Today we drill down to analyse the underlying trends within the services account which as we highlighted yesterday (Good Morning Nigeria, 11 Jan '21), posted a much smaller deficit of USD2.5bn in Q3 '21 from USD3.2bn in the prior quarter. The Q3 deficit marks the second lowest since the advent of the pandemic. Overall, the pandemic has been positive for the services account and the balance of payments. The deficits on the services account, which were trending roughly at a pre-pandemic average of c.USD8bn per quarter, have now shrunk to an average of c.USD2.8bn since the outbreak of the pandemic in Q2 '20.
As we have mentioned in previous dailies, the main reason behind the decline is that Nigerians have made minimal use of their travel, education and health allowance. We might also add the central bank's stricter documentation requirement for fx allocation to eligible users and increased scrutiny on fx transactions.
Total credits increased by USD40m to USD917m in Q3, with transportation accounting for USD486m, down from USD510m in Q2.
The net deficits in travel declined by 46% q/q to USD801m. Within the travel segment, we see that the net deficits for both personal and business travel fell to USD743m and USD57m respectively from around USD1.3bn in USD154m in Q2 '21. We see similar trends in education and health-related services as net debits on both lines fell by 44% and 69% q/q.
The net debits on insurance fell to USD150m from a revised USD161m in Q2. Prior to the revision, the figure was a record high of USD1.7bn (in the Quarterly Statistical Bulletin for Q2) which we attribute to a transposition error.
Although services account for over half of Nigeria's GDP, their contribution to export earnings is modest.
According to a joint OECD-WTO study on global value chains, services accounted for more than half of total value added in the export of major economies such as the US, and the UK.
In addition to its contribution to value addition, a well-developed service sector is commonly thought to be a key precondition for a country's involvement in global value chains.
Given its hearty appetite for imports, Nigeria's expenditure on service imports will increase in step with its economic recovery. The growth of an export-driven service sector offers a viable path to economic diversification.