‘Widening trade deficit weakens naira’

The surge in Nigeria’s trade deficit to N3.02 trillion in Q3’21 from N1.87 trillion registered in Q2’21 increased the pressure on the naira against the dollar, leading to the Central Bank of Nigeria (CBN) devaluing the local currency at the Secondary Market Intervention Sales (SMIS) window in Q3, according to analysts at Cowry Asset Management Limited.

 

In a report issued at the weekend, the analysts, citing the National Bureau of Statistics (NBS’) recently released “Foreign trade in goods statistics (Q1 – Q3’21)” report, said that the country’s widening trade deficit also highlights the urgency of export diversification.

 

As the analysts put it, “Cowry Research notes that the widened trade deficit amid rising petroleum products and manufactured goods imports partly triggered the pressure on the naira against USD and the resultant devaluation of the local currency at the SMIS Window by Central Bank of Nigeria in Q3 2021.

“Also, the sticky rise in exports value speaks to the need for FG to further create an enabling business environment that would promote exports of other products outside crude oil.”

Specifically, the analysts noted: “Exports, which constituted 38.62 per cent of the total trade, barely rose q-o-q b  1.00 per cent to N5.13 trillion in Q3’21. Imports, which accounted for 61.38 pet cent of the total trade, rose by 17.32 per cent to N8.15 trillion.

“Further breakdown of the total exports showed that sale of crude oil accounted for 78.48 per cent (N4.03 trillion), maintaining a flattish change from N4.08 trillion recorded in Q2’21 – chiefly due to the sustained high crude oil prices at above quarterly average of $80 per barrel despite the quarterly average volume of crude oil sales per day moderating to 1.36 million barrels in Q3’21, from 1.42 million barrels printed in Q2’21.

“Non-crude oil exports, which represented 21.52 per cent (N1.10 trillion) of the total export, grew q-o-q by 10.28 per cent. Notably, imports into the country increased q-o-q by 17.32 per cent to N8.15 trillion in Q3’21.”

 

In addition, the Cowry Asset Management analysts said they were expecting the naira to “weaken slightly against the USD as crude oil price may fall slightly amid threat of lockdown due to the new COVID-19 variant (omicron).”

New Telegraph reports that in the wake of the COVID-19 crisis, the resultant volatility in the price of crude oil, the commodity that accounts for the bulk of the nation’s export earnings, made defending the naira a tough challenge for CBN.

The development has led to financial experts intensifying calls for a diversification of the country’s economy that would end its dependence on crude oil. For instance, in a recent report, Financial Derivatives Company Ltd (FDC) highlighted the need for Nigeria to urgently embrace economic diversification.

The firm stated: “Diversification helps to mitigate volatility and provides a more sustainable path for equitable growth and development. It is even more crucial now, given the slower global economy and the pressing need in many developing nations to boost revenue.”

Significantly, however, FDC argued that economic diversification does not just refer to a transition away from reliance on a few commodities, “but also structural transformation, as seen by improved productivity, growth and development.”

 

According to the firm, “diversification facilitates the diversification of factors of production, trade and revenue through various dimensions. Inadequate infrastructure, such as a lack of proper transportation and frequent power outages, makes it difficult for firms, particularly in the industrial sector, to thrive. Lack of infrastructure raises the cost of producing and processing products, potentially leading to a rise in commodity prices.

“Weak infrastructure also discourages foreign direct investment (FDI) because of the high prices of energy, water and transportation dangers.”