A Structural Deficit on the Services Account

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Monday, January 27, 2020  / 1o:10 AM / By FBNQuest Research / Header Image Credit: FBNQuest

                                                                                   

As with the current-account deficit (Good Morning Nigeria, 14 January 2020), so did the net outflow on services improve a little in Q3 2019 as a proportion of GDP, from -7.2% the previous quarter to -6.8%. Since fx again became freely available, retail and business users have made good use of their allowances from the CBN.

 

The net deficit on services has widened accordingly from -4.4% in Q3 2017 to -6.5% in Q3 2018 and now -6.8%. Transportation, travel and other business services together comprised 94% of total services debits.

                                                                                                               

Put simply, Nigeria produces little in the way of services and imports a lot. A structural deficit on services is one constant in an uncomplicated balance of payments. The CBN's data series for Q3 in the detailed format is not yet available.

 

Credits on the services account of US$1.19bn were the lowest since Q2 2018. Transportation and travel accounted for 70% of the total. In our search for earnings from Nollywood, we found a zero entry for personal, cultural and recreational services, and the same for royalties and license fees.  The receipts could, of course, have been posted elsewhere.

 

Over time, Nigeria could replicate the prominent services industries in peer EMs such as transportation (Ethiopia), tourism (Kenya, Egypt and South Africa) or IT and outsourcing (India).

 

Transactions on the services account (US$ bn)

 

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Sources: CBN; FBNQuest Capital Research

 

The current-account trend over the past decade has been one of deterioration for the simple reason that total exports have stagnated while imports have grown with the population, diversification and backward integration notwithstanding. This pattern will only change with a combination of rapid import substitution, a sharp pick-up in oil exports (requiring new legislation) and the development of some core services industries.


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