COVID-19 Deepens Merchandise Trade Deficit

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COVID-19 Deepens Merchandise Trade Deficit

According to the National Bureau of Statistics (NBS), Nigeria recorded higher trade volumes in the first quarter of the year (+7.0% q/q; +14.1% y/y). This represents the highest quarterly trade flows (Q1’21: ₦9.8 trillion) Nigeria has recorded since the pandemic disrupted global supply chains (Q1’20: ₦8.5 trillion).

While the recovery in trade could be attributed to the reopening of economic activities, the surge in trade flows was predominantly driven by a higher import bill (+54.3% y/y), which was responsible for 70% of total trade flows. With exports sustaining its plunge (-29.3% y/y) for the fifth consecutive quarter, the merchandise trade deficit expanded.

Data from the NBS confirmed that machinery & transport equipment, chemical products, and petroleum products dominated the import segment. We believe the increased demand for machinery & transport equipment was triggered by the reduction of import duties on tractors, mass transit vehicles, trucks, and cars, as enshrined in the Finance Act 2020. This, in addition to increased manufacturing activities, contributed to import growth during the quarter.

Border-reopening had a muted impact on exports

Despite the reopening of economic activities which propped up oil prices, exports slipped 9.0% q/q and 29.3% y/y respectively to ₦2.9 trillion (Q1’20: ₦4.1 trillion). This could be attributed to OPEC+ production restrictions and a resurgence of COVID-19 infections in India. Due to the slump in crude exports, crude oil’s dominance moderated to 66.4% in Q1’21 (Q1’20: 71.7%).

On the flip side, non-oil exports expanded strongly (+80.5% q/q) quarterly, as agricultural (+128% q/q) and manufacturing (+94% q/q) exports picked up. This could be the low hanging fruits from the Africa Continental Free Trade Area (AfCFTA), as Nigeria exported helicopters, marine vessels, drilling platforms, and storage units to other African nations including Ghana, Cameroon, and Equatorial Guinea. On a yearly basis, however, non-oil exports are yet to climb to pre-pandemic levels (-30.2% y/y).

High trade intensity with India exposes external vulnerabilities

India retained its position as Nigeria’s top export destination, followed by Spain, China, the Netherlands, and France. On the flip side, China remained Nigeria’s top trade partner by imports followed by the Netherlands, the United States of America, India, and Belgium.

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Of these 7 countries, Nigeria’s trade relation is more intense with India as both export and import intensity indexes exceeded 4.0, indicating that bilateral trade relations between these two are stronger than their respective average trade relations with the rest of the world.

This explains the plunge in Nigeria’s exports despite the steady recovery in global crude demand and the ascent in oil prices experienced in Q1’21, as COVID-19 resurgence in India dragged demand for Nigeria’s crude.

External position hangs in the balance

In the second quarter of the year, we see India’s health situation dragging trade deficit further into the red zone, given the identification of two variants of the virus and the resurgence of restrictions in major cities in India.

Imports, on the other hand, could swell significantly on a year-on-year basis, riding on a sustained appetite for foreign products. With machinery, mineral and chemical products being the major drivers of imports, these commodities are relatively inelastic and as a result, increased currency-related costs could easily be passed on to final consumers or borne by the government (PMS products).

However, the fall in the value of the Naira could yield lower import volumes. Nonetheless, we expect the enacted provisions of the Finance Act to buoy importation of vehicles, given the gap in local supply. Ultimately, lower demand for Nigeria’s crude by India as a result of the health crisis could deepen Nigeria’s merchandise deficit in Q2’21.