Trade Deficit Expands For The Fifth Time

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2020 was clearly a year of disruption in trade, as the COVID-19 pandemic imposed a double-edged shock on demand and supply.

In Nigeria, the country recorded its worst deficit outturn since at least 2016. The slump in merchandise trade flows (-10.3% y/y) in 2020 was not as wide as expected due to the surge in imports, despite the devaluation of the naira and the historic fall in crude prices.

On a quarterly basis, however, trade flows improved by 8.9% q/q in Q4’20, as the reopening of economies spurred demand for the country’s exports, alongside the country’s ever-growing import bill. Consequently, the country’s merchandise trade deficit widened to ₦7.4 trillion in 2020, as a result of overdependence on crude oil for exports and inelastic import demand.

On a quarterly basis, the country experienced its fifth consecutive quarter of a wider trade deficit, in line with our expectations.

Trade Deficit Expands For The Fifth Time
Source: NBS, Vetiva Research

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Crude exports recover slightly in Q4’20

The country experienced a 17.3% y/y upsurge in imports during the year, despite the pandemic-induced dent on households and firms. This is attributed to demand for machines (boilers, machinery and appliances), mineral products and chemical products, which are jointly responsible for 55% of the import bill.

Exports, on the other hand, tripped by 34.8% y/y in 2020, due to the slump in crude exports, which reeled from the pandemic-induced lockdowns and subsequent fall in crude demand. The slump in crude exports was worsened by OPEC+ production cuts and compensatory cuts for earlier overproduction.

Specifically, crude exports slipped by 35.7% y/y in 2020. Thus, crude oil contributed lesser to total exports (75.4%) in 2020 compared to 2019 (76.5%). In line with our expectations, crude exports improved by 4.0% q/q in Q4’20 as a result of minor recoveries in demand and the vaccine-induced recovery in oil prices.

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Intra-African Trade Remains Low

India remained the country’s top trade partner by exports, followed by Spain and South Africa, responsible for 17.2%, 9.8% and 8.0% of exports respectively. Meanwhile, China retained its position as the top trade partner by imports, responsible for 28.3% of Nigeria’s imports.

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Despite the ratification of the Africa Continental Free Trade Area (AfCFTA) agreements, intra-African trade remained at low levels as South Africa was the only country to make Nigeria’s top 10 trading partners. In fact, trade within the pre-existing ECOWAS bloc was underwhelming as exports to ECOWAS countries fell by 72.3% y/y.

Narrower Deficits To Ensue

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Compared to 2020, the year 2021 began on a lighter note with vaccine distribution in advanced economies spurring recoveries in oil demand. As a result, oil prices continue to ascend beyond $50. With the reopening of the borders in December 2020, there could be much to cheer about in the new year, as intra-African trade is given a boost by the kick-off of the AfCFTA.

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This is further strengthened by efforts to improve trade measures and eliminate gridlocks at the Apapa Port, which handled 93% of exports and 43% of imports in Q4’20. Notwithstanding, European and Asian countries are expected to remain Nigeria’s top trade partners.

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With OPEC production cuts still in place and the subsequent ascent in oil prices to highs of $60 and $70 in Q1’21, we expect to see further quarterly recoveries in crude exports. Meanwhile, import demand could continue its steady path of growth as more machines, mineral products, chemical and allied products as well as transport mechanisms are imported into the country.

This will be reinforced by the recently ratified Finance Act, which reduced import duty on tractors, mass transit vehicles, trucks and cars. Ultimately, we expect narrower deficits in 2021 as crude exports recover, while import demand sustains its upward momentum.

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