Nigeria posts $5.14 billion in Current Account Surplus, bolstering forex stability

Nigeria recorded a current account surplus of $5.14 billion, or 11.46% of GDP, in Q2 2024, representing a significant improvement from the $3.38 billion (7.35% of GDP) surplus reported in the previous quarter.

This is according to data from the central bank analyzed by Nairametrics.

This boost in the nation’s external balance reflects a reduction in import bills and steady remittance inflows, which have helped stabilize the 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.

Trade Surplus powers Current Account gains

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.

Remittances lift Secondary Income surplus

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.

Other impacts

• 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% to $1.10 billion, reflecting higher foreign spending on services.
• Nigeria’s primary income deficit also rose marginally by 2.07% 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.
• However, 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.

Financial Account shifts due to surge in Portfolio Inflows

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.

• This shift reflects a surge in portfolio investment inflows, particularly into short-term debt securities, as global investors sought out Nigeria’s relatively high yields.
• Portfolio investment liabilities increased significantly, reaching $4.42 billion from $1.40 billion in Q1.

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.

What does this mean?

Nigeria’s improved current account position in Q2 2024 had initially set a solid foundation for forex 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 chain.