By Chinwendu Obienyi
With Nigeria’s current account (CA) in surplus position, analysts are forecasting it could rise to $4.48 billion (or 1.0 per cent of GDP) at the end of the year.
According to the provisional data released by the Central Bank of Nigeria (CBN), the Nigeria’s current account remained in a surplus position for the fourth consecutive quarter, settling at $2.58 billion in the first quarter (Q1) of 2022– the highest print since the second quarter of 2018 ($4.36 billion).
The increase was primarily driven by a higher trade surplus (+346.8 percent quarter-on-quarter (q/q) to $3.64 billion) and lower net service payments (-12.9 per cent q/q to $2.83 billion). The higher trade surplus synchronised neatly with the crude oil rally-induced increase in oil export (+21.9 per cent q/q) amidst a noticeable decline in imports (-3.0 per cent q/q) due to lingering FX shortages.
Similarly, the lower net service payments continued to reflect the combined impact of FX liquidity constraints and persistent currency pressures. As at July 27, 2022, Nigeria’s foreign reserves rose 0.2 per cent month-on-month (m/m) to $39.3 billion from $39.17billion it stood at the beginning of the month.
Meanwhile, the local currency remained under pressure across the various FX windows.
Specifically, the Naira depreciated 0.9 and 16.3 per cent m/m to N429.00/$1 and N715.00/$1 at the Investors’ & Exporters’ (I&E) Window and parallel market, respectively.
Analysts attributed this depreciation to the persistent demand-supply imbalance, invoked by depressed capital importation flows (Q1 2022 -$1.6 billion vs Q1 2020 – $5.9 billion), weak proceeds from crude oil exports (as output shortfall lingers), and elevated import bills ($4.5 billion monthly).
“Given the CBN’s revision of the 2021 numbers and the Q1 2022 print, we now expect the CA to settle at a surplus of $4.48 billion (or 1.0 per cent of GDP) in 2022E (vs 2021 FY: $1.85 billion deficit or -0.4 per cent of GDP). Our forecast is hinged on an improved trade balance in line with the effect of the rally in crude oil prices on total exports and higher service and income payments.
Although the CBN has enough liquidity to support the FX market over the short term, we highlight that foreign inflows are paramount for sustained FX liquidity over the medium term. Considering the tepid accretion to the reserves given the low crude oil production level and elevated PMS under-recovery costs, FPIs which have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long term.
Hence, we think further adjustments in the NGN/USD peg closer to its fair value and flexibility in the exchange rate would be significant in attracting foreign inflows back to the market”, analysts at Cordros Research said.
For their part, analysts at Afrinvest said, “In August, although we expect the Naira to trade within a similar band across market segments, we do not rule out the possibility of wider divergence between the official and parallel market rate given the subsisting exchange rate management strategy of the CBN”.