A CRITICAL APPRAISAL OF THE IMPACT OF FOREIGN EXCHANGE VARIATIONS ON SMALL SCALE BUSINESS
( A CASE STUDY OF PHINA PAINT INDUSTRIES LIMITED, AWKA, ANAMBRA STATE 1982 – 86
The aim is to find out the important of exchange rate variation on small scale industries in Nigeria especial under the tree floating exchange rate system which Nigeria opted for since the last quarter of 1986. A compendium of the research work is t hat exchange rate variation do have grate impact on manufacturing industries. It raises prices of materials inputs, reduces output of manufactures, and reduces demand and capacity utilization of firms especially where the movement (variation) of the exchange rate is against the manufactures country by being demand.
1.1 General background to the subject matter
1.2 Problems associated with the subject matter
1.3 Problems that the study will be concerned with
1.4 The importance of studying the area.
1.5 Definition of important terms
1.6 (Chapter ) Reference
CHAPTER T WO
2.0 Literature review
2.1 The origin of the subject area
2.2 School of though within the subject area.
2.3 The schools of though relevant to the problem of study.
2.4 Different methods of studying to problem.
3.1 Data presentation
3.2 Analysis of the Data
A critical look at the work or purchasing power of the naira today and what it had been in the 705 and early 80s when Oil (Petroleum) was booming would reveal the fact t hat the value of naira in relation to other currencies is devalued. Variation in exchange rate is not peculiar to Nigeria alone but3 is a fact of life prevalent in virtually all countries of the world. From the suspension of U.S dollars convertibility into gold in August 1971 made possible by President Nixon (1971) and consequent floatation of the dollar, business firms with overseas interest or rather manufactures which import or expert have been faced with uncertainties as to the investment of their base currency.
In this resolution by the 43 member countries in the Breton woods conference of 1944 which culminated to the setting up of the international monetary fund (I.M.T), each subscriber to the fund agreed to maintain the external value of its currency with 1 percent of its par value with the U.S Dollar. This, member countries were granted the right to revalue or devalue its chancy on the consent of other subscribers to the fund provided such revaluation or devaluation is not greater than one percent and that the is not grater than one percent and t hat the (1944) described as fundamental disequilibrium in its balance of payments’ as this agreement ensures a kind of stability (fixed Exchange Rate) of exchange rate of currencies currency movement were not key risk area faced by the
Manufacture s that trades internationally. Manufacturing firms rather give though to other problems facing them such as social responsibilities and labour relatives while discharging or giving lesser thought to exchange rate variations.
As identified by Richard Lassen (1982) the period of stability enjoyed by the manufacturing fir ms since the Briton woods conference was change with the events of 1971. The Dutch qguldern floated in may 1971 flowed by the floating of the U.S dollar and the consequent deionization of gold in August 1971. By the end of 1971 (December 1971) the smithariah Agreement made an attempt to re –established fixed parties just as it was during the Bretton wood Agreement except3 t hat wider margins round the morale peg of t he international momentary fund t he (I.M.T) were allowed 2.25 percent fluctuation in its exchanges rate on either side of t he parity. The defiling of the U .S. dollar from gold which rendered the dollar in invertible ushered in a period of psoriatic floating of currencies and hence a look to exchange rate variations was opened. In Nigeria, fluctuating exchange rate had its inception with the introduction of the second – Tier foreign Exchange market on September 29, 1986. The relaxation of the fixed exchange rate existed in Nigeria until 1986 and the introduction of the foreign Exchange market (F.EM) led to a sharp decline of the value of naira. The value of naira
according to Chizen Benefice (1988) witnessed a steep depreciation of about 66 percent pre – FIEM and from their the rate has not been stabilizer but continued to move up and down and in most cases the movement was against the naira.
The continuous movement in exchange rate does exert a great influenced on different funct3ional part of manufacturing firm examples and as follows:
A. THE PURCHASING FUNCTION:
In a manufacturing firm that imports parts or all of its materials inputs any slight change in the exchange rate will have a significant change on the firms production cost.
B. THE PRODUCTION FUNCTION
The production function (Capacity utilization) of industries are affected in the same direction as t he purchasing function is affected by changing in the exchange rate. :
C. THE SELLING FUNCTION
Disposing of firm finished goods is influence by variations exchange rate where the products are made of imported materials. If the exchange rate variation is favourable to t he manufacture, demand far his product increases and hence sales boom. Conversely, adverse movement in exchange rate divides the sales of the manufacture.
D. THE ACCOUNTING FUNCTION
Reflection must be made of the effect of exchange rate on the account of the firm. With floating exchange rates this becomes more difficult.
By affecting the above organizational functions exchange rate variations affect the profitably of small scale firms that engage in manufacturing with imported materials. Variation constitute a risk and is an addition risk to other risks and problems which the manufacture faces such as piling up of stock, liquidity problem, profit margin, etc.
Inadequate control of t he currency movement affects adversely t he firms profit3 ability just as inadequate control of stock levels as well as poor credit control. Thus, a firm t hat has experienced a boom in its sales and hence its profitability max be downed if does not exercised adequate care as adverse variation in the exchange rates have gone up and down like a go – go and over short periods of time “and “this has put consider able streams on the international business community,” identified Willingham Deerik ( 1982)
1.2 PROBLEMS ASSOCIATED WITH THE SUBJECT MATTER
The continuous gyration in the exchange rate of the currency of different countries as claudicated above is not freedom, any effect on the small scale industry. In fact, a wealth of literaur4e have been written on the implications of a continuous flotation to small scale manufacturing establishments who inputs are partly or wholly depended on imported materials.
Some of the problems and arguments of people with regards by Derrik Willinham (1982) and others are people follows: -
(a) While some people argue that the onrush of t he world recession cannot be attributed in any way to fluctuation in exchange rates and t hat such movements and differences in rates off inflation and rates of interest between countries in order to ensure economic stability; other above this argument and control that the only problem is t hat it does not work like t hat. The old truism that a country with high inflation be brought into balance with a country with low inflation by a weakening in its exchange does rate in relation to the other, just does not seven to work anymore and this is because so many other factor often work political or emotional than economic come into the equation.”
(b) While some purport the view t hat exchange r ate goes to custodian investment as risk associated to many be get ride of by stated by other people t hat “t he manner in which people have reached to the uncertainty of widely fluctuating exchange rates has been to play safe. The only thing with today’s fluctuating exchange rates is that whatever forward view he takes, he will be wrong and t hat it is the degree to which he is wrong that can be absolutely critical to the future of his business”.
© Una O. Eleazu (1988), consented that despite the argument that “ a high proportion of world trade is carried out by medium small companies and they are less able to copse with the risks and uncertainties involved and their growth rates are infibulated, some still advocate fluctuating exchange rate angle rate givers access t4oo manufacturers in general and hence improving their permanence as they can acquire materials they need for production.
(d) The echo of the Nigeria government in introducing a market determined exchange rate system was to achieve stability in the economy by devaluing the naira, however the would Bank (1983) recognizing the implications of depreciating a currency value stated that “that are a number of possible advisers consequences of currency devaluation may weaken a country’s own domestic stability by adding to inflation any pressures”.
In short, a whole gallery of literatures and debates of different people describe exchange rate variations as having s very grate impact on manufacturing firms. The problem is t hat which of the opposing schools of though can be s aid to be right in their description of the impact of variations on manufacturing industries. In other worlds, what does empirical evidence suggest is the impact of variations in exchange rate on manufacturing industries. In other words what does empirical evidence suggests is t he impact of variations in exchange rate manufacturing industries.
1.3 PROBLEMS T HAT THE STUDY WILL BE CONCERNED WITH
Having observed from the believes t he opposing schools of thought that both improved aggressions in exchange rates to have a great impact on manufacturing industries, my intention and purpose of this study are as follows:
(a) There is a great need for a study on this subject as freely fluctuating exchange rates have come to stay in this country since September 1986 and thus exchange rate variations have become one of the most important phenomena facing this country to day;
(b) As this country is trying ever possible best to see to expansion of industries and hence stimulating its export, it is pertinent to examine the impact variations in exchange rate have had on the small scale manufacturing industries though freedom is sough as the small manufacturing industries though whom redemption is sought as to increasing our export base and foreign exchange earnings;
(c) As most of the manufacturing industries in Niger ia are purely small – scale acting as what Dr. C. A Horne (1982) of Oxford polytechnic refereed to as “Jack t he giant kiiler” successfully meeting the customers need to which the large corporate are insensitive” and greater percentage of the these firms utilize important material imputes, it is very important to study the impact exchange rate variation have had on the demand for their products t he prices of their impact and their profit level; as well.
1.4 THE IMPORTANCE OF STUDYING THE AREA
To accomplish this study, t he following research are very important:-
(A) Exchange rate variations does not lead to reduction in the quantity of material imputes of small scale industries;
(B) Exchange rate a variation does not lead to increase in cost of imputes of small scale industries.
(C) Exchange rate variation does not lead to reduction in output of small scale industries.
1.5 DEFINITION OF IMPORTANT TERMS
The definition of terms used in this study is as follows:-
i. A critical appraise: - This is to estimate the value or quality of foreign exchange variation and to pass the judgments of the variation of the exchange rate on small scale industry.
ii. The impact of foreign exchange rate variation: - This is to able a critical look at the affect of the foreign exchange rte variation or t he changes on the small scale industries.
iii. Small scale industries: - These are the industries which the capital of operation is very small.
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