Nigeria’s Trade Deficit to Slowdown to N3.1 Trillion – Experts
Nigeria’s trade deficit is projected to slow down to N3.1 trillion in 2021 due to the expectation that the nation’s will earn more in the third quarter of the year. Despite the positive earnings projected, experts at Chapel Hill Denham believes that it would not be enough to reverse Nigeria’s deficit trade position in the year.
Recall that the Nigerian economy expanded by 0.51% in Q1-2021 and the recent trade report from the National Bureau of Statistics (NBS) affirmed the worse performance of trade and the contribution to the slow economic growth.
Trade balance deteriorated by 30.7% quarter on quarter to N3.94 trillion in Q1-2021 from N2.73 trillion in Q4-2020.
Likewise, the trade deficit was 12 times higher in Q1-2021 than in Q1-2020. Chapel Hill Denham said this was driven by reduced export and increased imports simultaneously.
“The increasing level of trade deficit is likely to drive the recurrence of the twin-deficit syndrome, a situation in which current account deficit and fiscal deficit coexist”, analysts at the firm explained.
The investment firm believes that a higher trade deficit will automatically increase the value of the current account deficit, increase the Central Bank’s financing of imports, raise Federal Government’s expenditure relative to revenue and put pressure on the ‘ailing’ external reserves.
Furthermore, it was noted that exports reversed gains, contracting by 8.99% quarter on quarter in Q1-2021 compared to 6.72% growth in Q4-2020. Meanwhile, the existing import preference of Nigerians expanded imports by 15.61% quarter on quarter in Q1-2021 compared to 10.08% in Q4-2020.
Nigeria’s trade profile remain biased to oil and three major countries. Driven by low production, crude oil exports slowed down in Q1-2021 by 23.5% quarter on quarter and 34.5% year on year relative to Q4-2020 and Q1-2020 respectively.
The Organisation of Petroleum Exporting Countries (OPEC) and its allies, the OPEC+, had slashed production quotas for member countries to keep prices stable in the $50 – $70 per barrel litre range.
Analysts noted that non-oil export continues to play a catch-up with oil export, expanding by 45.2% quarter on quarter in Q1-2021 against Q4-2020, but contracted by 16.1% year on year against Q1-2020.
“The challenge with non-oil exports revolves around difficulties with accessing FX in the official market, congested ports, internal supply chain limitations -for instance, having to transport agricultural produce from the north to the port in Apapa by road – insufficient production volumes due to subsistence farming and heightened insecurity and climate change disrupting the previously stable planting season”, analysts said.
Speaking to Nigeria’s major trading partners, analysts noted that China, India and Netherlands are the major countries topping the chart.
“On the import side, China, Netherlands, United States, India and Belgium controlled 61% of imports to Nigeria, while India, Spain, China, Netherlands and France are the top-5 major destination countries for Nigeria’s exports.
“With the lop-sidedness to China, India and Netherlands, Nigeria faces a big risk because an economic shock in any of these three countries will cast a spell on trade and constrain the overall level of economic growth in Nigeria”.
Agricultural exports continue to lag behind oil and manufacturing exports, the report shows. Analysts saw that Crude oil accounted for 66.4% of Nigeria’s export to the world in Q1-2021, followed by other petroleum products (18.6%) and manufactured goods (8.6%). Despite Nigeria’s huge agricultural potentials, exports from the sector is low at 4.4% in Q1-2021.
On imports, manufacturing goods gulps 66.2% of Nigeria’s imports from abroad in Q1-2021.
“Ideally, to foster growth, Nigeria’s imports should be biased to capital equipment and raw materials that are near impossible to develop domestically”, Chapel Hill Denham added.
The firm noted that Asia represents the top destination for Nigeria’s export and imports. Nigeria’s biggest export (crude oil) went to Asia in Q1-2021 while the biggest import to Nigeria (manufactured goods) was also from Asia.
The emergence of the Covid-19 pandemic has shown the risk of directing trade to a single region – Asia and the need to diversify imports and exports across product categories and countries.
Chapel Hill Denham said a reduction in trade deficit is expected in financial year 2021 with implications for economic growth.
Based on slow recovery of some of Nigeria’s export partners (India: 1.6%; France: 0.4%; Netherlands: -0.5% and; Brazil: 1.2%), analysts at Chapel Hill Denham project that Nigeria’s trade balance will return to a surplus by Q3-2021.
“Our projected surplus in Q3 and Q4-2021 may not be enough to achieve a trade surplus for 2021. We expect annual trade balance to slow down to a deficit of N3.1 trillion, coinciding with our cautious growth forecast of 1.7% for the year”, the investment firm stated.
Analysts said on the macro economy, the investment firm’s analysis and forecast is that slow improvement in trade will lead to a weak growth.
“Pressure on external reserves will persist, as deficit remains and the CBN will continue to research strategies to address the backlog of FX demand incited by growing imports.
As trade improves and imports from China and other major importers reach pre-pandemic levels, inflation will slow down more due to supply pressures”, it concluded.
Nigeria’s Trade Deficit to Slowdown to N3.1 Trillion – Experts
