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Economy | Nigeria Economy

A Small Deficit on the Services Account in Q1 2022

Aug 03, 2022   •   by   •   Source: FBNQuest   •   eye-icon 110 views

In our previous note on the balance of payments (BoP), we noted that Nigeria recorded a current account surplus of USD2.6bn in Q1 ‘21, equivalent to 2.4% of GDP. The positive outturn on the current account was mostly due to a surplus of USD3.6bn on the trade account and to a lesser extent a small net deficit of -USD2.8bn on the services account (vs USD3.2bn in Q4 ’21). Today we turn our attention to the drivers of the deficit on the services account.  

The smaller deficit on the services account relative to Q4 ’21 was mainly a result of a smaller net debit of -USD855m in other business services (inc. professional management consulting services) compared with -USD1.4bn in Q4 ’21. 

Overall, the deficits on the services account have been modest since the onset of the pandemic in Q2 ’21 and have not recovered to pre-pandemic levels. 

For context, the net deficit of -USD2.8bn recorded on the account in Q1 ’22 is just over a third of the -USD7.9bn deficit recorded in Q1 ’20 – at the start of the pandemic. 

The primary reason is that fx expenditure on travel-related items, such as those for health and education as well as transportation, are still below their pre-pandemic run-rate. For instance, fx utilisation for education and health amounted to c.USD388m and USD72m  in Q1 ’22 compared with USD1.6bn and USD682min Q1 ’20 respectively. 

While the country's appetite for imports is still strong, we believe that the CBN’s demand management strategies and stricter documentation requirements for fx allocation to eligible fx users may have reduced fx demand through official channels. 

Total credits (inflow) on the services account totalled USD956m from USD962m in Q4 ’21. Transportation accounted for almost 49% or USD465m of total credits. This compares with a total debit (outflow) of -USD3.8bn. 

Unlike a few countries on the continent such as Egypt, South Africa, Kenya, and Morocco that are able to generate fx inflow from services such as tourism, Nigeria lacks a vibrant service industry that will generate substantial amounts of fx inflow. 

While the near-term prospects for developing such an industry are almost non-existent, appropriate strategies for its development in the medium to long term  will require massive investments in education, health, security, and infrastructure. 

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