Outlook 2021: Eyeballing Major Economic Indicators in 2020 - Trade Balance

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Tuesday, February 09, 2021   /05:00 AM / By Proshare Research/ Header Image Credit: EcoGraphics


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Nigeria's merchandise trade balance as of Q3 2020 stood at N8.37trn. The trade balance increased by +34.15% when compared with the previous quarter (Q2 2020) while it declined by -8.85% when compared with Q3 2019. Nigeria's crude oil exports amounted to N2.42trn, non-crude oil exports N561.18bn, non-oil exports N214.65bn. These reveals that Nigeria's export revenue base is weak and is still heavily reliant on oil export revenue as its main source of foreign exchange earnings (see Illustration 16).


Illustration 16: Nigeria's Foreign Trade Statistics

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Nigeria's trade deficit rose by +32.45% from N1.8trn as of the end of Q2 2020 to N2.38trn in Q3 2020. Nigeria's import was valued at N5.38trn, representing an increase of +33.77% in Q3 2020 when compared with Q2 2020 and +38.02% compared with Q3 2019. On the other hand, the export component accounted for N2.99trn of the total trade in Q3 2020 indicating an increase of +34.85% compared to Q2 2020, but a decline of -43.41% compared to Q3 2019 (see Illustration 17).


Illustration 17: Summary of Nigeria's Foreign Trade

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The rise in Nigeria's trade deficit could be attributed to the rise in Nigeria's imports and the decline in Nigeria's exports. The rise in Nigeria's imports could be attributed to the pent-up import demand for machinery, mineral products, chemical & allied products. On the other hand, the significant decline in export could be attributed to the decline in lower oil prices and OPEC + production cuts (see Illustration 18).


Illustration 18: Plugging the Nigerian Trade Deficit; A Case of Probabilities

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Further analysis of Nigeria's trade balance reveals that in the major categories of Nigeria's trade components, the Nigerian economy imported more than it exported in these major categories i.e., amongst 7 major categories of goods traded, Nigeria imports in 5 major categories exceeded the exports recorded in the same period. For example, agricultural imports which amounted to N503.44bn in Q3 2020 exceeded exports which were N60.49bn in Q3 2020, also, raw materials import N710.21 exceeded the exports of N11.16bn recorded in Q3 2020 (see Illustration 19).

 

Illustration 19: Nigeria's Monthly Export, Import and Total Trade Value by Sectors (N'm) and Market Shares by Sector

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AfCFTA and the Reality of Nigeria's Trade Balance

Although the African continent faces a plethora of challenges in trade ranging from tariff and non-tariff barriers to poor infrastructure, poor transportation networks, corruption, and heavy bureaucracy, the AfCFTA presents a lot of opportunities for the African continent. The objective of the AfCFTA is to create a single continental market for goods and services, with free movement of businesspersons and investments, paving the way for accelerating the establishment of the Continental Customs Union.


Illustration 20: Structure of the AfCFTA

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Despite the opportunities the AfCFTA presents, the agreement would only benefit countries with a structured economy that are producing locally than some countries that do not have industries to produce/add value. Furthermore, it is argued that the agreement would impact government revenue and social welfare, as the elimination of tariffs among African countries would negatively affect trading states' treasury by up to $4.1bn annually and, deepen poverty. Furthermore, it is feared that the agreement would open the country's seaports, airports, and other businesses to unbridled foreign interference and domination.

 

In 2017, total intra-African agricultural trade was valued at US$24.4bn, representing 19% of total intra-African exports and 18% of intra-African imports. South Africa is the main exporter of agricultural commodities to the rest of the continent followed by Nigeria and Egypt (see Illustration 21).


Illustration 21: Main Intra-Africa Exports

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At the same time, Kenya and Namibia are the main intra-African agricultural importers. Intra-African agricultural exports are mainly palm oil, sugar, maize, rice, and tobacco. Intra-African trade is relatively low, presently only 15% of African exports go to other African countries compared to intra-regional trade level of 58% in Asia, 67% in Europe, and 31% in North America. Exports to the rest of the world were dominated by primary products (especially raw materials). These accounted for about 60% of total exports. Other manufactured goods, machinery, and transport equipment represented close to 70% of total imports while the main intra-Africa export products in 2017 were Minerals (25%), chemical products (11%), and food, beverages, and tobacco (9%) (see Illustration 22).


Illustration 22: Main Intra-Africa Agricultural Importers and Exporters, 2017

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Decomposing Nigeria's Trade with Africa

To understand how Nigeria stands to benefit from AfCFTA, it is important to decompose Nigeria's trade balance with Africa. The most recent data from NBS reveals that in Q3 2020 Nigeria only exported 14.77% of goods to Africa while it only imported 3% of its goods from Africa. Nigeria's top three export commodities to Africa in Q3 2020 were crude oil N343.46bn, manufactured goods N78.35bn, and agricultural goods N9.11bn. On the flip side, Nigeria's top three import commodities from Africa in Q3 2020 were manufactured goods N84.09bn, raw material goods N58.08bn, and agricultural goods N15.88bn (see Illustration 23). 

 

Illustration 23: Decomposing Nigeria's Q3 2020 Trade with Africa

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For Nigeria to fully utilize the full benefits of the AfCFTA agreement, it will need to focus on deepening its manufacturing capacity. An increase in its productive capacity would be impossible unless it resolves its infrastructural deficiencies such as epileptic power supply, poor road networks, insecurity. If these issues are not properly addressed Nigeria's cost of production would rise and hence make its production uncompetitive and limit Nigeria's ability to take full advantage of the opportunities that arise because of the AfCFTA agreement. Nigeria's focus on manufacturing activities will help drive economic growth, increase employment, and deepen its economic sustainability.


Eyes on 2021: The Multi-vision of Progress

Nigeria's trade balance for 2021 is hinged on many factors such as exchange rate dynamics, implementation of the AfCFTA, border closure, and the quick dispensation of the COVID-19 vaccine. For example, an effective and efficient port will help improve Nigeria's trade balance as encumbrances preventing the free flow of goods and services will be eliminated while on the flip side, if the current challenges facing Nigeria's port system continues e.g., the delays encountered in moving goods via the Apapa seaport then the current trade balance would likely worsen or remain the same.


Furthermore, the commencement of the AfCFTA portends advantages to Nigeria's trade balance as it opens a wider market space for Nigeria's exports and opportunity to get cheaper imports of goods and services. Also, a quick roll-out of the COVID-19 vaccine will help restore the global supply chain and hence have a positive effect on Nigeria's trade balance. On the other hand, an uneven roll-out of the COVID-19 vaccine will affect global trade adversely, and hence cause slow growth of Nigeria's trade (see Illustration 24).

 

Illustration 24: Eyes on 2021: The Multi-vision of Progress

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Downloadable Version of Goodbye 2020, Hello 2021, Understanding the Mega Trends of a Crucial Year for an Economy Report (PDF)

1.     Complete Report: Outlook 2021: Understanding the Mega Trends of a Crucial Year for an Economy- Jan 28, 2021

2.     Executive Summary: Outlook 2021: Understanding the Mega Trends of a Crucial Year for an Economy- Jan 28, 2021


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