THE EFFECT OF THE NAIRA DEVALUATION ON SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA ( A CASE STUDY OF SELECTED MINI IMPORTERS IN LAGOS STATE)
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Nigeria with abundance of resources like crude etc is deemed blessed. Her vast resources in commercial quantities have placed her 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 attain this enviable position. There are several journals to this and about its role and significance in the Nigeria of today. This has birthed the segmentation of the four key economic segments in Nigeria which are oil-related activities, the public sector (Governments and parastatals – that remains heavily dependent on oil derivatives), the organized private sector, and the informal sector (World Bank 2002). The first segment of the economic activity is heavily based upon and centered on oil. The most dominance of this sector is shown by the share of oil revenues that accrues as a percentage of exports since oil now accounts for more than 80 percent of the country’s export earnings/income.
In recent times, the drop in oil prices have left nations like Nigeria who run an oil based economy with undiversified economies in economic crises. This challenge brought about by exchange rate fluctuations is eventually leading to the devaluation of the Naira. This has affected the demand and supply sides of the economy. The government of the day in Nigeria usually relies on foreign exchange reserve generated from crude oil to manage excessive volatility in exchange rate and recently crude oil prices have dropped drastically. This has tremendous implication for foreign exchange earnings. The capacity of the Central Bank of Nigeria (CBN) to fund foreign exchange market has being called to question. Low level of foreign exchange reserve induces free movement of exchange rate. Issues are also on the rise on the demand side. There has being a high demand for foreign exchange in the last five (5) years as a result of factors like, 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 which has caused uncertainty in the foreign exchange market (CBN report, August 2013). Therefore, the increased foreign exchange demand in the face of unstable supply is leading to volatility in exchange rate.
