Nigeria’s Trade Deficit hits record high in 2020 despite recession exit in Q4
In the fourth quarter of 2020, Nigeria exited its worst recession in decades with a Gross Domestic Product (GDP) growth of 0.1%. Despite this, trade figures largely underperformed with an expansion in trade deficit. Just like GDP, the size and composition of trade in goods and services are important indicators of the health status of an economy. These indicators show how much of foreign currency a country earns by exporting to other countries and how much of foreign currency it needs to finance imports. For a country like Nigeria that has challenges with foreign exchange, trade performance is even more important. This brief examines Nigeria’s trade in goods performance in 2020 using recently released data from the National Bureau of Statistics.
Here are some highlights:
1. Nigeria imported more than it exported in 2020
When the value of imports is higher than that of exports in a country, there is often a problem with that economy. It simply means that the country demanded for more foreign goods than its ability to sell its locally produced goods to other countries. This is what economists call a trade deficit. In 2020, Nigeria recorded its largest trade deficit of N7.38 trillion which means imports were higher than exports by N7.38 trillion. It also means that there was more demand for dollars to finance imports than the economy’s ability to earn dollars from its exports, thereby, adding more pressure to the country’s exchange rate and external reserves. While import value stood at N19.9 trillion in 2020, the value of export was N12.5 trillion.
2. Nigeria’s total trade declined in 2020 due to COVID-19…
Following the impact of COVID-19 which affected both crude oil and non-oil exports, Nigeria’s total trade (imports + exports) value declined in 2020 to N32.4 trillion from N36.2 trillion in 2019. Trade value as a percentage of GDP stood at 21% in 2020. Total trade declined mainly due to lower exports in 2020, as countries implemented lockdowns and restrictions and this led to a significant fall in the demand for both crude oil and non-oil products across countries. Crude oil export, which was 75% of total exports, declined by 36% in 2020. Non-oil exports also fell by 43% in the same year. But there is partial good news in that total exports increased by 6.7% in the fourth quarter of 2020 when compared with what was obtainable in the previous quarter. It is partial because imports in the quarter grew at a faster rate of 10.1%, which resulted a wider trade deficit in the quarter.
One troubling data about non-oil export in Nigeria is non-oil export as a share of non-oil GDP which was 1% in 2020. In other words, Nigeria exported only 1% of its non-oil GDP. In 2019, it was 1.9%. This is really low especially when you consider the country’s potential and the importance of non-oil exports to the economy. The federal and state governments need to take urgent steps to develop targeted industries and make them export-oriented especially in the light of the African Continental Free Trade Area (AfCFTA) agreement.
3. …but COVID-19 did not stop the economy from growing its import
One would have expected that as exports declined due to COVID-19, imports will follow the same trend. But no, this is not the case as far as Nigeria is concerned. In fact, imports rose by 17.3% in 2020 and reached its highest figure ever at N19.9 trillion. The dollar value of imports also increased. This is what should happen in a non-recession year. So, in essence, it is much easier for Nigeria to import goods from other countries than it is to export to other countries and this is part of the reasons why we often have exchange rate problems. Ideally, import simply means that there are some goods produced in other countries that Nigeria needs but it cannot produce them locally or it cannot meet the required standard that consumers in Nigeria desire. Perhaps, there is also a cultural behaviour among Nigerians which favours the use of foreign goods over what is produced locally. Whatever the case is, the fact remains that Nigeria must improve local production of certain goods both in terms of quality and quantity and grow its exports, which must be significantly higher than imports. This is one, among several measures, to address the country’s foreign exchange problems and create jobs for Nigerians.
What exactly does Nigeria import?
4. Nigeria spent N2.9 trillion importing food, live animals, fats & oils, beverages and tobacco in 2020.
These items accounted for 15% of total imports value in 2020, an increase from a share of 10.4% in 2019. This share of 15% might look small but the question is do we really need to import some of these items, knowing fully well that we have the capability to produce them locally? To address this problem, it is time to intensify the “made in Nigeria” campaign but this time, there must be efforts to develop and enforce national standards, address skills deficiencies across targeted sectors and address the core challenges facing the business environment.
Back to the breakdown of imports data.
Other items and how much was spent importing them are: mineral products which include petrol – N3.15 trillion (15.8% of total import); vehicles, vessels, aircraft and parts – N2.2 trillion (11.2%); products of the chemical and allied industries- N2.7 trillion (13.5%); plastic, rubber and articles thereof – N1 trillion (5.1%). Another major import item – Boilers, machinery, appliances and parts accounted for 25.6% with a value of N5.1 trillion in 2020. Items in this category include industrial machinery and equipment which are used in producing other goods. Importing such items are often useful in production and could also translate into job creation.
5. In 2020, Nigeria traded more with Europe, Asia and America than with Africa
Nigeria’s trade has always been skewed towards countries outside the African continent especially when we are looking at imports. In 2020, 96.7% of goods we imported came from non-African countries, mainly those in Asia (49.3%) and Europe (33.3%). For exports, Nigeria sells mainly crude oil, and Europe and Asia accounted for 39% and 34% respectively, of what Nigeria exported in 2020. Africa had a fair share of 19%.
6. Nigeria has had challenges with trade even before COVID-19
No doubt, COVID-19 had an impact on Nigeria’s trade performance in 2020 with disruptions in the global supply chain and lower demand for crude oil, which affected both its price and production level. Before COVID-19, however, Nigeria has had several challenges as far as trading with other countries is concerned. For instance, since the closure of the land borders in September 2019, Nigeria has recorded consistent quarterly trade deficits, meaning that imports have been higher than exports since the fourth quarter of 2019. So, one can argue that COVID-19 was not the only problem that affected the economy. In fact, COVID-19 only exposed the long-term weaknesses the economy has been struggling with for decades.
Nigeria’s trade performance has not been impressive when we examine data from about 10 years ago. From 2011 to 2020, the value of imports doubled from N10 trillion to N19.9 trillion, meaning that Nigeria added N9.9 trillion to imports. Certainly, this was partly as a result of the series of devaluations/depreciation of the Naira over the years. During the same period, exports declined from N19 trillion to N12.5 trillion. If we compare data for 2011 and 2019 (before COVID-19), only N200 billion was added to export in a space of 10 years which is a growth of just 1.1%. Non-oil exports declined from N5.5 trillion in 2011 to N2.5 trillion in 2019 and N1.4 trillion in 2020. Little wonder why external reserves have remained at suboptimal level in recent years. The story becomes more depressing when we examine trade performance in US dollar. The dollar value of exports has significantly declined from US$122 billion in 2011 to US$53 billion in 2019 and US$32.8 billion in 2020. Nigeria’s inability to grow its export value within a space of 10 years is a major factor responsible for the underperforming external reserves, rising inflation and foreign exchange problems.
In concluding, despite high crude oil prices, which crossed US$60 per barrel in February, Nigeria’s external reserves have been falling significantly, losing 4.9% between January 25, 2021 and March 8. Perhaps, this suggests that oil dollar inflows are no longer enough to finance the country’s rising import bills and other demand for dollar. Hence, it is no longer a matter of choice but that of necessity for Nigeria to develop non-oil exports. Now more than ever, Nigeria needs to take action to improve non-oil exports by developing an up-to-date trade policy that defines clearly, the country’s priority areas, industries and products in relation to local production and exports. The Nigerian Export Promotion Council’s Zero-Oil Strategy would be a useful document but it needs to be reviewed and updated in view of the impact of COVID-19 and the AfCFTA. This must be backed by actual implementation which must be driven by a committee of stakeholders from both the public and private sectors.
If properly developed, the trade sector has the potential to solve Nigeria’s foreign exchange problem and propel Nigeria to become an industrialised nation, in view of the AfCFTA agreement and Nigeria’s proposed Vision 2050.
- Data used in this article are from the Foreign Trade Report released by Nigeria’s National Bureau of Statistics (NBS), which may be different from data in the Central Bank of Nigeria’s Statistical Bulletin. NBS data sheet can be downloaded here: https://nigerianstat.gov.ng/elibrary
- Annual average exchange rates used for conversion to US$ in 2011: N155.9/US$ (interbank rate); 2019: N361.9/US$ (I&E window); 2020: N382.2/US$ (I&E window). Source: CBN and FMDQ