1.1 Introduction
Naira devaluation refers to the reduction in the value of the Nigerian currency (Naira) relative to foreign currencies. It is a monetary policy action that typically results from economic factors such as inflation, trade imbalances, and changes in the global economy. Devaluation can significantly impact the cost of imported goods and services, affecting various sectors, including small and medium enterprises (SMEs) (Adebiyi & Alabi, 2019). The devaluation of the Naira, Nigeria's official currency, has emerged as a significant economic policy that influences various sectors, particularly small and medium enterprises (SMEs). In recent years, the Nigerian economy has faced numerous challenges, including fluctuating oil prices, inflation, and a growing need for economic diversification. As a response, the Central Bank of Nigeria has implemented policies aimed at stabilizing the economy, which included the devaluation of the Naira. This policy aims to enhance the competitiveness of domestic goods by making exports cheaper and imports more expensive (Adeleke & Ogundipe, 2021).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitation of the study and Definition of terms.
1.2 Background of Study
Historically, Naira devaluation in Nigeria is intertwined with the country's economic policies and the broader context of global economic trends. Following its independence in 1960, Nigeria adopted a fixed exchange rate regime, which maintained the value of the Naira against major currencies. However, by the late 1980s, persistent economic challenges, including inflation, declining oil revenues, and trade imbalances, prompted the government to reconsider its monetary policy (Adeleke & Ogundipe, 2021).
In 1986, the Nigerian government introduced the Structural Adjustment Program (SAP), which aimed to liberalize the economy and promote export-oriented growth. This program marked the beginning of a series of devaluations aimed at adjusting the Naira's value to reflect market conditions. The first significant devaluation occurred in 1986, where the Naira was adjusted from 1.5 to 3.5 Naira to the US dollar (Central Bank of Nigeria, 2020). Subsequent years saw further devaluations, leading to increased volatility in the currency's value.
The impact of these devaluations on small and medium enterprises (SMEs) has been substantial. SMEs, which represent about 48% of Nigeria's GDP and employ a significant portion of the workforce, found themselves caught in a challenging environment characterized by rising costs for imported inputs and machinery (National Bureau of Statistics, 2020). As the Naira continued to depreciate in subsequent decades, particularly during economic crises, many SMEs struggled to cope with increased production costs and limited access to foreign exchange for essential imports.
The most recent and notable devaluation occurred in 2016 when the Central Bank of Nigeria adopted a more flexible exchange rate regime, allowing the Naira to float against foreign currencies. This policy aimed to stabilize the economy and attract foreign investment, yet it further complicated the operating environment for SMEs, as many were unable to adapt to the rapid changes in exchange rates and the consequent rise in operational costs (Olufemi & Olusola, 2019).
The economic landscape of Nigeria has been significantly shaped by the fluctuation of its currency, particularly through the devaluation of the Naira. Devaluation is often employed as a monetary policy tool aimed at correcting trade imbalances and stimulating economic growth by making exports more competitive (Central Bank of Nigeria, 2020). However, this policy also carries profound implications for small and medium enterprises (SMEs), which are crucial to Nigeria's economic development, contributing approximately 48% of the national GDP and providing over 70% of employment opportunities (National Bureau of Statistics, 2020).
The rationale behind currency devaluation in Nigeria has been rooted in the need to boost domestic production and reduce reliance on imports. However, the realities of such a policy have presented a double-edged sword for SMEs. While a weaker Naira can enhance the export potential of local products, it also escalates the cost of imported raw materials and machinery, which many SMEs depend on for production (Olufemi & Olusola, 2019). Access to financing for SMEs in Nigeria is often limited. The devaluation of the Naira has compounded the challenges faced by these enterprises, as financial institutions become more cautious in lending, fearing that inflation and economic instability could lead to defaults on loans (Adeleke & Ogundipe, 2021). Consequently, SMEs struggle to maintain their competitive edge while facing escalating operational costs and restricted access to credit.
Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know The Effect of Naira Devaluation on Small and Medium Enterprises.
1.3 Statement of Problems
Investigation revealed that the effect of Naira devaluation on small and medium enterprises (SMEs) in Nigeria is a pressing issue that warrants thorough examination. One significant problem is the rising cost of imported raw materials and equipment, which is exacerbated by a weaker Naira. As the currency depreciates, SMEs that rely on imports for production face increased expenses, leading to squeezed profit margins (Adeleke & Ogundipe, 2021). More so, the devaluation of the Naira often results in stringent monetary policies and tighter controls on foreign currency availability. This scarcity places SMEs at a disadvantage, as they struggle to secure the necessary funds for importing essential goods and services, thereby hindering their operational efficiency (Central Bank of Nigeria, 2020).
Additionally, the psychological impact of currency fluctuations on business confidence cannot be overlooked. Frequent devaluation of the Naira creates an environment of uncertainty, making it difficult for SMEs to plan and invest for the future. Entrepreneurs may be hesitant to pursue growth opportunities or invest in new technologies due to fears of further devaluation and its associated costs (Olufemi & Olusola, 2019).
Furthermore, the overall economic environment shaped by Naira devaluation contributes to inflationary pressures, which disproportionately affect SMEs. The increased cost of living for consumers may reduce disposable income, thereby impacting the demand for goods and services offered by these enterprises (National Bureau of Statistics, 2020). As purchasing power declines, SMEs are likely to experience reduced sales, further threatening their sustainability in a volatile economic landscape.
1.4 Aim and Objectives of Study
The aim of the study is to examine the effect of Naira devaluation on small and medium enterprises (SMEs) in Nigeria. In achieving this aim, the following specific objectives were laid out as follows:
- To evaluate the effects of Naira devaluation on the accessibility of foreign exchange for SMEs and its implications for their operational efficiency.
- To analyze the relationship between Naira devaluation and the cost of imported raw materials for SMEs in Nigeria.
- To assess how currency fluctuations influence the financial performance and profitability of small and medium enterprises.
- To investigate the impact of devaluation on consumer purchasing power and demand for products and services offered by SMEs.
- To provide recommendations for policymakers and stakeholders on strategies to mitigate the adverse effects of currency fluctuations on SMEs in Nigeria.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- What is the relationship between Naira devaluation and the cost of imported raw materials for small and medium enterprises in Nigeria?
- How does Naira devaluation impact the financial performance and profitability of SMEs?
- In what ways does the devaluation of the Naira affect the accessibility of foreign exchange for small and medium enterprises?
- What is the effect of Naira devaluation on consumer purchasing power and demand for products and services provided by SMEs?
- What strategies can be implemented to mitigate the negative impacts of Naira devaluation on small and medium enterprises in Nigeria?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: Naira devaluation negatively affects the financial performance and profitability of small and medium enterprises in Nigeria.
- H1: Naira devaluation positively affects the financial performance and profitability of small and medium enterprises in Nigeria.
Hypothesis Two
- H0: There is a significant negative relationship between Naira devaluation and the cost of imported raw materials for small and medium enterprises in Nigeria.
- H1: There is a significant positive relationship between Naira devaluation and the cost of imported raw materials for small and medium enterprises in Nigeria.
Hypothesis Three
- H0: The accessibility of foreign exchange for small and medium enterprises is not significantly impacted by Naira devaluation
- H1: The accessibility of foreign exchange for small and medium enterprises is significantly impacted by Naira devaluation
1.7 Significance of Study
The findings will provide valuable insights for policymakers, enabling them to develop targeted strategies and policies that support the sustainability and growth of SMEs during periods of economic instability.
Additionally, the study will highlight the importance of access to foreign exchange for SMEs, which will inform financial institutions and stakeholders about the need for improved financial services and support systems tailored to the unique challenges of these enterprises.
Furthermore, this research will serve as a resource for entrepreneurs, equipping them with knowledge about the potential impacts of currency devaluation on their operations. It will encourage SMEs to adopt more resilient business practices and risk management strategies in response to currency fluctuations.
Lastly, the study will contribute to the existing body of literature on the relationship between currency devaluation and SME performance, providing a foundation for future research in this area and helping to bridge gaps in knowledge regarding the Nigerian economic landscape.
1.8 Scope of Study
The scope of the research is focused on the effect of Naira devaluation on small and medium enterprises (SMEs) in Nigeria.
1.9 Limitations of the Study
During the course of this study, there were some problems encountered which stood as limitations to the research work. Some of the limitations include:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- 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).
- Initial Cooperation Delay from Respondents: A particular limitation of this work came as a result of the respondent refusal to offer their cooperation at the initial time they were contacted. This contributed in making the success of this research study difficult.
1.10 Definition of Terms
Naira Devaluation:
Naira devaluation refers to the reduction in the value of the Nigerian currency (Naira) relative to foreign currencies. It is a monetary policy action that typically results from economic factors such as inflation, trade imbalances, and changes in the global economy. Devaluation can significantly impact the cost of imported goods and services, affecting various sectors, including small and medium enterprises (SMEs) (Adebiyi & Alabi, 2019).
Small and Medium Enterprises (SMEs):
SMEs are defined as businesses with a limited number of employees and a relatively low level of revenue. In Nigeria, the Small and Medium Enterprises Development Agency (SMEDAN) classifies small enterprises as those with 10 to 49 employees and medium enterprises as those with 50 to 199 employees. SMEs play a crucial role in the Nigerian economy by contributing to employment, innovation, and economic growth (SMEDAN, 2021).
Financial Performance:
Financial performance refers to the measure of a firm's financial health and its ability to generate revenue, manage expenses, and achieve profitability. It is commonly assessed using various financial metrics, including return on investment (ROI), net profit margin, and overall revenue growth (Okwu & Kalu, 2020).
Operational Efficiency:
Operational efficiency is the capability of an enterprise to deliver products and services in the most cost-effective manner while maintaining high quality. It involves optimizing resource use, reducing waste, and improving processes to enhance overall productivity (Ogunnaike et al., 2018).
Foreign Exchange Accessibility:
Foreign exchange accessibility refers to the ease with which businesses can obtain foreign currencies for transactions, particularly for importing goods and services. Limited access to foreign exchange can hinder SMEs' ability to operate effectively in a global market, especially during times of currency devaluation (Ojo, 2017).
