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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.

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