Nigeria has recorded its biggest foreign trade deficit since 1981 as the trade balance stood at a deficit of N7.38 trillion in 2020. This is according to available data obtained from the National Bureau of Statistics (NBS).
According to the recent foreign trade report, total imports in the year 2020 was valued at N19.9 trillion surpassing the total exports of N12.52 trillion, indicating a trade deficit of N7.38 trillion. This is the second time Nigeria is recording a negative trade balance in the past 10 years.
In 2016, during a similar recession as the one recorded last year, Nigeria recorded a negative trade balance of N290.1 billion, owing to an 11.1% decline in the value of exports. However, the current trade deficit is more than 25 times higher than that recorded in 2016.
Although Nigeria’s economy grew by 0.11% in Q4 2020, marking the exit from the COVID-19-induced recession, the Q4 2020 trade deficit of N2.73 trillion was the highest recorded in the year. The plunge in the value of Nigeria’s export could be attributed to the crash of oil prices and the outbreak of the covid-19 pandemic in 2020.
Oil price dilemma
- Since 2010, crude oil export has contributed more than 70% of Nigeria’s exports followed by non-crude oil exports which contributed an average of 24.10% between 2010 and 2020.
- The value of crude oil export is determined by two major factors, oil price and the volume of oil production.
- Nigeria recorded its highest trade surplus in the past decade in 2012 (N16.82 trillion) when Brent oil traded for an annual average of $111.67 and Nigeria produced an average of 2.35mbpd.
- However, in recent years oil prices have been declining which has subsequently led to volatility in Nigeria’s balance of trade due to our dependence on oil sales as a source of export income.
- In 2016, during Nigeria’s last recession, it recorded its first trade deficit of N290.13 billion since 1982. Similar to the current happening, there was a glut in the oil market which pushed the oil price to an annual average price of $52.39 in 2015 and $43.73 in 2016.
- Due to the impact of the Coronavirus on economic activities in 2020, history repeated itself as oil price significantly fell by an estimated rate of 34% to an annual average price of $42.34.
- Nigeria was also faced with the challenge of the quota placed on its production as a member of OPEC which declined its production by about 12% year-on-year.
Impact on Naira Valuation
In a free market, a trade deficit usually leads to currency depreciation as the market will rebalance itself by repricing imports higher and repricing exports lower to eliminate the deficit.
- However, Nigeria practices a managed floating system which means although the market determines the exchange rate, the CBN comes into the market to mop up the excess supply of naira to prevent naira depreciation.
- The CBN’s foreign reserve is however affected by this activity as the purchase is financed from the foreign reserve.
- Despite the management by the CBN in 2020, the exchange rate was devalued twice in the year, first on March 20 when the exchange rate went from N307 to about N360 and on August 6th when it went from N360 to N380 to the dollar respectively.
- The foreign reserve also depleted by 8.35% in 2020 from $38.60 billion as at December 31, 2019 to $35.37 billion on December 31 2020.
- In the parallel market which is the closest to `the free market’, the exchange rate depreciated by 27.42%, moving from N361/$ at the end of December 2019 to N460/$ at the end of December 2020.
- After a turbulent year in the oil market, the oil price has returned to pre-pandemic levels, reaching Goldman Sachs’ target for the year in the first quarter of 2021. Nigeria’s oil production levels however remain a large variable in the recovery process as OPEC+ decided to retain its production level for an additional month.
- Also, the Nigerian foreign reserve has depleted by 1.79% year to date from $35.37 billion as at December 31, 2020 to $34.74 billion on March 8 2021. This is despite the rise in oil prices.
- It can be hoped that Nigeria will recover from its negative trade balance in 2021, as the economy returns back to normalcy and oil prices continue in its recent bullish trend.