November 26, 2021 / 10:18 AM / by FBNQuest Research / Header Image
Credit: FNQuest Research
Today, we turn our attention to the financial accounts of Nigeria's balance of payments. As we have highlighted previously, Nigeria's current account deficit improved in Q2 '21, largely because of a surplus on the trade account. As shown in our chart below, the current account deficit was financed by a net surplus of USD2.1bn in the financial account, up from a revised sur'lus of USD1.8bn in Q1 '21. Nigeria has recorded a current account deficit every quarter since Q3 '18, with the exception of Q4 '18, when it had a modest surplus. For the most part, surpluses on the financial accounts have covered these gaps in the current account.
The successive deficits on the current account reflect Nigeria's diminishing competitiveness in international trade, which has led to downward pressure on the exchange rate in recent years.
We see from the data that the surplus on the financial account was due to a combination of net financial liabilities of c.USD1.1bn, and an almost equivalent surplus of USD1.0bn in net financial assets (which was primarily funded by c.USD2.1bn in external reserves).
The net financial liabilities comprised a USD1.6bn in foreign direct investment into Nigeria (vs. USD739m Q1 '21), mostly in the form of reinvested earnings on direct equity investments.
Portfolio investments recorded a net outflow of -USD273m compared with a net inflow of USD1.9bn in Q1 '21. The outflows were mainly related to debt securities (c.-USD470m), suggesting that some offshore fixed income investors may have been able to repatriate their funds during the quarter as the CBN started addressing the pipeline of delayed external payments. In contrast, investments in equities (shares of publicly quoted companies) recorded a net inflow of USD196m, compared with a net outflow of -USD216m in Q1 '21.
Looking ahead, we expect the USD3.35bn special drawing rights (SDR) from the IMF in Aug '21, and the USD4bn raised from the Eurobond in Q3 '21 to be reflected in the financial accounts for Q3 '21.
We see that the FY '22 budget has an external financing component of USD6.0bn. Issuing debt might help to plug the current account deficit in the short-run, but not in the medium to longer term. Nigeria's best option is to boost its trade competitiveness by diversifying its export base of commodities and services.