The Virus Impact on the Current Account


Wednesday, October 07, 2020 / 09:28 AM / by FBNQuest Research / Header Image Credit: Ecographics


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Nigeria's current-account deficit declined in Q2 2020 from a revised -4.9% of GDP the previous quarter to -3.4%. It generally moves in tandem with the trade balance. Exceptions arise when the terms of trade and/or the exchange-rate arrangements are subjected to an external shock such as the Covid-19 virus. In Q2 the deficit on trade widened from -1.2% of GDP to -4.0%. The balance of payments had only properly recovered from the previous external shock, persistent oil price weakness, in H1 2018. Payment delays developed in both cases.


There was a decline in merchandise imports in the quarter but it was smaller than we anticipated and was outweighed by the fall in exports of goods. The oil price crashed in response to lockdowns in advanced economies other than China, and for a time it was a challenge to place cargoes.


The CBN did not supply the I&E window (NAFEX) with fx throughout the quarter. A pipeline of delayed payments has developed, estimated by the IMF at up to US$3bn. This helps to explain the much-reduced net deficits on services and income. Additionally, international flights were halted, so the paid allowances for personal and business travel and expenses fell dramatically. 



Trends on the balance of payments (%/GDP)

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Sources: CBN; FBNQuest Capital Research


It is not directly reflected in our chart but net current transfers (principally workers' remittances) declined by more than 30% both q/q and y/y in Q2. In the early days of the virus in March, the World Bank bravely suggested a fall of about 20% for frontier and emerging markets. In a few cases such as Pakistan and Bangladesh, remittances have hit record levels.


The current account surely improved in Q3 and may even have posted a modest surplus. The oil price began to recover in early May and crude exports stabilized, subject to compliance with the OPEC quota. Imports of goods likely slowed while the constraints we have noted on services debits persisted.


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