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Implications Of Naira Devaluation On SMEs – Abraham ONOJA

Abraham John Onoja
Abraham John Onoja

Nigeria has abundant natural resources like crude oil among others. The country is considered blessed because it has vast natural resources in commercial quantities. She is also placed on a high pedestal among oil producing nations in the world. Its oil and gas industry, which has been described as the nation’s financial lifeline has helped the country in attaining enviable position among comity of nations.

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This has resulted to the segmentation of the four key economic sectors in Nigeria, which include the oil sector; the public sector (that still rely heavily on oil derivatives); the organised private sector, and the informal sector. The first economic segment is centred principally on oil.

In recent times, the drop in oil prices has left nations like Nigeria who run 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.

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In the last five years factors such as; 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 have resulted in uncertainty in the foreign exchange market according to a CBN report.

Therefore, the increase in foreign exchange demand in relation to unstable supply is leading to fluctuation in exchange rate.

Devaluation, 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 is a devaluation of the currency, the cost of goods and services are higher resulting in hyper inflation compared to other nations where there is no currency devaluation.

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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.

In 1960, after independence, agriculture used to be the mainstay of the economy, however, agricultural productivity declined drastically and lost its place as a result of crude oil discovery with its high value to the economy of the whole world. The revenue from crude oil enhanced the social and economic development of the country compared to agriculture.

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This has therefore, led to the neglect of 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 from 39.9 percent between 1971 to 1974 to 18 percent with occasional rise. Within this period the naira 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 devaluation of the naira.

Without a doubt, devaluation comes with its own advantages and 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.

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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 be in business? There are no positive signs we are anywhere close to improving our economic growth.

Small and medium enterprises (SMEs) 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 impacted the economy through the creation of employment opportunities, motivating people to embrace entrepreneurship and generation of income. It has also enabled social and political stability.

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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 effective policies are put in place.

However, the question posed here is, has the government made conscious effort to put 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 and so on

Possibility of a drop in naira as a result of SMEs over dependence on foreign product purchase is not optional.

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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 enterprises 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 because policy intervention is required to balance the effect of exchange rate flow until the economy moves from oil driven and dependent economy 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 favour of local firms. Government should also encourage and promote them.

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www (c) August 7, 2020

Written by Adesoji OMOSEBI

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