A second successive current-account deficit

Forex
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Tuesday, July 21, 2015 9:45AM / FBN Capital Research   

The CBN’s External Sector Development Report for Q1 2015 shows a current-account deficit equivalent to 2.8% of GDP. This was unchanged from the previous quarter, for which a deficit representing just -0.1% had been previously reported. The deficit was underpinned by a worsening of the net outflow on income. This line on the balance of payments is invariably a negative in Nigeria’s case but the outflow widened from -3.5% of GDP the previous quarter to -5.2%, which the report’s commentary attributed to particularly large remittances of dividends and branch profits.

The deficits on the current (and capital) accounts in Q1 help to explain the pressure on the naira exchange rate in the period, and the introduction of additional administrative measures by the CBN such as the scrapping of its bi-weekly fx auctions in February.  

We highlight the decline in merchandise imports to US$12.4bn in Q1 from US$15.7bn in the previous quarter. This was to be expected, given the average exchange rates in the respective periods of N191.1 and N172.0 per US dollar.  Demand for a commodity tends to ease when its price increases. 


The naira exchange rate is not exempt from this general rule despite Nigeria’s voracious appetite for imported goods and services. Even if it was miraculously exempt, the CBN’s circular of 23 June covering the 40 import items has maintained the correlation.    

 



Our expectation is that import contraction will continue and that, barring another exceptional net outflow on the income line, the current account will look a little healthier in subsequent quarters this year.    

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