent variable: LOG (GDP)

Variable Coefficient Std. Error t-statistic Prob

LOG (SMEO) 0.001790 0.115915 0.015439 0.9879
LOG(CBTC) 0.224068 0.089324 2.508484 0.0226
INTR -0.00105 0.008206 -0.128589 0.8992
INFL -0.043046 0.003818 -11.27534 0.0000
EXCHR -5.78E-06 0.000433 -0.013363 0.9895
C 3.065010 0.562254 5.451288 0.0000

Table 2

R-squared 0.951328
Adjusted r-squared 0.937013
F-statistic 66.45585
Prob (F-statistic) 0.00000
Durbin-Watson Stat 1.880189

46
Table 3: The relationship between naira devaluation and import volume of

SMEs in Nigeria.

Variable Coefficient Std. Error t-statistic Sig.

(Constant) 22.26857 5.883722 3.784776 0.0005
DEXCH -0.076872 0.480067 -0.160127 0.8736
Source: Researchers’ computation on regression result in eviews 8.1

R2 = 0.080625 Adj. R2 = 0.023750

F (3, 24) = 0.025641
Prob (F-statistics) = 0.873567 DW= 1.829288
DW= 1.829288

47
Table 4 Naira devaluation affects small and medium scale enterprise

development.

Variable Coefficient Std. Error t-statistic Sig.

(Constant) 19.15892 5.968649 3.209925 0.0026
DEXPORT -0.007028 0.010520 0.668122 0.0479
DIMPORT -0.001568 0.014482 0.108275 0.0143
Source: Researchers’ computation on regression result in eviews 8.1

R2 = 0.743221
Adj. R2 = 0.861801
F (3, 24) = 4.903462
Prob (F-statistics) = 0.032712
DW= 1.971673

4.2 Analysis of results

The empirical result of the estimated regression line is presented in table

4.1above shows that all the variables have turned out with their correct expected

signs. The estimated regression line as presented above has a positive intercept

represented by 3.07. This means that holding all explanatory variables constant,

Gross Domestic Product (GDP) will still increase automatically by 3.07 percent.

The result shows that there is a positive relationship between small and

medium scale enterprises output and GDP in Nigeria. This is consistent with
48
theoretical expectation, implying that 1 percent increase in small and medium scale

enterprises output leads to an increase in GDP by 0.002 percent, ceteris paribus.

The result also shows that commercial bank total credits have a positive

relationship with GDP. This is also consistent with GDP. This is also consistent with

theoretical expectation, implying that 1 percent increase in commercial bank total

credits leads to 0.22 percent increase in GDP, ceteris paribus.

Further investigation shows that interest rate has a negative relationship with

GDP. This is consistent with theoretical expectation, implying that 1 percent

increase in interest rate leads to 0.04 decreases in GDP, ceteris paribus. More

examination shows that inflation rate has a negative relationship with GDP. This is

also consistent with theoretical expectation implying that 1 percent increase in

inflation rate leads to 0.04 decreases in GDP, ceteris paribus.

Statistically, the result shows that two variables; commercial bank total credits

and inflation rate, are statistically significant in influencing GDP in Nigeria. This is

because the t-statistics values of 2.51 and 11.28 calculated in absolute term for

commercial bank total credits and inflation rate respectively are all greater than the

critical value of 1.740 at 5 percent level of significance. This means that these

variables are significant in affecting GDP growth rate in Nigeria.

49
 The R-squared value of 0.95 shows that the estimated regression line has a

very high fit on the data. In particular, the adjusted R-squared value of 0.93 shows

that about 93 percent of the total variations in the dependent variables has been

explained by variations in the explanatory variables. This means that the estimated

regression equation has a very high explanatory power.

Similarly, the f-statistics value of 66.46 shows that the overall model is

statistically significant. This is because the F-statistics value of 66.46 calculated is

greater than the critical value of 2.53 at 5 percent level of significance. This means

that the independent variables have joint impact on the dependent variable. The

overall significance of the model also shows that there exist a high degree of linear

relationship between the dependent variable and the independent variables.

On the other hand, other variables such as small and medium scale enterprise

output, interest rate and exchange rate are not statistically significant as in

influencing GDP in Nigeria. This is because the t-statistics values of 0.015, 0.129

and 0.013 calculated in absolute term for small and medium scale enterprises output,

interest rate and exchange rate respectively are all less than the critical value of 1.714

at 5 percent level of significance.

Econometric criteria

50
 The econometric test is otherwise called the second-order test. This is carried

out to determine the presence or absence of autocorrelation in the model. For the

purpose of this study, the Durbin-Watson (DW) statistics is employed to test for the

absence of serial correlation in the model.

The Durbin-Watson Statistic at 5 percent level of significance is computed as

follows:

K1 = 3 dI = 1.34 4-dI= 2.66

N = 40 du = 1.66 4-du=2.3

The above computation can be represented by critical regions in the Durbin-

Watson (DW) graph below:

No
autocorrelation
Negative
Positive
Region
Region

dL du 4-du 4-dL

1.34 1.66 51 2.34 2.66

 From the Durbin-Watson graph above, the D-W value of 1.880 falls in the

region of no autocorrelation. This means that findings from this study can be applied

in the Nigeria economy for policy formulations.

R2 = 0.080625 Adj. R2 = 0.023750

F (3, 24) = 0.025641
Prob (F-statistics) = 0.873567 DW= 1.829288
DW= 1.829288
The result in Table 3 above shows an R2 value (coefficient of multiple determinants)

of 0.080625. This implies that only 8% per cent changes in the dependent variable

GDP is caused by changes in the independent variables of exchange rate. This means

that exchange rate fluctuation is not a good determinant of GDP. It therefore means

that the remaining 92 per cent is caused by other variables not found in the equation

but indicated by the error term.

The result in Table 4 above shows an R2 value (coefficient of multiple determinants)

of 0.743221. This implies that the proportion of the variation in foreign trade that is

explained by Export and import is 74.32% which means that foreign trade

fluctuation is a good determinant of GDP. It therefore means that the remaining

25.68 per cent is caused by other variables not found in the equation but indicated

by the error term.

52
4.3 Test of hypotheses

This section conducts test of hypotheses to validate or invalidate the earlier

formulated hypotheses. The test is conducted using the t-test at five percent level of

significance.

Hypothesis one

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

From the result obtained the t-statistics value calculated of 0.015 for small and

medium scale enterprises, output is less than the critical value of 1.714 at five percent

level of significance. Based on the result, the null hypothesis is accepted and we

conclude that naira devaluation does not have a significant effect on small and

medium enterprises in Nigeria

Hypothesis two

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

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

53
 From the result obtained, the t-statistics value calculated of 0.015 for SMEs

output is less than the critical value of 1.714 at the five percent level of significance.

Based on the result the null hypothesis is accepted, thus we concluded that naira

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

Hypothesis three

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.

The adjusted R2 value of 0.023750 means that the model is only2.35 per cent

goodness fit. The F-value of 0.0256 which is lower than the critical F-value of 3.14

goes to confirm that there exist a significant relationship between the dependent

variable of GDP and the independent variable of exchange rate. The estimated

coefficient for exchange rate is negative, indicating that there exist an inverse

relationship between exchange rate and GDP. This means that when exchange rate

increases, GDP will then decrease. The result is in order with economic theory

because once there is an increase in the exchange rate in Nigeria, more amount of

the Naira needs to be paid to acquire imported goods which are mostly what

54
Nigerians engage in, we import more than we export. The result of the probability

value of exchange rate shows the variable (at short-run) is not statistical significant

in explaining GDP. Therefore, naira devaluation does not affect small and medium

scale enterprise development.

Hypothesis Four

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

development.

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

The adjusted R2 value of 0.861801 means that the model is 86.18 per cent goodness

fit. The F-value of 4.903462 which is greater than the critical F-value of 3.14 goes

to confirm that there exist an significant relationship between the dependent variable

of GDP and the independent variable of exchange rate. The estimated coefficient for

import and export is negative, indicating that there exist an inverse relationship

between import and export on the GDP. This means that when export and import

increases, GDP will then decrease. The result is in order with economic theory for

import but not for export. The result of the probability value of naira devaluation in

terms of foreign trade (p value of F-statistics) shows the variables are jointly

55
statistical significant in explaining GDP. Therefore, naira devaluation affects small

and medium scale enterprise development.

4.4 Discussion of finding

The result as obtained in the previous section showed that there is a positive but

insignificance relationship between small and medium scale enterprises in Nigeria.

This is in line with findings by Eze and Okpala (2015) who studied the impact of

small and medium scale enterprises in Nigeria, using periodic data from 1993-2011

employing the ordinary least square (OLS) regression and co-integration techniques.

The result indicated or showed a positive but insignificant relationship between

small and medium scale enterprises and economic growth in Nigeria. This

insignificant relationship existing between SMEs output and the Nigerian economy

can be attributed to the challenges facing SMEs growth in Nigeria which ranges from

infrastructural inadequacies, poor management structure, lack of access to affordable

credit, lack of accounting record, unstable macro-economic variables and the like.

Similarly, the result showed that Commercial Bank Total Credit (CBTC) has

a positive and significant relationship with the economy of Nigeria. This is in line

with economic theory as Akingunola (2011) assessed the specific financing options

available to SMEs in Nigeria and their contribution to economic growth

performance. Using Spearman’s Rho correlation at 10 percent level of significance,

56
the Rho value of 0.643 indicated a significant and positive relationship between

SMEs financing and economic growth in Nigeria.

Furthermore, the result showed that interest rate has a negative but

insignificant relationship with the Nigerian economy. This can be considered valid

as bank lending rate has remained comfortably high as most banks lending rate is at

22.5%. This makes it impossible for small and medium scale enterprises to make

any impact on the Nigerian economy. Moreover, the result showed that inflation

rate is negatively and significantly related with the Nigerian economy. This is also

in line with theoretical expectation as the Nigerian economy suffers distortions by

inflation. Inflation has been found to be a major bane to our economic growth as it

raises the cost of locally produced goods.

From the analysis conducted, the researchers observed that at level, the

variables were non-stationary but after first differencing, all the variables became

stationary. From the regression result, the researchers understood that exchange rate

exerts negative effect on the GDP and it was observed insignificant in explaining

GDP mostly, due to the fact that the exchange rate is only affecting the GDP at

current price and not at constant price. Another reason observed is that the Nigerian

economy re highly dependent on import, hence, devaluation affect the nation

negatively. Also, the researchers observed that foreign trade is significant in

explaining GDP but the import and export rate have negative effects on the GDP
57
possibly because Nigeria depends on import to produce good for export, hence,

affecting GDP negatively.

The variables were observed to be free from causality except on three

occasions where import and export causes each other and the exchange rate causes

export. After conducting a test to correct the errors of the model, the researchers

observed that the model is not spurious and at the short run, all variables could not

explain GDP but the residual which was found to validate the model prove that at

the long run, equilibrium relationship between GDP, Exchange rate, Export and

Import tends to exist, meaning the variables have a long run relationship and not a

short one. After which, a serial correlation was conducted and the result was that the

model was free from autocorrelation after first differencing.

Finally, exchange rate has been found to be negatively but insignificantly

related with the Nigerian economy. This negative relationship shows that increase

or appreciation of exchange rate leads to a fall in the Nigerian economy as people

will prefer foreign goods over locally produced goods thus, causing capital flight. In

other words, high exchange rate limits the ability of SMEs to import and expand

their businesses which will ultimately leads to a fall in the Nigerian economy as the

SMEs sector employs about 70 percent of the nation’s economy.

58
 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

59
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:

i. 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.

ii. 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.

60
 iii. 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.

iv. 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

61
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.

62
REFERENCES

Abolaji , A.O. (2014). Estimating the Long Run Effects of Exchange Rate
Devaluation on the Trade Balance Of Nigeria” European Scientific Journal.

Adeyemi, S.L, and A.L Badamus, (2001). “An Empirical Study of Small Scale
Financing in Nigeria. Journal of Unilorin Business School. Vol.1, No 1.

Adoyi, P.O and J.C.O Agbo, (2009).” An Assessment of the contribution of Small
Business firms to the development of Benue State”. Journal of Research in
National development Vol. 7, No 1

Akabueze, B. 2002, „Prospectus on Nigeria SMEs under the Small and Medium
Industries Investment Scheme (SMIEIS).

Akingunola, R.O (2011).”Small and Medium scale Enterprises and Economic

growth in Nigeria: An Assessment of Financing Options”. Pakistan journal
of business and economic review Vol. 2, No 1.

Aremu, M. A. (2004). Small Scale Enterprises: Panacea to Poverty Problem in

Nigeria, Journal of Enterprises.

Augusto, O. 2004, „Beyond bank consolidation effects on banking and real sectors,
CBN 4th Annual Monetary Policy Conference, 18-19th Nov. p. 83-85.

63
Azende T. (2011). “An Empirical Evaluation of Small and Medium Enterprises
Equity Investment Scheme in Nigeria”. Journal of Accounting and Taxation,
3(5), 79-90.

Central Bank of Nigeria. (CBN). Statistical Bulletin 2008

Cook, P., and Nixson, F. (2000). Finance and Small and Medium-seized Enterprise
Development. IDPM,

Daodu, O (1997).“ Promoting Entrepreneurship and Small Business: Lessons of

Experience” In Gunu, U (2004).”Small Scale Enterprises in Nigeria: Their
start Up, Characteristics, Sources of finance, and Importance”. Ilorin
Journal of Business and social sciences. Vol. 1 Nos 1 and 2

Daodu, O (1997).“ Promoting Entrepreneurship and Small Business: Lessons of

Experience” In Gunu, U (2004).”Small Scale Enterprises in Nigeria: Their
start Up, Characteristics, Sources of finance, and Importance”. Ilorin Journal
of Business and social sciences. Vol. 1 Nos 1 and 2

Ekpenyong, D.B.E. and Nyong, M. O. 1992, „Small and medium-scale enterprises

development In Nigeria. Seminar Paper on Economic Policy Research for
Policy Design and Management in Nigeria. NCEMA/AEPC, Nigeria, April
24-25.

Golis, C. 1998, Enterprise and Venture Capital: A Business Builder and

Investment Handbook, 3rd edition, Australia: Allen and Urwin

Hallberg, K. (2000). A market-oriented strategy for small and medium-scale

enterprises IFC Discussion Paper Number 40. Washington, D.C.:
International Finance Corporation.

Lall, S. (1992). “Structural Problems of African Industry” In F.Steward, S. Lall

and S. Wnagive (eds): Alternative Development Strategies in Sub-Sahara
Africa: Macmillian, London

Mainoma, M.A. (2005). The nexus between risk and investment decision:
Experiences from Nigerian investment climate. Nigeria Journal of
Accounting Research, Department of Accounting, ABU, Zaria. No. 3 Dec.,
2005. p. 64.
64
Mall, C. P. and Shanmugan, B. (1988). “Survival Strategies for Small Business in
Developing Countries”. Management Forum, Vol. 14 No. 2. (June).

Mambula, C. (1997). “Factors Influencing the Growth performance and

Development of Small Plastic manufacturing Firms (SPMFS) in Nigeria and
Implication for Policy”. Unpublished Ph.D Dissertation University of wales,
Swansea, U.K

Mambula, C. (2002). Perceptions of SME growth constraints in Nigeria. Journal of

Small Business Management, Vol. 40 (1), pp. 58-65.

Obadan, M.I (2003).”Poverty Reduction in Nigeria: The way forward” CBN

Economic and Financial review Vol., 39: No 4

Ogwuma, P.A (1995). “Revitalizing the Manufacturing Sector”. CBN Bull-Ion.

Vol. 19, No2

Ojo, A.T. 1984, Banking In Nigeria, London: Graham Burn.

Okpala and Eze, (2011). Quantative analysis on impact of small and medium scale
enterprises on the growth of Nigeria economy

Omojimite I. (2010). Money demand stability: A case study of Nigeria. Auckland

University of Technology, Auckland, New Zealand.

Robinson. T (1997). Testing The Short Run and Long Run Exchange Rate Effect
Journal For Public Profiles For Economic Researchers .Retrieved From
www.banrep.gov.co/borra120.

Todaro M.P (2009). Economic development in the third World 2nd edition, New
York Longman publishers Group, ISBN 0582295327.

Venin Taylor. (1991). Can Investors Profit From Devaluations? The Performance
of World Stock Markets after Devaluations, European Economists Journal.

65
 APPENDIX

Regression result

Dependent variable: LOG (GDP)

Method: Least Squares

Date: 02/06/17 Time: 13:53

Sample: 1992 2014

Included observations: 23

Appendix 1

Variable Coefficient Std. Error t-statistic Prob

LOG (SMEO) 0.001790 0.115915 0.015439 0.9879
LOG(CBTC) 0.224068 0.089324 2.508484 0.0226
INTR -0.00105 0.008206 -0.128589 0.8992
INFL -0.043046 0.003818 -11.27534 0.0000
EXCHR -5.78E-06 0.000433 -0.013363 0.9895
C 3.065010 0.562254 5.451288 0.0000

66
R-squared 0.951328 Mean dependent var 6.260584
Adjusted R- 0.937013 S.D dependent var 0.359526
squared
S.E of regression 0.090231 Akaike infor criterion -1.753429
Sum squared resid 0.138408 Schwarz criterion -1.457213
Log likelihood 26.16444 Hannan-Quinn criter. -1.678932
F-statistic 66.45585 Durbin-Watson stat 1.880189
Prob (F-statistic) 0.000000
Appendix II
YEAR GDP SMEO CBTC INT INF EXCH

1992 337.29 72.28 75456.3 29.8 44.5 0.8938

1993 342.54 118.12 88821 18.32 57.3 2.021

1994 345.23 186.62 143516.8 21 57 4.018

1995 352.65 324.1 204090.6 20.18 73.1 4.537

1996 367.22 423.02 254853.1 19.74 29.1 7.3916

1997 377.83 464.95 311358.4 13.54 8.5 8.0378

1998 388.47 526.96 366544.1 18.29 10.5 9.9095

1999 393.11 575.91 449054.3 21.32 6.6 17.2984

2000 412.23 625.62 587999.9 17.98 6.9 22.0511

2001 431.78 762.74 844486.2 18.29 18.9 21.8861

2002 451.79 916.83 948464.1 24.85 12.9 81.0228

2003 495.01 1094.64 1203199 20.71 14 81.6494

2004 527.58 1484.42 1519243 19.18 15 83.8072

2005 561.93 1930.78 1991146 17.95 17.9 92.3428

67
2006 595.82 2741.79 2609289 17.26 8.4 100.8016

2007 634.25 3044.77 4820696 16.94 5.4 111.7

2008 672.2 3503.35 7799400 15.14 5.9 126.26

2009 718.98 4082.35 9667877 18.99 5.2 134.04

2010 776.33 4648.7 9198173 17.59 5.8 132.37

2011 834 5,385.82 9614446 16.69 5.14 130.6

2012 888.89 6284.92 10440956 15.79 6.4 128.28

2013 950.11 7287.99 11100969 14.9 5.15 126.56

2014 977.12 7588 12511672 14 6.4 14.31

Source: CBN statistical bulletin

68