How Currency Fluctuations Affect SME Access to Credit and Investment Decisions: The Case Study of Uganda, Kenya and Ghana
Exchange rate fluctuations affect the major decisions made by Small, Medium Enterprises (SMEs) in developing countries. This policy brief examines how a depreciation or an appreciation of a country’s local currency against foreign currencies affects SMEs’ access to credit and investment decisions. The findings show that currency movements exacerbate existing financing challenges faced by SMEs. The results further indicate that SME decisions such as what to invest in and whether to engage in international trade or not are greatly affected by exchange rate volatilities. It is recommended that governments increase support to cheaper sources of credit that are easily accessed by SMEs, such as local saving groups. We also recommend sourcing inputs locally through import replacement and export promotion strategies that ensure stability in the demand and supply of foreign currency and reduce the foreign currency needs of SMEs that rely on imported inputs.