July 30, 2021/Proshare
By FBNQuest Research
Nigeria’s current-account deficit narrowed in Q1 ’21 from -4.7% to -1.8% of GDP. This was the result of lower net outflows for trade, services and income, together with a welcome pick-up in net transfers (workers’ remittances and general government transactions). Nigeria is fairly new to regular deficits on the current account: they used to mark a particularly sharp fall in oil export revenue, as in 2015, but have become almost structural. This is the ninth in a row, bringing additional pressures onto reserves and the exchange rate. It flags the FGN’s limited success in diversifying the economy away from oil and gas.
Non-oil exports again disappointed in Q1 ’21. Running above USD2bn per quarter pre-COVID, they have been hit by the legacy of the earlier land border closures in addition to the pandemic.
Nonetheless the trade deficit declined due largely to a fall of more than USD3.0bn in non-oil merchandise imports.
The deficit on services has shrunk because Nigerian households and businesses have made limited use of the allowances available for health, education and corporate expenses during the pandemic. Once ‘normal’ life and travel resumes, we would expect the deficit to return to previous levels.
The net deficit on income of USD680m in Q1 was the lowest in the CBN’s data series that runs back to 2008. Rather than being a cause for celebration, this probably reflects the reality that foreign companies have deferred the repatriation of dividends and other investment income due to the challenge of accessing fx since March ’20. Reduced corporate profitability would surely be another factor.
Net current transfers recovered to their highest level since Q1 ’20 (pre-pandemic). The report in Q2 and subsequent quarters should show the impact of the CBN’s incentives for remittances (the ‘Naira 4 dollar scheme’), which it extended in May until further notice (Good Morning Nigeria, 20 May 2021).
The best prospects for the return of a trade, and perhaps a current-account surplus lie in a strong recovery in crude production and prices. The rapprochement between Saudi and the UAE over production quotas within the OPEC+ alliance has underpinned the price of UK Brent crude within a range of USD70-USD75/b.
The latest data show positive trends on the financial account, which we will cover in a future daily note.
Trends on the balance of payments (BoP; % GDP)
Source: CBN; FBNQuest Capital Research
