External Sector Remains Vulnerable to Crude Oil Movements

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Monday, December 24, 2018 10:40 AM / FSDH Research

 

FSDH Research expresses concern about the short-term outlook of the external sector of the Nigerian economy. We also observe the continued dominance of crude oil exports on total exports. 

Although Nigeria recorded a favourable trade balance (total merchandise exports higher than merchandise imports) in Q3 2018, it dropped sharply compared with previous quarters. The external trade data that the National Bureau of Statistics (NBS) published for Q3 2018 shows that there was an importation of submersible drilling platforms of N1.16trn in August 2018. 

This increased imports significantly during the quarter. However, adjusting for the occasional drilling platforms, the trade balance was lower than the last two quarters of the year 2018. Despite the substantial increase in crude oil during the quarter, the unimpressive growth in exports (especially non-oil exports) has adverse implications for the exchange rate. 

Crude oil exports grew by 40% in Q3 2018 compared with the level recorded in Q3 2017, while non-crude oil exports grew by 17%. The contribution of crude oil exports to total exports increased to 85% in Q3 2018, the highest level attained since Q1 2016. The increase in the price of crude oil without a corresponding growth in non-crude oil exports, was the major driver of the growth of crude oil exports to total exports. FSDH Research estimates that Nigeria would have recorded an unfavourable balance of trade (total merchandise imports higher than merchandise exports) in Q3 2018 had the price of crude oil not increased substantially during that period. 

Looking at the consistent decline in the crude oil price in the Q4 2018 so far, there are indications that imports may exceed exports. Market intelligence conducted by FSDH Research has not revealed significant improvements in the non-crude oil exports so far in Q4 2018. 

Most of the exporters that we spoke with complained of various bottlenecks in the exportation of non-oil goods from Nigeria. Some of the issues they raised are: the gridlock in the Apapa area in Lagos, lack of standardization from the regulatory bodies and duplication of duties by the port agencies. Each of these obstacles increases the time and cost of exports from Nigeria. 

In addition, most agriculture exportable commodities suffered considerable setbacks due to security challenges in some parts of the country. There is an urgent need for the Federal Government of Nigeria (FGN) to look at these exportlimiting factors in Nigeria in order to grow the noncrude oil exports and insulate the external sector from movements in the crude oil price. 

FSDH Research also notes that Nigeria needs to increase the exportation of semi-final and final goods from Nigeria. This can be done through value addition to the primary commodities that currently dominate the exports. For this to happen, additional policies and initiatives are required to make the business environment more conducive for businesses to expand. A business-friendly environment will reduce the cost of running business and enable the exports from Nigeria to compete with those of other countries on the international market. 

There is a need to engage Nigeria’s trading partners to ensure reciprocal trading relationships that will benefit Nigeria. FSDH Research observes that South Korea and China which accounted for 43% of Nigeria’s total imports in Q3 2018 are not on the list of Nigeria’s top ten export trading partners. 

Nigeria can negotiate better trading terms with its trading partners in order to create more markets for Nigerian-made goods on the international market. These measures and initiatives will ensure a more favourable balance of trade for Nigeria, enable broad-based exports earnings for the country and help sustain and strengthen the value of the currency.


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