Exchange Rate Fluctuation and the Performance of SMES in Nigeria
AbstractThere are high costs of imported raw materials arising from volatile exchange rates which influence the performance of Small and Medium Scale Enterprises (SMEs) in Nigeria. Therefore, this study examined the effect of exchange rate fluctuations on the performance of SMEs in Nigeria. The study specifically examined the long and short run effects of exchange rate fluctuations on the performance of SMEs in Nigeria. The unit root test was used to test for the stationarity of the variable of interest used in the study. The GARCH model was used to estimate the exchange rate fluctuation. Bound co-integration test was used to examine the long-run relationship between exchange rate fluctuation and SMEs performance. Auto Regressive Distributed Lag (ARDL) approach was employed to examine the long and short-run relationship between exchange rate fluctuation and SMEs performance. The results show that a long run relationship exist between exchange rate fluctuation and the performance of SMEs in Nigeria. Also, in the short run, a 1 percent increase in exchange rate fluctuation has 0.96 percent decrease on the performance of SMEs at 5% level of significance. Similarly, inflation and trade openness exhibits positive and negative relationship with SMEs performance indicator. The study concludes that there exists a negative and significant relationship between exchange rate fluctuations and SME performance in the short run. Also, inflation and degree of openness are the major determinants of exchange rate fluctuations in Nigeria. Therefore, it was recommended that SMEs activities should be encouraged by government by giving incentives and subsidies to local manufacturers and by maintaining inflationary and interest policies that will achieve a stable exchange rate.Keywords: Exchange rate fluctuation, Auto Regressive Distributed Lag (ARDL), Small and Medium Scale Enterprises (SMEs)
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