In a recent CBN’s published data on Nigeria’s balance of payments (BoP), Nigeria’s current account (CA) produced a net surplus of $6.1 billion in Q3 ’24, up from a revised net surplus of $3.9 billion in Q2 ’24 and $1.5 billion in the corresponding quarter of the prior year.
The CA surplus in Q3 ’24 marks the eighth consecutive quarter of surpluses, according to analysts at FBN Quest.
A current account surplus can benefit a country by allowing it to invest excess funds or build foreign currency reserves.
It can also indicate that a country is a net lender to the rest of the world.
Benefits are, investment in the domestic economy as a country can use the surplus to invest in its economy, building foreign currency reserves as a country can use the surplus to build reserves of foreign currency.
A country with a surplus is a net lender to the rest of the world.
Interestingly, a surplus may indicate that the government isn’t investing enough; it may also lead to an imbalance in the economy because a surplus may indicate that the economy is not positive.
A surplus can cause a country’s currency to appreciate, which can lead to a reduction in overseas demand.
A current account surplus indicates a favourabletrade balance and income situation, which can help stabilize the economy.
It can also help stabilise the naira against the dollar as well as attracting investors and boost economic activity.
This boost in the nation’s external balance reflects a reduction in import bills and steady remittance inflows, which have helped stabilisethe naira against the dollar, keeping it in the N1,450-N1,500 range.
Amid economic headwinds, this surplus provides hope for a more stable foreign exchange (forex) landscape.
In relative terms, the absolute value of the surplus is equivalent to 13.0 per cent of GDP, compared with the 8.7 recorded in the preceding quarter.
This is the highest surplus as a percentage of GDP recorded in the data series, surpassing even the record surplus from Q2.
Nigeria recorded a current account surplus of $5.14 billion, or 11.46 per cent of GDP, in Q2 2024, representing a significant improvement from the $3.38 billion (7.35% of GDP) surplus reported in the previous quarter.
Information contained in the report shows a strong trade surplus primarily drove the current account surplus, with merchandise imports falling sharply and crude oil prices offering partial support.
Although Nigeria’s crude oil production declined from 1.33 million barrels per day (mbpd) in Q1 to 1.27 mbpd in Q2, the average price of Bonny Light crude rose to $86.97 per barrel from $85.58.
This slight price increase provided a partial buffer against the revenue shortfall from lower production volumes.
Merchandise imports, which dropped by 20.59% from $10.88 billion in Q1 to $8.64 billion in Q2, played a substantial role in strengthening Nigeria’s trade position.
The decrease in import spending was largely due to reduced petroleum product imports, which fell from $4.31 billion to $2.79 billion, along with a drop in non-oil imports.
Another key factor supporting the current account was the robust secondary income surplus, driven by remittances from Nigerians living abroad.
Inflows from the diaspora reached $5.78 billion, a rise from the $5.14 billion recorded in Q1 2024.
This consistent inflow highlights the important role of Nigerians abroad in providing liquidity that helps mitigate naira volatility.
Despite the overall positive current account balance, Nigeria’s service account deficit grew to $3.47 billion from $3.26 billion in the previous quarter.
This increase resulted from a rise in payments for business and travel services, with outlays for business services nearly doubling to $1.41 billion from $0.71 billion.
Additionally, travel payments grew by 4.76 per cent to $1.10 billion, reflecting higher foreign spending on services.
Nigeria’s primary income deficit also rose marginally by 2.07 per cent to $2.47 billion in Q2 from $2.42 billion in Q1.
This uptick was mainly due to an increase in reinvested earnings by non-resident investors, indicating sustained foreign interest in Nigeria’s economic opportunities despite broader challenges.
Significantly, this deficit did not threaten overall forex stability, as the naira maintained stability against the dollar.
The naira’s steady range of N1,450-N1,500 in Q2 suggests that external balance improvements offset the services deficit, helping to sustain investor confidence in Nigeria’s currency.
In the financial account, there was a notable increase in liabilities, which amounted to $2.27 billion in Q2 2024, reversing a $5.03 billion net reduction in Q1.
The quarter-on-quarter (q/q) improvement in the CA was driven by a combination of positive developments across all its components.
Beginning with the merchandise trade, the net credit on the trade account improved to $4.3 billion (9.2% of GDP), up from a revised surplus of $3.3 billion (7.4% of GDP) in Q2 ’24.
Although merchandise exports improved, the trade account’s higher credit was primarily driven by a reduction in imports, which fell from $8.8 billion to $9.6 billion in Q2 ‘24.
Oil and gas exports accounted for 86 per cent of merchandise exports, or $11.2 billion in Q3 ‘24. However, its share of imports declined to 33 per cent, or $2.9 billion from $3.8 billion in Q2 ’24.
The services account, which typically runs a net deficit, recorded a lower net deficit of -$3.2 billion during the quarter, from -$3.5 billion in the prior quarter.
Also, the income account recorded a reduced net deficit of -$1.1 billion, down from -$1.8 billion in Q2 2024, driven by an increase in investment income from $1.4 billion from $788 million in the previous quarter.
Many analysts believe that this influx highlights Nigeria’s attractiveness to short-term investors, although it points to a reliance on portfolio investments rather than direct foreign investment, which may present future vulnerabilities.
Nevertheless, the financial inflows contributed positively to forex reserves, reinforcing the naira’s stability.
The cumulative effects of reduced import bills, steady remittance inflows, and lessened import dependency helped to stabilize the naira during the second quarter.
However, a significant shift occurred in Q3, as rising forex demand led to a sharp depreciation in the naira, which continued to weaken into early November.
The demand for dollars surged as businesses sought to meet year-end obligations, while speculative activities in anticipation of potential government reforms further heightened forex pressures.
This increase in dollar demand strained the local currency, causing the exchange rate to fall well below the levels seen in Q2.
As oil revenues fluctuate and short-term investment inflows remain sensitive to global market conditions, Nigeria’s forex stability is likely to be tested in the months ahead.
Without sufficient dollar inflows from diverse sources, Nigeria’s currency could continue facing depreciation pressures, especially if external shocks or policy changes further disrupt the forex supply chat.
Finally, the net surplus on current transfers in the BoP increased to $6.1 billion, from $5.8 billion in Q2 ’24, primarily driven by workers’ remittances, which totalled $5.4 billion.
Going forward, the analysts said, “We expect the CA to maintain its surplus in the near term, driven by the ramp-up of domestic refining of petroleum products.
“We forecast a CA surplus of 7.4 per cent of GDP in 2024. However, despite the gains from domestic refining, we expect the surplus to moderate to 5.7 per cent in 2025 as businesses increase imports in response to the reduced naira exchange rate volatility”.
Sustaining surplus current account
A country can sustain a current account surplus by maintaining a trade balance where exports exceed imports. This can be achieved through a combination of policies, economic conditions, and exchange rates.
Analysts believe a government can sustain a surplus current account if it can invest excess funds in foreign currency reserves or other investments.
An undervalued currency can make exports more competitive and imports more expensive, which can increase a country’s current account surplus.
A country with a strong economic expansion may see a surge in imports, which can widen a current account deficit.
According to Stephen Iloba, an economist, “A recession can cause a decrease in consumer demand for imported goods, which can lead to a current account surplus just like an overvalued currency can make imports cheaper and exports less competitive, which can widen a current account deficit.
“Expectations of productivity growth can affect a country’s current account balance as well as government spending can affect a country’s current account balance.
“Interest rates can affect a country’s current account balance, while a country’s current account surplus can indicate that it is a net lender to the rest of the world. However, a current account surplus can also be a sign of an economic imbalance”.
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