A sequence of current account deficits

Monday, June 7, 2021 / 9:35 a.m. / by FBNQuest Research / Header image credit: RB Associates

Nigeria’s current account deficit deteriorated in Q4 ’20 from a revised downward level of -3.6% to -4.7% of GDP. Expectations for better performance were dashed by resilient merchandise imports, which rose $ 1.7 billion in the quarter. Nigeria is relatively new to regular current account deficits: they once marked a particularly sharp drop in oil export earnings but have become almost structural. This is the tenth in a row. This sequence removes a pillar of the narrative, prized by rating agencies and the FGN for its roadshows, that Nigeria offers a strong external record. It also puts additional pressure on reserves and the exchange rate.

The current account has been in deficit since Q3 ’18, which is mainly responsible for a deterioration in business performance. Trade and current account deficits broadly moved in tandem before the virus. The trade deficit has since become the larger of the two: net transfers (mostly remittances) have declined as noted previously, but the positive impact of COVID-19 on service and income deficits has been more important.

The impact has been positive as international flights have been halted for several months, so draws for health, education and business expenses have fallen sharply. Once they picked up on a limited scale, Nigerians may not have been able to make it to the destinations of their choice. The return to “normalcy” will bring both deficits back to pre-COVID levels.

When it comes to reducing the income deficit, our view is that foreign companies have postponed the repatriation of dividends due to the challenge of accessing foreign exchange since March 20.

Non-oil exports disappointed again in Q4. Exceeding $ 2 billion per quarter throughout 2019, they have fallen to less than $ 700 million. The closure of Nigeria’s land borders, since reversed, has played its part.

Apart from Q2 ’20, which was overall the quarter of containment in Nigeria, imports of goods proved to be more resilient than expected. The background is the steady increase in population of +/- 3% per year as well as the modest impact of efforts to stimulate import substitution. In addition, it appears that many companies have maintained their operations by sourcing foreign currency from the parallel market.

The best hopes for a return to trade, and perhaps a current account surplus, lie in a strong recovery in production and crude prices. Both trends are now favorable even if we do not adhere to the theory of the commodity supercycle.

Evolution of the balance of payments (BoP;% GDP)

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Source: CBN; Fundraising FBNQuest

Proshare Nigeria Pvt.  Ltd.

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Proshare Nigeria Pvt.  Ltd.

Proshare Nigeria Pvt.  Ltd.

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