CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The desire to build a strong economy is
the desire of every patriotic citizen in Nigeria. This desire is
illustrated via high productivity in the part of citizens in Nigeria
and, the ability of the government to diversify the economy to earn more
foreign exchange.
Over the years, the discovery of oil in
Nigeria has been argued to be a curse rather than a blessing. This
assertion is gotten from the fact that oil still remains Nigeria’s
biggest income earner, as it accounts for over 80% of export earnings.
The drop in oil prices has 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 causing too much pressure on the Naira. This
has affected the demand and supply of the US Dollar and other major
currencies, as scarcity is inevitable. The demand for foreign exchange
by businesses surpass the supply of the currency, thereby causing
scarcity, inflation and some business closing shops due to their
in-ability to get foreign exchange to import. 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.
1.2 STATEMENT OF THE PROBLEM
Small and medium scale enterprises are
the backbone of any economy. The in-ability of the government to create a
favourable and enabling environment for SMEs to do business can result
in an economic meltdown.
Nigeria as an import dependent nation
relies greatly on goods and services from other countries. Since the
sharp fall in oil prices, foreign exchange accessibility has been a
problem to SMEs in Nigeria, as major currencies such as the US Dollar
and British pond are getting scarce due to increased demand for them.
The foreign reserve of Nigeria has been greatly affected by the decline
in oil revenue, thereby forcing the Central bank of Nigeria to devalue
the naira and allow for a flexible exchange rate. This policies are made
to save the country from the adverse effects of the decline in oil
revenue to the country.
1.4 RESEARCH OBJECTIVES
Below are the objectives that would guide this research work;
- To access the dependency level of SMEs on foreign goods and services.
- To determine the main cause of foreign exchanges scarcity and effect on the Nigerian economy.
- To examine the consequences of SMEs over dependency on foreign goods and services on the economy.
- To examine possible options of overcoming the current foreign exchange crises for importers.
1.5 RESEARCH QUESTIONS
- How dependent are SMEs in Nigeria on foreign goods and services?
- What are the factors responsible for foreign exchange scarcity in Nigeria?
- What options are available to counter the challenges posed by security of foreign exchange to importers in Nigeria?
1.6 RESEARCH HYPOTHESES
- Ho: SMEs in Nigeria are dependent on foreign goods and services.
- Ho: Dollar scarcity has crippled the operations of SMEs in Nigeria.
1.7 SIGNIFICANCE OF THE STUDY
The study is significant as it would add
to existing literature on the challenges in accessing forex and how it
affects small and medium scale enterprises and the economic growth of
Nigeria. It will serve as a guide to further research, academic work and
as a self-help study material for those who might wish to firsthand
knowledge about foreign exchange and SMEs.
It is also hoped that Nigeria policy
makers will find it’s a helpful material in the formulation and
implementation of policies on foreign exchange and how it facilities
growth in Nigeria.
1.8 SCOPE AND LIMITATIONS OF THE STUDY
The study covers the challenges SMEs
face in accessing FOREX in Nigeria, using responses from selected
electronic dealers in Alaba International Market in Lagos state as a
case study.
Every research study comes with a
constraint. For the purpose of achieving stated objectives for the
study, the researcher confronted both financial and time constraints.
Funds to print and distribute questions coupled with tight lecture
schedules were the limitations for the study.
1.9 DEFINITION OF TERMS
SME: Small and Medium Scale Enterprise.
Naira: The Currency of Nigeria.
Devaluation: Devaluation on modern monetary policy is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged.
Forex: Foreign Exchange
Exchange rate: an exchange rate between two currencies is the rate at which one currency will be exchanged for another.
Import: An import is a good brought into a jurisdiction, especially across a national border, from an external source
Export: The term export
means shipping the goods and services out of the port of a country. The
seller of such goods and services is referred to as an "exporter" and
is based in the country of export whereas the overseas based buyer is
referred to as an "importer
Balance of Payment: The
balance of payments (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 (over a quarter of a year or more commonly
over a year).
CBN: Central Bank of Nigeria
E-Commerce: Electronic
commerce, commonly known as E-commerce or e-Commerce, is trading in
products or services using computer networks, such as the Internet.