February 18, 2021/proshare

By FBNQuest Research

Nigeria’s current-account deficit improved a little in Q3 ’20 from -4.1% to -3.3% of GDP. Expectations of a rather better performance were dashed by an unexpected rise of USD2.5bn in merchandise imports. Crude oil and gas imports increased by USD900m in Q3 as the NNPC, we assume, stepped up its purchases to maintain inventory levels while other imports were USD1.6bn higher than in the previous quarter. Q3 did bring an easing of COVID-related restrictions yet the increase (of 16% q/q for non-oil imports) still came as a surprise, given subdued household demand conditions and the pipeline of delayed external payments. The CBN only resumed its supply of fx, and at modest levels, at the investors’ and exporters’ (I&E) window in late August. 

This was the ninth successive deficit on the current account, for which a deteriorating balance on trade is largely to blame. A trade deficit equivalent to -3.3% of GDP in Q3 compared with surpluses of 2.8% and 4.1% one and two years previously. Oil and gas exports generated 7.3% of GDP rather than the 13.2% and 16.6% earned in the same earlier periods. A combination of price and production trends have been responsible.  

Non-oil exports also disappointed in Q3 and were their lowest since Q1 ’16. 

At the same time, the trend rise in merchandise imports has continued, driven by the steady rise in the population of +/- 3% per year as well as the modest impact of efforts to boost import substitution.  

While the trade balance has steadily worsened, the combined net outflow on services and income has shrunk to -2.8% of GDP from -11.1% in Q3 ’19. This is a positive although short-term consequence of the COVID-19 virus and the FGN’s response to it. International flights were halted for several months, so fx drawings for health, education and business expenses sharply declined. Once they resumed on a reduced scale, Nigerians may have been unable to travel to their destinations of choice.  

Net transfers (workers’ remittances, essentially) were broadly stable as a percentage of GDP in Q3 and have fallen as anticipated by the World Bank for emerging and frontier markets in general. A few countries (such as Kenya, Bangladesh and Pakistan) have bucked the forecast trend and posted impressive growth in remittances.  

We see another current-account deficit in Q4, although reduced due to a better contribution from merchandise exports and remittances. The constraints on services outflows will persist.

Trends on the balance of payments (BoP; % GDP)

Source: CBN; FBNQuest Capital Research