Jul 11, 2010 By Omo Gabriel and Babajide Komolafe/Vanguard

Nigeria’s trade and investment relation with the rest of the world fell significantly in the first three months of the year, with foreign direct investments taking more of the heat as it dropped by 65 per cent.

This deteriorating terms of trade and investment relation with other countries has affected and put pressure on the nation’s external reserves.

According to the Central Bank (CBN) Governor, Sanusi Lamido Sanusi, Nigeria’s gross external reserves stood at $37.63bn on 23rd June, 2010 representing a decrease of $1.19bn or 3.06 per cent when compared with the level of $38.82bn as at 31st May 2010.

The Monetary policy Committee of which the CBN Governor is the chairman, however, explained that the current external reserves level is still adequate as it would finance 16 months of imports, compared to the internationally recommended benchmark of 3 months of import cover for a country’s external reserves.

The foreign exchange market the source of the draw down on the reserves, according to the CBN, remained relatively stable in the first half of the year. During the period, January 01 to June 16, 2010, total sales at 45 bi-weekly WDAS auctions amounted to $11.15510bn, equivalent to an average of $247.89 million per auction.In the corresponding period of 2009, the sum of $12.99548bn was sold at 70 daily and bi-weekly RDAS auctions, equivalent to an average of $185.65m per auction.

According to the CBN in May 2010, the average foreign exchange demand of $459.26m per auction was recorded against the average sales of $394.45m, representing sales as a percentage of demand of 85.89.As at June 23, 2010, average demand for the month dropped to $315.73m and, correspondingly, the average sales also declined to $297.69m, representing sales as a percentage of demand of 94.29.

In June 2010 the apex bank said the WDAS rate opened at N150.27/ $1 (inclusive of 1 per cent commission) and closed at N150.09/$1, at an average exchange rate of N 150.24/$1 for the month. This represented an appreciation of 6 kobo (0.04 per cent) compared with the average closing rate of N 150.30/$1 recorded in May 2010.The BDC segment of the market recorded average selling rates of N153.26/$1 and N153.86/$1 in the months of May and June 2010 respectively, representing a depreciation of 0.4 per cent.At the inter-bank market, the average selling rates for May and June 2010 were N151.48/$ and N151.35 respectively, representing a 0.09 per cent appreciation.

The WDAS and interbank segments of the foreign exchange market witnessed mild naira exchange rate appreciation while the BDC segment experienced mild depreciation. Thus, the stability of the naira exchange rate attained in the foreign exchange market since the first half of 2009 continued in the first half of 2010.But FDI, which refers to direct investment by foreigners to set up businesses and own productive assets like factories, mines and lands,  fell to $550.62m in the first quarter of the year from $1.569.62 in the previous quarter, according to figures released by the CBN in its first quarter external sector statistics monitor issued recently.

The deterioration in the country’s foreign trade and investment is further reflected in the data showing the daily cross border transaction on goods and services (current account) balance which fell by 8.5 per cent in the first quarter to $10.016bn.In addition, external trade contracted while the degree of openness fell and external debt sustain ability deteriorated.The report stated, the country’s estimated current account balance in first three months of 2010 declined, when compared with the levels recorded in October, November and December 2009.

Portfolio investment on the other hand recorded an increase, while foreign direct investment (FDI) declined in the first quarter of 2010, in comparison with the levels recorded in the fourth quarter of 2009.Portfolio investment increased from $314.62m in fourth quarter of 2009 to $716.64m in the first three months of 2010. The observed increase in portfolio investment between the two periods could be ascribed to the improving confidence in the economy, the CBN said.

Available statistics revealed that Nigeria’s trade balance declined in between January and March, 2010  following a slight contraction in merchandise exports in comparison with the developments observed between October and December, 2009. Similarly, considering quarter on quarter analysis, estimated exports dropped from 71.9 at the end of December, 2009 to 60.0 per cent in at the end of March, 2010. Quarter on quarter imports increased between the review and proceeding period, from -29.48 per cent to -0.95 per cent, indicating comparative increase in the country’s import bills.

According to the apex bank figures the degree of openness depicting the share of Nigeria’s total external trade to gross domestic products (GDP) fell marginally during the period under review, indicating a reduction in Nigeria’s total trade in relation to gross domestic products.In comparison with the levels recorded in the last quarter of, 2009, current account as a percentage of GDP improved slightly in the first three months of 2010. Also, the level of exports stood at $17.8bn as against imports value of $6.8bn, indica-ting a robust goods account balance.The marginal increase in the price of crude oil in the international oil market  contributed to this development.

The development compensated for the large deficits recorded in services and income accounts. The deficits recorded in the two accounts could be ascribed to the back-lash effects of the global economic crisis.Furthermore, current transfers balance fell slightly at the end of March 2010, when compared with the levels recorded as at the end of December 2009.

Estimated external debt sustainability index, computed as the ratio of external debt to real GDP, rose indicating deterioration in external sector sustain ability during first quarter of 2010, when compared with the observed level recorded in the preceding quarter. According to the CBN data, public sector external debt increased from $3.95bn at the end of December, 2009 to $4.31bn as at end of March, 2010, signifying contracting of new debt by the Federal Government. Even with this development, public sector external debt is sustainable, attributable to the corresponding growth in real GDP .

The private sector external debt as at end March 2010 stood at $500.74m, when compared with $593.93m at the end of December 2009 and $1,236..85m in the first quarter of 2009. This class of debt represent debt drawn within the analysed quarters only.

The CBN said that the real effective exchange rate (REER) and the nominal effective exchange rate (NEER) of the naira indices declined at the end of March 2010, over the level recorded at the end of December, 2009. The depreciated REER indicates improvements in the external competitiveness of the prices of the Nigerian trade-able goods. The only good Nigeria trades on is oil which price and quantity produced are determined by OPEC.