Nigeria’s Balance of Payments Deficit Rises to Most in More Than 25 Quarters

uarterly balance of payment deficit swung to its highest since at least the first quarter of 2014 after deficit in Nigeria’s current account and, financial and capital accounts pushed the external sector indicator into a negative zone following two successive positive quarters.

Balance of payment, the record of all international trade and financial transactions between Nigeria and the rest of the world, in the first quarter of 2020 hit -$11.182bn, according to BusinessDay analysis of data from CBN.

In the last quarter of 2019, BOP stood at $6.28bn, and $2.096bn in the first quarter of the same year.

The BOP figure mostly account for a period of the full impact of the coronavirus pandemic suggesting a steeper deficit in the second quarter, according to economists.

Balance of payment is made up of components that track how money flows in and out of a country as a result of trade (current account), financial transactions and transfers across borders (financial and capital account).

A negative current account typically shows a country’s imports more than it exports, which is not bad per se, but usually leads more international borrowing to finance that consumption (financial and capital account deficits).

In Q1, Nigeria’s current account deficit shrank by $2bn to $4.88bn helped by smaller trade deficit, its largest component, despite a bigger deficit in services and income account.

On the other hand, Financial and Capital account netted -$6.3bn in the period compared to $ 13.24bn in the fourth quarter of 2019 and $4.82bn in the corresponding quarter of 2019.

Uche Uwaleke, a professor of finance and capital markets, chair, banking and finance department, Nasarawa State University Keffi, Nasarawa State, said persistent deficit trade balance hurts the country’s Balance of Payments, exerts pressure on the forex market and depletes external reserves as more imports outweigh exports.

This situation, he said is exacerbated by the vagaries in the international market for crude oil which is the country’s major source of foreign exchange. Against this backdrop, it is vital that the recent IMF loan is utilized to fill the hole in the country’s BOP while seizing the opportunity of the three years moratorium offered by the Fund to develop multiple sources of forex with a focus on Agriculture as well as reduce the level of imports via an aggressive implementation of import substitution policy.

In its April 2020 World Economic Outlook, the International Monetary Fund (IMF) predicted Nigeria’s current account balance to further contract (improving level) to -3.3 percent in 2020 from -3.8 percent in 2019 and -2.5 percent in 2021.

“The pace of economic recovery remains slow, as declining real incomes and weak investment continue to weigh on economic activity. Inflation—driven by higher food prices—has risen, marking the end of the disinflationary trend seen in 2019. External vulnerabilities are increasing, reflecting a higher current account deficit and declining reserves that remain highly vulnerable to capital flow reversals. The exchange rate has remained stable, helped by steady sales of foreign exchange in various windows,” Amine Mati, IMF Senior Resident Representative and Mission Chief for Nigeria, stated in February 2020 article IV.

Nigeria’s external reserves have declined to $36.31 billion as at June 18, 2020 from $36.59 billion as of May 29, 2020, data from the CBN indicated.