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

6
as a 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

9
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)

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

11
 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).

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

12
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

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)

13
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)

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

14
 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

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.

15
 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

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

16
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 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
17
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).

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

18
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).

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

19
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

 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.

20
  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

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

21
 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,

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

22
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 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.

23
  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.

 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

24
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 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

25
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 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"

26
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 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

27
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 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

28
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

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

29
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).

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

30
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

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.

31
 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 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

32
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 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.

33
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

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

34
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 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
35
ii. Radio/Television license fees

iii. Mobile advertisement tax

iv. Water borehole tax

v. Generator tax

vi. Fuel tax

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.

37
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

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

38
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
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:
39
 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.

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:

40
 (a) If the observed t* is greater than 2 (or smaller than 2), we reject the null

hypothesis.

(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,

42
will be denoted as Y.Y here is the dependent variable as the parameter estimates

will 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

43
CBTC=Commercial bank total credit

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.

44
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.

The coefficient of INT which is b 3 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

46
R-squared 0.951328
Adjusted r-squared 0.937013
F-statistic 66.45585
Prob (F-statistic) 0.00000
Durbin-Watson Stat 1.880189

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

48
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

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

49
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.

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

50
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

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

51
dL du 4-du 4-dL
1.34 1.66 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

52
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.

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

53
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.

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

54
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

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

55
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 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.

56
 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,

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
57
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

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.
58
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.

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

59
(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 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:

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 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.

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

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 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

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

62
medium scale enterprise development while exchange rate turns out to be

negatively related with the Nigerian economy affecting small and medium scale

enterprises.

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APPENDIX

Regression result

Dependent variable: LOG (GDP)

Method: Least Squares

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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

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

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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

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

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