AN ANALYSIS OF LONG-RUN RELATIONSHIP BETWEEN EXCHANGE RATE AND SMALL AND MEDIUM ENTERPRISES PERFORMANCE (SMES) IN NIGERIA: AN ARDL PERSPECTIVE

Abstract

This study empirically examined long run relationship between exchange rate and performance of small and medium enterprises in Nigeria using ARDL approach. The study employed time series analysis data were collected on contributions of wholesale and retail trade output to GDP (a proxy for performance of small and medium enterprises, PSME) exchange rate (EXR), inflation (INF) and interest rate (INTR) spanning 38 years (1981-2018). Both descriptive and analytical tools were employed to analyse the data. Autoregressive Distributed Lag model was employed to determine the long run relationship between exchange rate and performance of SMEs in Nigeria. Additions to exchange rate were inflation rate and interest rate. The results of the estimated ARDL model showed that the disequilibrium in the previous periods has fallen back to equilibrium in the current period by about 8.01% of the speed of adjustment. The findings reveal that inflation rate (INF) and interest rate (INTR) respectively have negatively and positively significant long run effects on performance of small and medium enterprises (PSME) while exchange rate (EXR) has positive but insignificant long run effects on PSME (performance contributions of wholesale and retail trades to GDP as a proxy). This implies that changes in exchange rate do not contribute significantly to the performance of SMEs in the long run. Based on the findings, the study recommends that there is need for the federal government, Central Bank of Nigeria and other concerned regulatory authorities to come up with strong policies that would maintain a favourable and stable exchange rate. This is absolutely vital because a favourable and stable exchange rate will promote economic stability and hence enhances small scale business performance in Nigeria. The study further recommended that government should reduce borrowing and lending charges to enhance the performance of small and medium enterprises in Nigeria.