The Nigerian economy ended 2019 in what appears to be another major setback, as trade balance posted N579 billion deficit in the fourth quarter of 2019, no thanks to the surge in importation within the period.
According to the latest foreign trade report released by the National Bureau of Statistics (NBS) for full year 2019, this is the first time the Nigerian economy recorded deficit trade balance in a quarter since 2016m when it witnessed recession.
Nigeria’s trade balance historical trend (2016 – 2019)
It is worthy of note that at the end of 2019, Nigeria’s total trade was estimated at N36.15 trillion, a 108% rise when compared to N17.34 trillion recorded in 2016. This implies that Nigeria’s foreign trade has witnessed significant growth in recent years.
However, it is important to provide some insights into what is driving growth in the country’s foreign trade and the key implications ahead. Basically, foreign trade is the value of goods (import and export) a country traded with the rest of the world within a period.
So, if a country has more exports than imports, it is in a favourable trade position (surplus). On the other hand, if a country imports more than exports, then it is in an unfavourable trade position (deficit).
In 2016 Q1, Nigeria’s trade balance entered the negative territory, an unfavourable trade position with a N253.3 billion trade deficit, and this was largely driven by marginal increase in import. This followed consecutive trade deficits in Q2 and Q3 2016. By the end of Q2 2016, Nigeria had entered recession.
Over the years, since the post-recession era, Nigeria’s total import had dropped marginally below export, thereby leading to favourable trade balance. In 2019, Nigeria recorded positive trade balance between Q1 and Q3 2019, until a significant trade deficit was recorded at the end of Q4 2019. The trade deficit recorded in 2019 Q4 coincided with the period when the Nigerian government had ordered the customs to shut its land borders.
Import surge on the back of border closure
The quantum of illegally imported goods that flow into Nigeria has always been a constant sore spot for the country; hence, in August 2019, Nigeria closed its land borders in order to control the proliferation of smuggled items into Nigeria. However, critics of the government condemned the policy, stating that it would stifle businesses and lead to inflationary pressure.
Following the border closure, import has surged significantly, and inflation is equally on the rise, as the Nigerian economy continues to grapple with the impact of the closed borders. The surge in import suggests that goods formerly traded and those smuggled through the land borders are partly being redirected through sea.
The increase in import is expected to have a strong effect on the country’s depleting foreign reserves, and the Central Bank may be left with little or no choice but to consider another devaluation.
While Nigeria is yet to resolve the fallout from the closed borders as negotiations with other neighbouring countries are still ongoing, import may yet rise further, as Nigeria remains largely import dependent. This means the country may be in for another trade deficit in subsequent quarters, which will amount to increased pressure for another round of recessionary cycle for the economy.
Recession concerns intensify as Coronavirus dampens growth outlook
The outbreak of Coronavirus (COVID-19) in China, and subsequent rapid spread across countries, has crashed the global oil price. As at the time of this writing, Brent crude oil price has dropped to $35 a barrel, while WTI dropped to $31.
The drop in oil price due to COVID-19 has been driven by low demand for crude oil in China (second-largest economy in the world), as oil inventory continues to pile up. It should be noted that Brent oil at $35 a barrel is largely below Nigeria’s 2020 budget benchmark of $57. On the side, Nigeria may further have to approach the debt market.
Already, Nigeria is considering reviewing the budget benchmark; this has become necessary as oil price continues to plunge. Despite the decision of OPEC and its allies to cut oil production by 1.5 million barrel a day in the second quarter, this may not have significant push on oil price as the global oil demand continues to drop faster than supply.
For the Nigerian economy, while experts have predicted that Nigeria may not devalue naira in 2020, recent developments with the surge in import bill are expected to deplete the country’s external reserves further, and pressures will mount further on the Central Bank of Nigeria to pull the plug on naira in the medium term.