Impact of Exchange Rate On The Performance of Small and Medium Enterprises in Nigeria
Impact of Exchange Rate On The Performance of Small and Medium Enterprises in Nigeria
Impact of Exchange Rate On The Performance of Small and Medium Enterprises in Nigeria
ABSTRACT
Nigeria is currently experiencing an unprecedented Keywords: Exchange Rate, Small and Medium
fluctuation in the price of oil and Naira Naira-Dollar Enterprises (SMEs), Performance, Regression Model,
exchange rate depreciation, with exchange rate Naira-Dollar
volatility being more pronounced as it concerns the
issues of macroeconomic financial stability, thus, 1. INTRODUCTION
affecting
ing the performance of small and medium Nigeria exchange rate has had a chequered history.
enterprises in Nigeria in terms of survival rate and For over four decades, there has been inconsistencies
contribution to GDP, this study examines the impact in Nigeria's exchange rate policies and lack of
of exchange rate on the performance of small and continuity in the exchange rate policies have
medium enterprises in Nigeria using econometric worsened the unstable nature of the naira rate
regression model el of the Ordinary Least Square (OLS). (Adeniran, Yusuf & Adeyemi, 2014; Gbosi, 2005).
Findings revealed that exchange rate, capital, tax, Anigbogu, Okoye, Anyanwu and Okoli (2014) state
managerial skill, market size, infrastructure and level that exchange rate management in Nigeria has
of education conform to the a priori expectation of the evolved through various regimes. During the first
study and are statistically significant in explaining the decade of independence and for the early years of the
SMEs performance in Nigeria. In the light of the 1970s, the IMF modified ed fixed exchange rate was
above empirical findings in the analysis carried out, adopted. After its collapse, the country moved to the
the study therefore recommends that government adjustable peg regime, which pegged the naira to
should as a deliberate policy, encourage rural based series of international currencies (1973-85).
(1973 The
industrialization whereby investors in different flexible and managed float regime was instigated
communities would be encouraged to establish small under SAP in 1986. The exchange
exch rate was left to
and medium scale industries that would be based float freely and determined by market forces with the
entirely on local raw materials including machines monetary authorities intervening intermittently in the
and equipment. This will boost and develop the local FOREX market to ensure stability of the rate. The
market. There should be policies that focus on country returned back to a fixed regime from 1994 to
technical
ical education at all levels for the development 1998, where the naira was fixed at ₦21 to a dollar.
of human capital. Finally, the government should The democratic dispensation of 1999 re-ushered
re the
vigorously seek to improve the international stand of flexible and managed float regime and has remained
the economy with other economies of the world so as the system till present
to enlarge the market for Nigerian exports. It shoul
should
also re-orient
orient its policy towards the external sector Consequently, with the re-ushering
ushering of the flexible and
and ensure that the sector contributes utes optimally to managed float regime, Naira to Dollar exchange
exchan rate
output growth. has continued to depreciate at an alarming rate both at
@ IJTSRD | Available Online @ www.ijtsrd.com | Volume – 2 | Issue – 4 | May-Jun 2018 Page: 1554
International Journal of Trend in Scientific Research and Development (IJTSRD) ISSN: 2456-6470
international trade. The exchange rate according to contribution to Gross Domestic Product (GDP)
Jongbo (2014) is therefore an important relative price (Anigbogu, et al 2015; Yusuf and Dansu, 2013;
as it has influences on the external competitiveness of Adeloye, 2012 ).
domestic goods. Thus, exchange rate has received
considerable attention in terms of its influence on This low survival rate and poor contribution of SMEs
investment and economic growth. Extant literature to Gross Domestic Product (GDP) is attributed by
averred that in Nigeria, exchange rate has changed researchers to a lot of factors. Akinruwa, Awolusi and
within the time frame from regulated to deregulated Ibojo (2013) and Komppula (2004) state that SMEs
regimes. It was further stated that the exchange rate of performances are constrained by two major factors:
the naira was relatively stable between 1973 and 1979 internal factors such as entrepreneur competencies,
during the oil boom era and when agricultural commitment, resource, strategic choice and external
products accounted for more than 70% of the nation’s factors like competitors, culture, technology,
gross domestic products (GDP). In 1986 when the infrastructure and government policy. In addition,
Federal Government adopted the Structural Onugu (2005) reported that ten key broad problem
Adjustment Programme (SAP), the country moved areas militate against SMEs in Nigeria which are
from a peg regime to a flexible exchange rate regime crystallized in the following decreasing order of
where exchange rate is left completely to be intensity. They include: Management problems,
determined by market forces but today the prevailing Access to finance/capital, Infrastructural problems,
system is the managed float whereby monetary Government policy inconsistency and bureaucracy,
authorities intervene periodically in the foreign Environmental factor related problems, Multiple taxes
exchange market in order to attain some strategic and levies, Access to modern technology problems,
objectives (Adeniran et al, 2014; Ewa, 2011; Mordi, Unfair competition, Marketing related problems, Non-
2006; Gbosi, 2005). This inconsistency in policies and availability of raw materials locally. Among the
lack of continuity in exchange rate policies has catalogue of problems enumerated by researchers,
aggravated the unstable nature of the naira rate government policy which include exchange rate
(Adeniran et al, 2014; Gbosi, 2005). policy is perceived to presently top the chat in the
problems affecting the SMEs performance in Nigeria.
Performance of Small and Medium Enterprises in Hence, the need to empirically investigate the impact
Nigeria of exchange rate on the performance of small and
Small and Medium Enterprises (SMEs) have been medium enterprises in Nigeria.
described as the backbone of virtually all economies
of the world because they have strong influence on 5. RELATED EMPIRICAL LITERATURE
the sustainable development process of less developed Related studies in this study area have been
as much as developed countries and they also foster approached by scholars from varying literary
economic growth, alleviate poverty, create perspectives. Morenikeji, & Njogo, (2012) examined
employment and provide personalized services the impact of small and medium scale enterprises in
(Obokoh, 2008; Wattanapruttipaisan, 2003; Ayyagari, the generation of employment in Lagos State. They
Beck and Demirguc-Kunt, 2003). Obokoh, (2008) found a correlation between small and medium scale
stated that the development of SMEs is an essential enterprises and sustainable Development of the
element in the growth strategy of most economies and Nigerian economy. In other words that promotion of
holds particular significance for developing countries SMES and improvement in employment generation
like Nigeria. The best performing economies in Asia were related. Anigbogu, Okoye, Anyanwu, Okoli,
are heavily based on SMEs which are major sources (2014) looked at Real Exchange Rate Movement-
of dynamism in economic development. The Misalignment and Volatility- and the Agricultural
requirements for SMEs to access the global market Sector: Evidence from Nigeria using single-regression
and upgrade their position within the international model via the ordinary least squares. They found that
market as a result of trade liberalization are becoming RER misalignment and RER volatility impact
increasingly difficult due to competition (Udechukwu, negatively on agricultural production value. Also,
2003; Abonyi, 2003). The unique role played by appreciation of the RER inhibits the sector’s
SMEs notwithstanding, it has been reported by performance, while, on the contrary, financial
various researchers that the performance of SMEs in intermediation to the sector (proxy as the ratio of
Nigeria is very low in terms of survival rate and agricultural bank credit to total bank credit) serves as
@ IJTSRD | Available Online @ www.ijtsrd.com | Volume – 2 | Issue – 4 | May-Jun 2018 Page: 1555
International Journal of Trend in Scientific Research and Development (IJTSRD) ISSN: 2456-6470
a positive impetus to the sector. Jongbo, (2014) policy rate had significant and positive effects on the
investigated The impact of Real Exchange Rate performance of Nigerian deposit money banks.
Fluctuation on Industrial output in Nigeria. They Uremadu, Ani and Odili (2014) examined banking
found that real exchange rate played a significant role system credit to small and medium scale enterprises
in determining industrial output and that in addition, (SMEs) and economic growth in Nigeria. They that
availability of foreign exchange increased through though the banking system credit to SMEs gradually
contentious export drive from both oil and non-oil increased yearly as a result of increase in population
products which contributed tremendously to increased and hence economic activities, the credit to SMEs as a
industrial output. Imoughele, and Ismailia, (2014) percentage of total credit to the private sector declined
examined The Impact of Commercial Bank Credit on yearly. Banking system credit to SMEs was not
the Growth of Small and Medium Scale Enterprises: significant and thus did not contribute meaningfully to
an Econometric evidence from Nigeria (1986 – 2012). economic growth in Nigeria. Total credit to the
It was revealed that SMEs and selected private sector was statistically significant and positive
macroeconomic variables included in the model had a at 5% level.
long run relationship with SMEs output. Also, that
savings time deposit and exchange rate had a The literature on exchange rate movement is vast.
significant impact on SMEs output in Nigeria. Some of these empirical studies focus on the impact
Commercial bank credit to SMEs, total government of exchange rate on the economy (or aggregated
expenditure and bank density had direct but variables like export, BOP, etc.) as a whole without
insignificant impact on the country’s SMEs output. due accentuation to sectorial analysis and dynamism
This they said may be connected with stringent policy of the Exchange Rate. Due accentuation has not been
in accessing credit facility and the crowd out effect of given to exchange rate and SMEs’ performance. This
government expenditure in the economy. The study study aims to fill the lapse in the existing literature by
also showed that interest rate had adverse effect on empirically tracing the link between exchange rate
SMEs output. Imoisi, Uzomba and Olatunji, (undated) movements and the SMEs’ sector.
carried out the analysis of interest and Exchange rates
effect on the Nigerian economy: 1975– 2008. They 6. METHODOLOGY
discovered that an increase in interest rate retarded Model Specification
investment and subsequently economic growth. The model incorporate real exchange rate, capital, tax,
Exchange rate showed the expected positive sign, managerial skills, market size, infrastructural facilities
implying that depreciation in exchange rate retarded and level of education as explanatory variables while
growth from 1975 to 2008. Rasaq, (2013) examined performance of small scale enterprises was used the
the impact of exchange rate volatility on the macro dependent variable. Thus, the model for the study is
economic variables in Nigeria. They found that stated as follows:
exchange rate volatility had a positive influence on The structural form of the model
Gross Domestic Product. Ajagbe,(2012) investigated SME = f (EXR, CAP, TAX, MAS, MKZ, FRA, EDU)
Inflation and Small and Medium Enterprises Growth … … … (1)
in Ogbomosho Area, Oyo State, Nigeria. They found The mathematical form of the model
that there was a positive relationship between SME =β0 +β1EXR+β2CAP+β3TAX+β4MAS+β5MKZ
parameter estimate associated with capacity +β6FRA+β7EDU … (2)
utilization. Insah, and Chiaraah (2013) carried out a The econometric form of the model
study on Sources of Real Volatility in the Ghanaian SME = β0
economy. The result of the findings revealed that +β1EXR+β2CAP+β3TAX+β4MAS+β5MKZ+β6FRA+
government expenditure is a major determinant of real β7EDU+μi (3)
exchange rate volatility. Both domestic and external Where;
debts were negatively related to real exchange rate SME = Performance of small and medium scale
volatility. Current external debt and a four year lag of enterprises proxied by industrial
domestic debt had significant impacts on real growth rate
exchange rate volatility. Okoye and Eze (2013) X- EXR = Exchange rate
rayed the Effect of Bank lending rate on the CAP = Capital proxied by bank credits to SMEs
Performance of Nigerian Deposit Money Banks, The TAX = Taxes proxied by company income taxes
result confirmed that the lending rate and monetary
@ IJTSRD | Available Online @ www.ijtsrd.com | Volume – 2 | Issue – 4 | May-Jun 2018 Page: 1556
International Journal of Trend in Scientific Research and Development (IJTSRD) ISSN: 2456-6470
MAS = Managerial skills proxied by government EDU = Level of education measured by literacy rate
expenditure on skill acquisition f = Functional relationship
MKZ = Local market size proxied by or measured by β0 = the intercept or the constant
industrial output β1 – β5 = the co-efficient of the explanatory variables
FRA = Infrastructure proxied by government μt = Stochastic error term.
aggregate expenditure on power
7. PRESENTATION OF RESULTS
8. CONCLUSION AND RECOMMENDATIONS of survival rate and contribution to GDP, this study
With the unprecedented decline in the price of oil and examines the impact of exchange rate on the
the Naira-Dollar exchange rate depreciation, and with performance of small and medium enterprises in
exchange rate volatility being more pronounced as it Nigeria using econometric regression model of the
concerns the issues of macroeconomic financial Ordinary Least Square (OLS). From the result of the
stability which is currently affecting the performance OLS, it is observed that exchange rate, capital,
of small and medium enterprises in Nigeria in terms managerial skill, market size, infrastructure and level
@ IJTSRD | Available Online @ www.ijtsrd.com | Volume – 2 | Issue – 4 | May-Jun 2018 Page: 1557
International Journal of Trend in Scientific Research and Development (IJTSRD) ISSN: 2456-6470
of education have positive impact on SMEs Fund to provide and raise funds for viable but ailing
performance in Nigeria. This means that if exchange SMEs to help resuscitate them. Government should
rate, capital, managerial skill, market size, provide more capital funding to the nascent SMEs
infrastructure and level of education are developed with viable business ideas and prospects in order to
and improved upon, they will bring about more SMEs reduce the rate of unemployment in Nigeria.
performance in Nigeria. On the other hand, tax has a Government should provide an enabling business
negative impact on SMEs performance in Nigeria. environment with the provision of adequate
Thus, increase in tax will bring about a decline in infrastructural facilities like constant power supply,
SMEs performance in Nigeria. The study revealed good road network, water supply and others. Also,
that exchange rate, capital, tax, managerial skill, government and non-governmental organizations
market size, infrastructure and level of education are (NGOs) should organize regular seminar and
good and major determinants of SMEs performance in symposiums on skill acquisitions in order to develop
Nigeria. the needed human skills in the country.
@ IJTSRD | Available Online @ www.ijtsrd.com | Volume – 2 | Issue – 4 | May-Jun 2018 Page: 1558
International Journal of Trend in Scientific Research and Development (IJTSRD) ISSN: 2456-6470
8. Anigbogu, T. U., Okoli, I.M & Nwakoby, N.P the dynamics of exchange rate in Nigeria, CBN
(2015). Financial intermediation and small and Bullion Vol. 30 (3), July-September. Pp.17-25
medium enterprises performance in Nigeria (An
19. Morenikeji, S. A & Njogo, B. O. (2012). Impact
aggregated analysis: 1980-2013). European
of small and medium scale enterprises in the
Scientific Journal,11(28), 257-272.
generation of employment in Lagos state. Journal
9. Anigbogu, T. U., Okoye, P.V.C., Anyanwu, N. K. of Business and Management Review 1 (11), 107-
& Okoli, M. I. (2014). Real exchange rate 140.
movement-misalignment and volatility- and the
20. Obokoh, L. O. (2008). Trade liberalization and
agricultural sector: Evidence from Nigeria.
small and medium sized enterprises (SMEs)
American International Journal of Contemporary
failures in Nigeria. Banks and Bank Systems, 3(3),
Research,4(7),133-141.
51-61.
10. Ayyagari M., T. Beck., A. Demirguc-Kunt (2003).
21. Okoye , V & Eze, O. R.(2013). Effect of bank
Small and medium enterprises across the globe: a
lending rate on the performance of Nigerian
new database // World Bank Policy Research
deposit money banks, International Journal of
Working Paper, 1-34.
Business and Management Revie1( 1)34-43.
11. Ewa A (2011) in Asher O. J (2012). The impact of
22. Omotosho, B. S. (2015). Is real exchange rate
exchange rate fluctuation on the Nigeria economic
misalignment a leading indicator of currency
growth (1980 – 2010). Unpublished B.Sc Thesis
crises in Nigeria? CBN Journal of Applied
of Caritas University Emene, Enugu State,
Statistics,6(1), 153-179.
Nigeria.
23. Onugu, B.A.N. (2005). Medium and medium
12. Gbosi, A. N. (2005). Money, Monetary Policy and
enterprises (SMEs) Nigeria: problems and
the Economy. Port Harcourt: Sodek.
prospects, a dissertation submitted to the St.
13. Imoisi,A. I., Uzomba, P. C.& Olatunji, L. clement university in partial fulfillment of the
M.(undated). AN analysis of interest and requirements for the award of the degree of doctor
exchange rates effect on the Nigerian economy: of philosophy in management, 1-114.
1975– 2008, Asian Economic and Financial
24. Rasaq, D. A. (2013). The impact of exchange rate
Review 2(6):648-657.
volatility on the macro economic variables in
14. Imoughele, L. E and Ismailia, M.,(2014). The Nigeria, European Scientific Journal 9(7), 152-
impact of commercial bank credit on the growth 165.
of small and medium scale enterprises: An
25. Udechukwu F.N. (2003). Survey of small and
econometric evidence from Nigeria (1986-2012)
medium scale industries and their potentials in
Journal Educational Policy and
Nigeria small and medium industries equity
Entrepreneurial),1(2) 251-261.
investments scheme (SMIEIS). – Lagos: Central
15. Insah, B. & Chiaraah, A. (2013). Sources of real Bank of Nigeria CBN training Centre, 6-18.
volatility in the Ghanaian economy, Journal
26. Uremadu, S. O., Ani, O.I. & Odili, O. (2014).
Economics and International Finance, 5(6), 232-
Banking system credit to small and medium scale
238.
enterprises (smes) and economic growth in
16. Jongbo, O. C (2014). The impact of real exchange Nigeria: A co-integration approach. IOSR Journal
rate fluctuation on industrial output in Nigeria, of Economics and Finance, 5(6), 41-51.
Journal of Policy and Development Studies (9)1,
27. Wattanapruttipaisan T. (2002). Promoting SME
268-278.
Development: Some Issues and Suggestions for
17. Komppula, R. (2004). Success factors in small Policy Consideration // Bulletin on Asia-Pacific
and micro enterprises- A study of three branches Perspectives 2002 unescap.org, 2003.
of industry In North Karelia,
28. Yusuf, T. O. & Dansu, F. S. (2013). SMEs,
18. Mordi, M.C. (2006). Challenges of exchange rate Business Risks and Sustainability in Nigeria.
volatility in economic management of Nigeria, in European Journal of Business and Social
Sciences, 2(9), 76-94, 2013.
@ IJTSRD | Available Online @ www.ijtsrd.com | Volume – 2 | Issue – 4 | May-Jun 2018 Page: 1559