EFFECT OF EXCHANGE RATE FLUCTUATIONS ON THE PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN NIGERIA

Abstract

This study explores the effect of exchange rate fluctuations on Small and Medium Enterprises in Nigeria. The relationship between changes in interest rates, inflation, exchange rates, and the financial performance of SMEs in Nigeria is examined using a quantitative approach in this study. The National Bureau of Statistics (NBS) and the Central Bank of Nigeria (CBN), two respectable organizations, are among the sources of secondary data that are used. Even after accounting for variations in exchange rates, the multiple regression analysis's findings show that changes in inflation and interest rates have a major impact on the performance of SMEs in Nigeria. The results of the mediation analysis demonstrate that the relationship between changes in exchange rates and the financial performance of SMEs is substantially mediated by both interest rates and inflation rates. The indirect effects through interest rates (IE = -0.26, p = 0.001), inflation rates (IE = -0.32, p < 0.001) and (IE = -0.40, p < 0.001) are significant, indicating that the total effect of exchange rate fluctuations on the financial performance of SMEs is partially mediated by these two variables. The study recommended that in order to protect the performance of SMEs, prudent monetary policies should be put in place to stabilize interest rates and rein in inflation. Through macroeconomic stabilization, policymakers should concentrate on initiatives that reduce exchange rate volatility and its unintentional negative consequences on SMEs. Governments should give SMEs the tools and strategies to control exchange rate risks. These tools and techniques, like hedging mechanisms, can help SMEs better navigate economic swings and preserve their financial stability.