A Notable Decline in the Current Account Deficit

Wednesday,November 17, 2021 /08:59 AM / by FBNQuest Research / Header Image Credit:

Nigeria'scurrent-account deficit narrowed to -0.4% of GDP in Q2 '21 from a revised -2.1%in Q1 '21. This was mainly as a result of a net surplus of USD1.1bn in thetrade account, equivalent to 1.1% of GDP. Although the current-account deficitis the tenth in a row, it is the smallest since Q4 '18. Improvement in thetrade account reflects a rise in the value of crude oil and gas exports toUSD11.2bn in Q2 from c.USD6.5bn in Q1 '21. Also, oil and gas exports more thandoubled from an all-time low of USD5.2bn in Q2 20, as the pandemic-relatedlockdown resulted in a global demand destruction for crude oil.

Asshown in the chart below, the trade account and current account tend to moveroughly in the same direction. The correlation emphasizes the oil and gassector's dominance of Nigeria's international trade, as it accounts for nearly90% of merchandise exports.

Dueto the pandemic, the trade deficit was consistently larger than the currentaccount deficit between Q2 '20 and Q1 '21 as the value of oil exportsplummeted. However, we note that the trade account has now swung back intosurplus for the first time since Q3 '19, thanks to a recovery in crude oilprices in Q2 '21.

Althoughnon-oil exports improved slightly by 14% q/q to c.USD1.bn in Q2, it is yet torecover to the pre-pandemic run-rate of over USD2bn per quarter.

Thedeficit on the services account increased to almost USD4.7bn (4.8% of GDP) inQ2 from USD2.9bn (2.9% of GDP) in Q1. The deficit for insurance services spikedto USD1.7bn, the largest since Q1 '08 which is the start of the CBN's dataseries. From the data, we can deduce that Nigerian businesses are seeking moreinsurance services from abroad.

Thenet deficit on the income account increased to USD3.2bn from its lowest pointof cUSD560m in Q1, due to repatriation of dividends of foreign companies andother investment income.

Netcurrent transfers recovered to USD6.4bn, their highest level since Q4 '19. Nettransfers to the general government increased by 41% q/q to USD2.6bn. Netremittances by workers from abroad also improved to USD4.9bn from USD4.3bn inQ1.

Highoil prices of over USD80 per barrel bode well for the trade account but thegains from higher prices will be partially offset by lower oil production(excluding condensates), which according to OPEC figures hovered between 1.23and 1.25 million barrels per day (mbpd) in Q3 '21, compared to 1.27 and1.41mbpd in Q2 '21.

Trends on the balance of payments (BoP; % GDP)

Proshare Nigeria Pvt. Ltd.