Nigeria spent far more than it produced in the process bringing down its Current Account (CA) balance to a negative of $17 billion, the Central Bank of Nigeria recorded in its Balance of Payment (BoP) statistics.
The implication, according to experts, is that the country produced and exported far smaller than what it imported during the year ended 2020.
The BoP said, “This was driven by deficits in three of the four components of the CA, bringing the CA balance as a percentage of GDP to -4.2 per cent (2019: -3.6 per cent) which implies that the country consumed more than it produced”.
Specifically, the country recorded deficits on Goods Trade Account (- $16.4 billion versus $2.2 billion surplus in 2019), Services Trade Account (-$15.8 billion versus -$33.8 billion in 2019), and Income Account (-$5.8 billion versus -$12.5 billion in 2019) respectively.
The deficit on the Goods Trade Account was mainly driven by the 44.1 year-on-Year (y/y) decline in earnings from crude oil exports to $26.8 billion (versus $47.9 billion in 2019), while the value of imported refined oil declined by 15.7 per cent y/y to $52.3 billion from $62.1 billion in 2019.
Afrinvest explained that, “this development further underscores the huge fortune lost annually by the country to the importation of refined oil products due to the non-functional state of the national refineries. Despite the decline in earnings, crude oil was Nigeria’s major commodity of exports in 2020, accounting for 74.6 per cent of the total value of goods exported ($35.9 billion) to the rest of the world (RoW) in 2020.
The deficit on the Services Trade Account (-$15.8 billion) represents the lowest since 2017 and this was mainly driven by 59.0 per cent and 57.4 per cent year-on-year (y/y) decline in Personal and Business travel expenses to $4.9 billion and $6.8 billion compared to $11.9 billion and $16.0 billion in 2019.
We attribute this to the restriction on cross-country travels in most of 2020 due to COVID-19 pandemic, and we believe this trend will likely reverse in 2021 as more economies across the world re-opens their airways for travels. However, we are of the view that high insecurity, weak macroeconomic fundamentals, and poor state of infrastructure will continue to deny Nigeria the potential gains that come with a viable tourism & hospitality sector in the near term”, says Afinvest.
Likewise, the deficit on the Income Account (-$5.8 billion) represents the lowest in more than five years. This was largely driven by a 56.5 per cent y/y reduction in Direct Investment Income debit from -$5.2 billion, to -$12.2 billion in 2020.
“We suspect this may not be unconnected to the failed attempt of some foreign investors to repatriate their investment in 2020, as the CBN adopted a strict foreign exchange management policy to reduce pressure on the external reserves”, it said.
However, Nigeria recorded a drop in the Current Transfer Balance to $21.0 billion from $26.4 billion in 2019. This was mainly driven by Workers’ Remittance credit which settled at $17.0 billion, down from $23.5 billion in 2019. Analysts say the contraction in remittances drove the CBN’s introduction of the “Naira for Dollar” scheme in March 2020 as dollar inflow through official channels dried-up.
Consequent on the pressure on the CA, Net-Capital & Financial Account, a measure of the difference between a country’s liability to the RoW and assets from the RoW, settled at $5.1 billion in 2020 compared to $18.1 billion in 2019. Although this represents a reduction compared to 2019, yet, the positive Net-Capital and Financial Account indicate that the country’s liability to the RoW outweighed its assets from the RoW as of the end of 2020.
“While we expect the CA balance to improve to -$7.1 billion in 2021 (vresus -$17.0 billion in 2020), we project that the country’s BoP will remain in deficit in the near term, due to over-dependence on crude oil export and the huge import bill”, said Afrivest.
