Diversification to include a shock-resistant BoP

Most analysis of the balance of payments (BoP) covers the current account, and in this narrow sense Nigeria’s position is no longer dire. The oil price has now been soft for three years, leading to a current-account deficit for five successive quarters from Q4 2014. (There was briefly a deficit in Q2 2016 when the production losses/leakages from the Niger Delta were particularly high.) We are seeing a familiar lag: export earnings fell with the price of oil whereas import demand was initially sustained by the CBN’s reserves and banks’ indulgence. The BoP shows that the sharp fall in imports dates from Q4 2015. We all remember the backlog in repatriations for offshore investors and the reduced access to fx for manufacturers for raw materials.

The current account was comfortably in surplus in Q1 2017 (3.4% of GDP) and the oil price has settled in a range of US$45/b to US$55/b for many months. We should, however, be concerned because the outflows will pick up now that the economy is emerging slowly from recession and the CBN is making fx available in copious quantities. The policy aim should be to make the BoP sustainable, and not a reflection of the swings in the oil price. This is an element of the FGN’s broader strategy of economic diversification.

Imports should have started to pick up from Q2 as a result of the CBN’s fx interventions. The CBN’s sales to authorized dealers via the interbank market will come off a low of just US$370m in Q1 2017, compared with US$2.75bn one year earlier and closer to US$5bn two years previously.

On the services side the retail-driven outflows have crashed. For business travel they amounted to just US$61m in Q1 this year, compared with US$655m two years earlier. The story was similar for health and education expenditure. Now that the CBN is making fx available on a regular basis to the banks for onsale to the retail segment for invisibles, this will change.

On the goods side, there is plentiful anecdotal evidence that the CBN’s interventions have boosted imports of raw materials. In addition, our own manufacturing PMI has been in positive territory for four successive months (February through to June). The sub-indices for output and new orders provide a good narrative. Closer questioning of respondents by our partner, NOI Polls, reveals that firms have been able to raise production thanks to the greater access to raw materials. We should add that the CBN’s manufacturing PMI highlights a similar upward trend for three months in a row. It is because of this expected build-up in imports that we see the current-account surplus narrowing from 3.1% of GDP this year to 1.2% in 2018.

Gregory Kronsten
Head, Macroeconomic & Fixed Income Research

Source: Business Day, 24 July 2017.
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