CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the Study
Small and medium scale enterprise
are sub-sectors of the industrial sector which play crucial roles in industrial
development (Ahmed, 2006), Following the adoption of economic reform programme in
Nigeria in 1981, there have been several decisions to switch from capital
intensive and large scale industrial projects to the small scale enterprise
which have better prospects for developing domestic economy, thereby generating
the required goods and services that will propel the economy of Nigeria towards
development. It is based on this premise that Ojo (2009), argued that one of
the responses to the challenges of development in developing countries
particularly in Nigeria is the encouragement of entrepreneurial development
schemes.
Despite the abundant natural
resources, the country still finds it very difficult to discover her
developmental bearing since independence quality and adequate infrastructural
provision has remained a nightmare, the real sector among others have witnessed
downward performance while unemployment
is on the increase. Most of the poor and unemployed Nigerians in order to
better their lives have resorted to the establishment of their own businesses
(Ojo, 2009).
Consequently, small scale
enterprise is fast becoming a household name in Nigeria. This is as a result of
the fact that the so called white collar jobs that people clamor for are no
longer there even the touted sectors (banks and companies) known to be the
largest employer of labour are on the down-turn following the consolidation
crisis and fraudulent practice of the high and mighty in the banking sector
(Ojiegbe, 2007).
Devaluation of currency is a
macro-economic fiscal policy that bothers on deliberate reduction in the value
of home currency with the aim of maximizing gain in tradable items. Goods and
services are cheaper in a nation where currency is devalued compared to
another. The reduction in prices of goods and services will stimulate trading
activities in that country with overall purpose of enhancing economic growth
and development and the alleviation of poverty. This concept is regarded by IMF
and World Bank as instrument for fiscal equalization and stability,
particularly in the sub-Sahara region where many countries are indebted to these
financial institutions.
Devaluation of currency became popular
in Nigeria when Babangida-led administration in 1986 instituted the Structural
Adjustment Programme as a policy designed to achieve a realistic exchange rate
for the naira that was over-valued. This was unhealthy for economic growth and
development of the nation since overvalued currency further worsened balance of
payment problem (Todaro, 1989). On the basis of this, the nation was advised to
accept devaluation policy as requirement for economic recovery.
Against this background, looking at
the opinion of some scholars in this area may suffice a better understanding.
Todaro (1981),asserted that currency devaluation is when a country’s currency
is devalued or more strictly depreciated when the official rate at which its
Central Bank is prepared to exchange the local currency for dollar is
increased.
Campbell (2004), in his contribution
sees currency devaluation as a deliberate downward adjustment in the official
exchange rate established by a government against specified standard or another
currency. The concern on the above scholastic discourse simply mean that
devaluation of currency is about stimulating exports and lowering importation
of goods and services, for the achievement of balanced growth, with the general
goal of alleviating poverty. However, suffice to say that Nigeria situation is
paradox, due to enormous poverty in the land in spite of its devalued currency
coupled with myriad of poverty alleviation program. Small and medium scale
enterprises are mostly privately owned and operated businesses characterized by
a small number of employees, little capital and low turnover compared to their
bigger counterparts. It usually shares only a tiny segment of the market it
operates (Agunwanna, 2014). Majority of the small and medium scale enterprise
are import dependent (directly or indirectly), hence need services that are
rendered from across the Nigerian boundary. Most of those services,
technological expertise and equipments are sourced from countries like USA and
Japan while few come from neighboring African countries and others are locally
produced (Olamide, 2005).
However, this research work was
designed to assess the effect of the naira Devaluation on small and medium
scale enterprises in Nigeria (A case study of
Okigwe L .G.A of Imo State).
1.2 Statement of the Problem
Devaluation jump-starts and stalls
industrial diversification more than it hurts agricultural export development.
Devaluation also undermines the banks and consequently domestic ownership of
privatized assets and performance of the rest of the real economy. Devaluation
further hurts firms in trading as well as poor farmers and the urban poor
(Peters, 2006). One other area where devaluation is being dismissed is
regarding Foreign Direct Investment (FDI). The nation’s democratic
consolidation is expected to create conducive environment for businesses to
thrive to enhance economic growth. However, devaluation may dampen investors’
confidence in the country’s economy and hurt the country’s ability to secure
foreign investment (Shulaf, 2008).
It is a known fact that SMEs in Nigeria still depend on goods and
services from China, UK, USA etc, since importing tends to be cheaper than
producing locally. The over dependence of SMEs on foreign products is suicidal
as the continuous drop in the value of Naira result to high cost of sales and
other operational/manufacturing costs. SMEs will have to spend more money to
buy goods and services and resultant collapse of small and medium enterprises.
1.3 Objectives of the Study
The main
objective of this study is to assess the effect of the naira devaluation on
small and medium scale enterprises in Nigeria (A case study of Okigwe
L .G.A of Imo State ).
1.3.1 Specific objectives were to:
i.
Examine the justifications for naira
devaluation in Nigeria on small and medium scale enterprise in Okigwe L .G.A of Imo State.
ii.
Evaluate the impact of naira devaluation
on small and medium scale enterprise in Okigwe
L .G.A of Imo State.
iii.
Examine the challenges of naira
devaluation to small and medium scale enterprise performance in Okigwe
L .G.A of Imo State.
1.4 Research Questions
1.
Are there justifications for naira
devaluation in Nigeria considering its impact on small and medium scale
enterprise in Okigwe L .G.A of Imo State)?
2.
To what extent has naira devaluation
impacted on small and medium scale enterprise in Okigwe L .G.A of Imo State?
3.
What are the challenges of naira
devaluation to small and medium scale enterprise performance in Okigwe L .G.A of Imo State) ?
1.5 Research Hypothesis
The following
Null Hypothesis (H0)were considered;
1.
There are no significant justifications
for naira devaluation in Nigeria considering its impact on small and medium
scale enterprise in Okigwe L .G.A of Imo State).
2.
Naira devaluation has not impacted significantly
and positively on small and medium scale enterprise performance in Okigwe L .G.A of Imo State).
3.
Naira devaluation does not pose
significant challenges to small and medium scale enterprise performance in Okigwe L .G.A of Imo State) ?
1.6 Significance of the Study
The study is significant as it
would add to existing literature on naira devaluation and how it affects small
and medium scale enterprise in Nigeria. It would benefit investors as it would
serve as a guide for investment. It is also hoped that Nigeria policy makers
will find it a helpful material in the formulation and implementation of
policies on devaluation of Naira and how it facilitates growth in Nigeria.
Also, it is worth to note that future
researchers, will benefit from the material by using it as a reference
materials and a guide to their research work when researching on similar topic.
1.7 Scope of the Study
The study covers the effect of
devaluation of the naira on small and medium businesses in Nigeria (a case
study of Okigwe L .G.A of Imo State).
In this research work, among the
numerous small scale enterprises in Okigwe
L .G.A of Imo State, three small scale business establishments were selected from three different senatorial
district, these are:-
i.
Palm oil production and marketing
enterprise
ii.
Food stuff and utensil enterprise
iii.
Oliver Nigeria limited, dealers of food
stuff and pharmaceutical
a.
Palm
oil production and marketing enterprise:- This business enterprise was
established in 2004 under the legal frame work of sole proprietorship, the
business is located at Okigwe L .G.A of
Imo State, according to the owner Mr. Uchechukwu, he said they started with a
working capital of N100,000 and
operated the business with the family members when they newly started but now,
they have up to 12 workers including both the sellers and marketers and also
those whom their services is necessary in one way or the other in the success
of the business. Also their capital excluding the value of land is
approximately N800,000.
b.
Food
stuff and utensils enterprises:-
This business enterprise was established in 2001 under the legal frame work of
sole proprietorship, with a total capital of N70,000, excluding the value of
land, the according to Ibekwe, he was selling only foodstuff, but now, as a
result of financial difficulty in 2005 he decided to join hand with Obioma, as
a result, they decided to combine foodstuff with utensils, currently, the
business is being operated in form of a partnership business, with a total
capital of N1.3million naira excluding the value of land and with workers up to
15 in number.
c.
Food
stuff and pharmaceuticals:-
This business enterprise was established by Mr. Oliver, he operates at Okigwe L .G.A of Imo State urban, he began
business in the year 2000 under the
legal frame work of sole proprietorship, he started with a total capital of N200,000 excluding the value of land with
just only him meaning the business, now the business is being operated with up
to 13 workers and with a total capital of N1.5
million excluding the value of land.
1.8 Limitation of the Study
Every research study comes with a
constraint.For the purpose of achieving stated objectives for the study, the
researcher was confronted with both financial and time constraints; funds to
print and distribute questionnaires coupled with tight lecture schedules and a
lax attitude of respondents.
1.9 Definition of Terms
SME:
Small and medium scale enterprise, an independent unit that carry out economic
activities on a small scale for the sole aim of making profit (Obadie, 2011).
Naira
– The currency of Nigeria (Rafael, 2014).
Devaluation
– A reduction in the value of a currency with respect to foreign monetary units
with which that currency can be exchanged (Rafael, 2014)
Import
– An import is a good brought into a jurisdiction especially across a national
border from an external source (Anyeru, 2001).
Export –
The term export means shipping the goods and services out of the port of a
country (Anyeru, 2001).
Balance of Payment
– The balance of payment (BOP) of a country is the record of all economic
transactions between the residents of a country and the rest of the world in a
particular period (covered a quarter of a year or more commonly over a year
(Rafael, 2014).