CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF STUDY
Exchange rate is a means through which a country determines its level of economic performance. Foreign exchange rate provides access to a country’s economic stability. Exchange rate fluctuates daily by the changes in market forces of demand and supply of currencies from one nation to another. Therefore exchange rate is constantly monitored and examined when one has a need to send or receive money from overseas (www.comparetemit.com). Exchange rate refers to the rate to which a currency exchanges for another currency. It is the price of a currency for another currency. Exchange rate is determined by the interaction of demand and supply of foreign exchange. Thus, if demand for a currency rises with the supply being constant, the exchange rate of the currency will appreciate. But if the demand for the currency falls with the supply remaining constant, the exchange rate will depreciate (Ezenwakwelu, 2017). An exchange rate as a price relationship between a country’s currency and another is one of the most important prices in an open economy that controls the flow of goods, services and capital in a country and which exerts strong pressure on the balance of payments, inflation and other macroeconomic variables. Thus, to safeguard competitiveness, macroeconomic stability and economic growth, the choice and management of an exchange rate regime is essential (Fahrettin, 2000 cited by Mohammed, 2016). Exchange rates of most countries’ currencies are fixed in relation to other currencies. Thus, countries keep some reserves of other currencies which enable them to intervene at the foreign exchange market. If demand for US dollar rises against the Nigerian currency (naira), the central bank of Nigeria will therefore, supply the dollar which is in higher demand and withdraw the supply of naira which demand has dropped. As a result of this, naira exchange rate depreciates and dollar exchange rate appreciates. The rise and fall of real exchange rate reveals strength and weakness of a currency in relation to foreign currency and it is a means for illustrating the competitiveness of domestic industries in the global market (Razazadehkarsalari et al., 2011). Appreciation of exchange rate reveals increased imports and reduced exports while depreciation of exchange rate reveals increased export, reduced import and a shift from foreign goods to domestic goods (Aliyu, 2011). However, exchange rate reforms were expected to realize macroeconomic stability and sustainable development in Nigeria. But the country fails to meet the expectation because the different regimes of exchange rate have been with instability and uncertainties.
The small and Medium Enterprises play key roles in transition and developing countries (OECD, 2002). These firms typically account for more than 90% of all firms outside the white-collar jobs sector, constituting a major source of employment and generates significant domestic and export earnings. OECD, (2005) stressed that SME development emerges as a key instrument in poverty reduction efforts, therefore, SME obviously contributes to economic, social development and poverty reduction. World Bank review on small business activities establishes the commitment of the World Bank Group to the development of the SMEs sector as a core element in its strategy to foster economic growth, employment and poverty alleviation (World Bank, 2012). This is because, SMEs constitute the driving force of such industrial growth and development and this is due to their great potentials in ensuring diversification and expansion of industrial production as well as the attainment of the basic objectives of development. Given the great potentials of SMEs to bring about social and economic development, it is of no surprise that the performance and financing SMEs is of huge concern to the government of different countries in the world (Okpara 2000). SMEs in both developing and developed countries play important roles in the process of industrialization and economic growth, by significantly contributing to employment generation, income generation and catalyzing development in urban and rural areas Hallberg, (2000); Olutunla, (2001); OECD, (2004); Williams, (2006). For instance, statistics shows that Africa and Asia has the majority of their population living in rural areas where SMEs delivers about 20% - 45% of full-time employment and 30% - 50% of rural household income (Haggblade and Liedholm 1991).
However, financing SMEs is a major catalyst and a key success factor for the development, growth and sustenance of any economy. Most government and business circles have come to recognize the importance of financing SMEs and have consequently agreed that their growth constitutes one of the corner stone’s of economic development (Olutunla,2001; OECD, 2004). Despite the numerous factors that challenge the survival and growth of SMEs in both developing and developed countries, finance has been identified as one of the most important factor in which exchange rate is included (UNCTAD, 2001; SBA, 2000).
1.2 STATEMENT OF THE PROBLEM
In many countries, the past few decades have witnessed renewed interest in the development of small and medium enterprises (SMEs). Various studies have acknowledged the importance of SMEs in economic growth, referring to them as “the engine of growth” and as “catalysts for [the] socioeconomic transformation of any country.” SMEs represent a means to attain key macroeconomic objectives such as employment generation, increased growth, and poverty reduction at low investment cost while developing a country’s entrepreneurial capabilities and indigenous technology.
However, in spite of its numerous contributions to a nation’s economy there are quite a number of economic maladies with the exchange rate reforms which are low level of savings and investment, high rate of inflation, high level of unemployment and poverty. Nigeria’s economy has been characterized by low capacity utilization, high debt burden, and inflation, high level of income inequality and unemployment, poverty, etc. Over the years there has been several studies by researchers on the lack of recognition for sustainable development programmes, especially those that are capable of enhancing SMEs’ growth, which is responsible for the current economic state of the country. The situation is further compounded by the government’s attitude of indifference and apathy, which contributes directly to the current dire situation of the country’s economy. However, there is no study that has focused on SMEs in Nigeria, especially on the effect of exchange rate on the performance of SMEs in Nigeria.
1.3 AIMS AND OBJECTIVES OF THE STUDY
The main aim of the study is to examine the effect of exchange rate on the performance of SMEs in Nigeria. Other specific objective includes:
- to determine the relationship between exchange rate and the performance of SMEs in Nigeria.
- to determine the causes of exchange rate and how they affect the performance of SMEs in Nigeria
- to investigate the factors affecting exchange rate and the performance of SMEs in Nigeria
- to proffer solution to the problems facing the performance of SMEs in Nigeria.
1.4 RESEARCH QUESTION
- What is the relationship between exchange rate and the performance of SMEs in Nigeria?
- What are the causes of exchange rate and how they affect the performance of SMEs in Nigeria?
- What are the factors affecting exchange rate and the performance of SMEs in Nigeria?
- What is the solution to the challenges faced by SMEs as a result of exchange rate?
1.5 STATEMENT OF RESEARCH HYPOTHESIS
1. HO: there is no significant relationship between exchange rate and the performance of SMEs in Nigeria.
2. H1: there is significant relationship between exchange rate and the performance of SMEs in Nigeria.
1.6 SIGNIFICANCE OF STUDY
The study will be significant to a nation’s economic organizations in understanding how exchange rate especially its fluctuations affects the performance of SMEs who are high economy growth contributors to a country. It will also enlighten them on the factors that affect the fluctuations of exchange rate and the solution there in. The findings of the study will be beneficial to SMEs because it help them know how to improve on their performance in the midst of a fluctuating exchange rate. Furthermore, the study will contribute to existing literature on the effect of exchange rate on the performance of SMEs in Nigeria.
Finally, the study will serve as research tool for further research on the effect of exchange rate on the performance of SMEs in Nigeria by other researchers.
1.7 SCOPE OF STUDY
The scope of study covers the effect of exchange rate on the performance of SMEs in Nigeria 2000-2019.
1.8 LIMITATION OF STUDY
1. 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).
2. 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.
1.9 DEFINITION OF TERMS
Effect: a change which is a result or consequence of an action or other cause. Something that is produced by an agency or cause, result or consequence. Power to produce results; efficacy; force; influence
Exchange rate: Exchange rate is the price of one currency in terms of another currency. Exchange rates can be either fixed or floating. It is the floor price that must be paid irrespective of the market price. It is the value of one currency for the purpose of conversion to another.
Performance: the action or process of performing a task or function. It is the act of performing a ceremony, play, piece of music, etc. the execution or accomplishment of work, acts, feats, etc. a particular action, deed, or proceeding. an action or proceeding of an unusual or spectacular kind
SMEs: Small and medium-sized enterprises (SMEs) are non-subsidiary, independent firms which employ less than a given number of employees. This number varies across countries.
Small and medium-sized enterprises or small and medium-sized businesses are businesses whose personnel numbers fall below certain limits. The abbreviation "SME" is used by international. Organizations such as the World Bank, the European Union, the United Nations and the World Trade Organization
