Nigeria recorded a whopping 52% drop in exports proceeds in the quarter ending June 2020 mostly due to the effects of Covid-19. This is contained in the Current Account Deficit numbers published by the Central Bank of Nigeria. The current account deficit for the quarter fell to $3.2 billion compared to first-quarter data of $5.6 billion, the latest report indicates.
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Export drop
According to the data, total exports in the second quarter of the year fell to $6.3 billion from $13.8 billion in the first quarter of 2020 before the Covid-19 lockdown grounded the economy. Crude Oil inflows which Nigeria relies on for 85% of its export proceeds went from $11.2 billion in the first quarter to just $5.2 billion in the second quarter of the year.
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Crude Oil prices fell to as low as $20 per barrel in April as markets panicked as the Covid-19 lockdown spread globally. OPEC members also decided to cut crude oil output with Nigeria’s quota falling from 1.8 million barrels per day to just 1.4 million barrels per day. This culminated in lower export proceeds for Nigeria piling pressure to devalue the currency after the first devaluation in late March.
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Non-oil revenues also fell sharply from $2.1 billion in the first quarter of the year to $1.1 billion in the second quarter of the year revealing how damaging the pandemic has been on the economy. Nigeria earned an average of $2.6 billion per quarter from non-oil exports in 2019, the highest since 2008 when the CBN started publishing figures.
Imports also fall
Nigeria’s dollar outflow for imports also fell from $14.7 billion in the first quarter of 2020 to $10 billion in the second quarter of the year. The fall was also driven by a drop in oil imports falling to just $307 million from $3.7 billion. Non-oil exports which is a major driver of dollar outflows from Nigeria $11 billion to $9.7 billion. This was also due to the impact of the lockdown as most goods imported into the country from other parts of the world fell.
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Despite several import substitution policies of the current government, Nigerians spent an average of $12.7 billion on the importation of goods into the country in 2019 compared to $7.3 billion a year earlier. The country’s main non-oil imports are boilers, machinery and appliances gulping over 27% of imports. Vehicle parts are also a major source of dollar outflows with over 12.8% of the value of what is imported into the country.
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The government has focussed its ban on accessing forex for the importation of listed items which they believe can be made in Nigeria. Most of these items are food-related.
Why this matters: Nigeria’s exchange rate is mostly determined by how much dollars the country can attract compared to outflows.
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- With exports proceeds down by over 50% pressure was on the central bank to devalue the naira.
- However, the CBN also had the option of managing the demand side of the deficit culminating in a drop in current account deficits.
- The more Nigeria earns from exports compared to imports the higher the chances that the exchange rate will remain stable.
- For example, in 2018 when the exchange rate was stable at N360/$1, Nigeria earned about $15.3 billion in dollar inflows or exports (mostly from crude oil sales) compared to $10.1 billion in imports.
- Thus Nigeria will need to either earn more from exports or cut some of its reliance on imports if it is to maintain a stable exchange rate for the country.