An Empirical Analysis of the Joint Effects of Exchange Rate Devaluation and Monetary Policy Tightening on the Performance of Small and Medium Enterprises in Nigeria

This study empirically investigates the joint effects of exchange rate devaluation and monetary policy tightening on the performance of small and medium enterprises (SMEs) in Nigeria over the period 1980 to 2024. SMEs play a critical role in employment generation, income distribution, and economic diversification; however, they remain highly vulnerable to macroeconomic shocks, particularly those stemming from currency fluctuations and restrictive monetary regimes. The study adopts a time series econometric approach, employing the Ordinary Least Square and the Cochrane Orcutt to find the relationships between SME performance and key macroeconomic variables, including exchange rate, monetary policy rate (MPR), inflation rate, real interest rate, and credit to the private sector. Stationarity tests using the Augmented Dickey-Fuller and Phillips-Perron procedures confirm that all variables are integrated of order zero, justifying their use in level form. Descriptive statistics reveal considerable volatility in exchange rate and inflation, suggesting an unstable macroeconomic environment. Empirical results show that exchange rate devaluation significantly constrains SME performance by increasing input costs, particularly for imported goods and capital. Likewise, monetary policy tightening reflected in high interest and policy rates adversely affects SME access to finance, stifling growth and innovation. Inflation and real interest rates further exacerbate these constraints, while credit to the private sector offers a mitigating effect when sufficiently expanded. The findings underscore the need for balanced macroeconomic policies that stabilize the currency and ensure affordable credit conditions for SMEs. Policy recommendations include targeted intervention funds, exchange rate management strategies, and SME-friendly monetary frameworks to cushion the sector from adverse policy spillovers. By shedding light on the compound impact of macroeconomic policies on SMEs, this study contributes to the broader discourse on inclusive growth and sustainable development in Nigeria's fragile economic landscape.