Deceptive Calm Around the Services Account in Q2 2021


Thursday, November 18, 2021 / 10:21 AM / by FBNQuest Research / Header Image Credit: FBNQuest


Nigeria posted a much reduced deficit on the current account in Q2 '21 and its first trade surplus since Q3 '19. The driver was an increase of 73% in oil and gas exports on the previous quarter on the back of a strong rise in the oil price and a modest uptick in output under the watchful eye of OPEC+ (Good Morning Nigeria, 17 November 2021). Our focus today is the deficit on the services account, which widened from USD2.94bn in Q1 '21 to USD4.67bn. The widening in turn was the consequence of record debits on insurance services of USD1.71bn. The net outflow for the industry of USD1.70bn compares with little more than USD10m the previous quarter, and requires a detailed explanation from the statistical authority. By virtue of the size of the market and the very low penetration of insurance in Nigeria, the industry has attracted sizeable FDI from some of the leading global players.


Some of the other debits on services barely moved in Q2. Education and health related spending, and business and personal travel were little changed from Q1 and running at roughly half pre-COVID levels. 


We have consistently pointed out that in time such spending will pick up as Nigerians make use of the several allowances available through the CBN. The services, and therefore the current-account deficit will again expand. The improvement is short term.


Total credits on the account in Q2 dipped below USD1bn to USD880m, with transportation accounting for USD510m.


Nigeria is without an industry that generates substantial services inflows. Examples on the continent include recreational tourism (Egypt, Kenya, Morocco and others), offshore financial services (Mauritius), and air transport (Ethiopia). Looking further afield, we single out India for medical tourism and IT outsourcing.


Nigeria's get-out from a succession of current-account deficits stretching back to Q1 '19 will not be delivered by services in a hurry.


Its best bet remains a dramatic improvement on the trade account, which means further gains in the oil  price and the easing of output quota controls by OPEC+ as demand recovery continues under the sunniest forecasts for the global economy.


The second best would be a robust pick-up in workers' remittances in response to the CBN's incentives such as the Naira 4 dollar scheme. There are tentative signs of a positive response in the Q2 data.


Transactions on the services account (USD bn)

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Sources: CBN; FBNQuest Capital Research

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