A Notable Decline in the Current Account Deficit

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Wednesday, November 17, 2021 / 08:59 AM / by FBNQuest Research / Header Image Credit:

                                                                                                                                                                                    

Nigeria's current-account deficit narrowed to -0.4% of GDP in Q2 '21 from a revised -2.1% in Q1 '21. This was mainly as a result of a net surplus of USD1.1bn in the trade account, equivalent to 1.1% of GDP. Although the current-account deficit is the tenth in a row, it is the smallest since Q4 '18. Improvement in the trade account reflects a rise in the value of crude oil and gas exports to USD11.2bn in Q2 from c.USD6.5bn in Q1 '21. Also, oil and gas exports more than doubled from an all-time low of USD5.2bn in Q2 20, as the pandemic-related lockdown resulted in a global demand destruction for crude oil.

 

As shown in the chart below, the trade account and current account tend to move roughly in the same direction. The correlation emphasizes the oil and gas sector's dominance of Nigeria's international trade, as it accounts for nearly 90% of merchandise exports.

 

Due to the pandemic, the trade deficit was consistently larger than the current account deficit between Q2 '20 and Q1 '21 as the value of oil exports plummeted. However, we note that the trade account has now swung back into surplus for the first time since Q3 '19, thanks to a recovery in crude oil prices in Q2 '21.

 

Although non-oil exports improved slightly by 14% q/q to c.USD1.bn in Q2, it is yet to recover to the pre-pandemic run-rate of over USD2bn per quarter.

 

The deficit on the services account increased to almost USD4.7bn (4.8% of GDP) in Q2 from USD2.9bn (2.9% of GDP) in Q1. The deficit for insurance services spiked to USD1.7bn, the largest since Q1 '08 which is the start of the CBN's data series. From the data, we can deduce that Nigerian businesses are seeking more insurance services from abroad.

 

The net deficit on the income account increased to USD3.2bn from its lowest point of cUSD560m in Q1, due to repatriation of dividends of foreign companies and other investment income.

 

Net current transfers recovered to USD6.4bn, their highest level since Q4 '19. Net transfers to the general government increased by 41% q/q to USD2.6bn. Net remittances by workers from abroad also improved to USD4.9bn from USD4.3bn in Q1.

 

High oil prices of over USD80 per barrel bode well for the trade account but the gains from higher prices will be partially offset by lower oil production (excluding condensates), which according to OPEC figures hovered between 1.23 and 1.25 million barrels per day (mbpd) in Q3 '21, compared to 1.27 and 1.41mbpd in Q2 '21.

 

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

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Sources: CBN; FBNQuest Capital Research


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