Implications of Naira Devaluation on SMEs in Nigeria -By Abraham John Onoja

Nigeria, a nation with abundance of resources like crude etc., a nation which is deemed blessed. Having vast resources in commercial quantities, she is placed on a high pedestal among oil producing nations in the world. Her oil and gas industry which has been widely described as the nation’s financial lifeline has helped her in attaining this enviable position. This has however, birthed the segmentation of the four key economic segments in Nigeria which include the oil sector activities, the public sector (Governments and parastatals – that still rely heavily on oil derivatives), the organized private sector, and the informal sector.  The first economic segment is heavily based upon and centered on oil.

In recent times, the drop in oil prices have left nations like Nigeria who run an oil based economy in economic crises. This challenge which is as a result of exchange rate fluctuations is leading to the devaluation of the Naira. This in return has affected the demand and supply sides of the economy.  The drastic fall in the prices of crude oil has tremendous implications for foreign exchange earnings. The capacity of the Central Bank of Nigeria (CBN) to fund foreign exchange market is also being called into question.

In the last five (5) years factors such as, heavy dependence on imported finish products, the  industrial sector’s dependence on imported raw materials with other inputs, reversal of capital flow by investors and high speculative demand have resulted in uncertainty in the foreign exchange market (CBN report, August 2013). Therefore, the increase in foreign exchange demand in relation to unstable supply is leading to fluctuation in exchange rate.

     Analyzing the word Devaluation, it originally refers to a sharp fall in currency within a fixed exchange rate. Devaluation is not Depreciation nor Revaluation. Devaluation of currency is a macro-economic fiscal policy which dwells on deliberate reduction in the value of local currency with the purpose of increasing gain in tradable items. It is a monetary policy tool of countries that have a fixed exchange rate or semi – fixed exchange rate. In a nation where  there’s a devalue in currency, the cost of Goods and services are cheaper  compared to another nation where there is no currency devaluation. The advantage of a reduction in prices of goods or services is to help stimulate and promote trading activities in a country with the overall purpose of enhancing economic growth and development to alleviate the issue of poverty.

      In 1960 After independence, Agriculture used to be the spindle of the economy, however, it declined drastically and lost its face as a result of crude oil discovery with its value to the economy of the whole world. The revenue from crude oil helped the Nigerian economy greatly with impact towards the social and economic development of the country compared to agriculture
This has therefore, led to the sudden neglect for agricultural activities. The impact of this is thus; the contributions of agriculture to the Gross Domestic Product were Negligible! The retrogressions are thus; contribution of agriculture to the Gross Domestic product fell 39.9 percent between 1971 to 1974 to 18 percent with occasional rise. and within this period the Nigeria devaluation was very high.

  As a developing nation, Nigeria is still import dependent. Everything is virtually imported. This is likely to bring about more negative impacts than positive impacts as a result of devaluing the naira. Without a doubt, devaluation comes with its own advantage’s disadvantages depending on how it is effectively managed. It can be used as a fiscal policy tool to discourage importation, promote and protect the infant industries, have a balance of payment as well as encourage and promote the small and medium businesses. But however, the question posed here is?  “As a nation, are we there yet? ” with most Small and Medium Scale Businesses still depending on goods and services from other countries to still be in business, there are no positive signs we are anywhere close to improving our economic growth.

Small and medium enterprises are the significant drivers of economic development, especially for a developing economy like Nigeria. It is otherwise known as the most flourishing business sector. SMEs have benefited the economy through creating employment opportunities, motivating people in entrepreneurship, generating income, and providing encouragement to social and political stability.

Not bypassing the implication of the devaluation of the naira, which includes import rates increasing and becoming more expensive. As long as we as a country remain dependent, we cannot afford to devalue our currency because we are not producing a product that will interest buyers or investors from other countries and worse still, SMEs are not buoyantly equipped by the government to produce these products. Naira devaluation can serve as a tool for encouraging local production and reducing importation if adequate and effectively policies are put in place. However, the question posed here is, has the government made a conscious effort in putting these policies in place to help speed up local production.

With importation being relatively cheaper than producing locally, majority of SMEs still depend on purchasing goods and services from China, UK, USA etc, Possibility of a drop in naira as a result of SMEs over dependence on foreign product purchase is not optional. This drop will result in higher cost of sales and other manufacturing costs. SMEs then import at a higher rate thereby resulting in inflation, low demand for goods and services, and this will in turn cause small and medium businesses to crash thereby having adverse effects on economic growth.

In conclusion, Naira devaluation is not so effective in promoting and encouraging the growth of small and medium Enterprises (SMEs), this is so,  policy intervention is required to balance the effect of exchange rate flow until the economy moves from oil driven and dependent to other sectors like Agriculture, Manufacturing Iron and Steel Industries etc. Government expenditure should be geared towards creating social overhead to enable SMEs thrive. The Government trade policy should be in favor of local firms and aid them in any way possible to encourage and promote them.