the Nigerian Economy ended 2019 in what appears to be another major setback, with the trade balance posting a deficit of N579 billion in the fourth quarter of 2019, not thanks to the surge in imports during the period.
According to the latest foreign trade report released by the National Bureau of Statistics (NBS) for the whole of 2019, it is the first time that the Nigerian economy has recorded a trade balance deficit in one quarter since 2016m, when it suffered a recession.
Historical Trend of Nigeria’s Trade Balance (2016 – 2019)
It is to highlight that At the end of 2019, Nigeria’s total trade was estimated at N36.15 trillion, an increase of 108% from the N17.34 trillion recorded in 2016. This implies that Nigeria’s foreign trade has witnessed significant growth in recent years.
However, it is important to outline what is driving the country’s foreign trade growth and the key implications ahead. Basically, foreign trade is the value of goods (import and export) that a country has exchanged with the rest of the world over a period of time.
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Thus, if a country has more exports than imports, it is in a favorable trade position (surplus). On the other hand, if a country imports more than it exports, then it is in an unfavorable trade position (deficit).
In the first quarter of 2016, Nigeria’s trade balance moved into negative territory, an unfavorable trade position with a trade deficit of N253.3 billion, and this was largely due to a marginal increase in imports. This followed consecutive trade deficits in the second and third quarters of 2016. By the end of the second quarter of 2016, Nigeria had slipped into recession.
Over the years, since the post-recession era, Nigeria’s total imports have fallen slightly below exports, leading to a favorable trade balance. In 2019, Nigeria recorded a positive trade balance between the first and third quarters of 2019, until a large trade deficit was recorded at the end of the fourth quarter of 2019. The trade deficit recorded in the fourth quarter of 2019 coincided with the period when the Nigerian government ordered customs to close its land borders.
Increase in imports following border closures
The amount of illegally imported goods this flow to Nigeria has always been a constant sore point for the country; thus, in August 2019, Nigeria closed its land borders in order to control the proliferation of contraband items into Nigeria. However, government critics condemned the policy, saying it would stifle business and lead to inflationary pressures.
Following border closures, imports have increased significantly and inflation is also on the rise, as the Nigerian economy continues to grapple with the impact of border closures. The increase in imports suggests that goods once traded and those smuggled across land borders are partly being redirected by sea.
The increase in imports is expected to have a large effect on depleting the country’s foreign exchange reserves, and the Central Bank may have little or no choice but to consider another devaluation.
While Nigeria has yet to resolve the fallout from the border closures, with negotiations with other neighboring countries still ongoing, imports could increase further as Nigeria remains largely dependent on imports. This means that the country could experience another trade deficit in the following quarters, which will amount to increased pressure for another round of recession for the economy.
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Recession worries escalate as coronavirus dims growth outlook
The Coronavirus (COVID-19) outbreak in China, and its rapid spread across countries, has driven down the world price of oil. As of this writing, the price of Brent crude oil has fallen to $35 a barrel, while WTI has fallen to $31.
The drop in the price of oil due to COVID-19 has been driven by weak demand for crude oil in China (the world’s second largest economy), as oil inventories continue to pile up. It should be noted that Brent oil at $35 a barrel is well below Nigeria’s 2020 budget benchmark of $57. At the same time, Nigeria may still have to get closer to the debt market.
Already, Nigeria is considering revising the baseline budget; this has become necessary as the price of oil continues to plunge. Despite the decision by OPEC and its allies to cut oil production by 1.5 million barrels per day in the second quarter, this may not have a significant impact on the price of oil, as global demand for oil continues to fall faster than supply.
For the Nigerian economy, while experts have predicted that Nigeria may not devalue the naira in 2020, recent developments with the surging import bill are expected to further deplete the country’s external reserves, and pressures will intensify. still on the Central Bank of Nigeria to pull the plug into the naira over the medium term.