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Macro updates: Nigeria falls short of net exports despite record monthly trade surplus

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Tinubu baba

In Q4 of 2023, Nigeria shifted back into net importer status, primarily attributed to a substantial acquisition of tanks and armoured vehicles in October, valued at N5.06 trillion.

While this may raise eyebrows, a more nuanced examination reveals a temporary anomaly rather than a cause for sustained concern.

Key to this development is the identification of growth sectors within Nigeria’s exports. The agriculture sector exhibited robust expansion, climbing from 2.237% of exports in 2022 to 3.46%.

Late-year recoveries in sesamum prices and a surge in cocoa prices contributed significantly, with cocoa prices projected to continue their upward trajectory into Q1 2024. Solid minerals also posted growth, albeit more modestly, rising from 0.31% to 0.38% of exports.

Despite the overall shift toward a net import position, December marked a noteworthy achievement with the trade surplus reaching record levels. This positive outcome suggests resilience and adaptability in Nigeria’s trade dynamics, mitigating concerns arising from the one-off purchase of military assets.

Ongoing reforms in the solid minerals sector, which will provide a framework for the legal exportation of key minerals, may begin to bear fruit by the close of 2024 as revised investment timelines from mining majors point to significant price recovery expected across the sector.

Elsewhere, angst about the implementation of the Export Prohibition Act seems unfounded, with around 79% of official agricultural exports unaffected.

As the nation navigates challenging economic headwinds, taking advantage of abnormally high commodity prices will be crucial for widening the emerging trade surplus.

In response to Nigeria’s soaring inflation, the Central Bank of Nigeria (CBN) moved last week to implement the robust measures agreed by the Monetary Policy Committee. The Cash Reserve Ratio (CRR) saw a significant hike from 32.5% to 45%, set to result in a capital crunch in the banking industry to the tune of an eyewatering N5 trillion.

Governor Olayemi Cardoso defended these moves in a Foreign Portfolio Investors Call with Foreign Portfolio Investors (FPIs), held in collaboration with the NGX Group. He cited concerns over recent foreign exchange reforms and a 400 basis points Monetary Policy Rate (MPR) increase.

Deputy Governor Mohammad Abdullahi acknowledged a banking system shortfall but assured an incremental CRR implementation. Analysts project sustained inflation pushing over January’s 29.90% due to fiscal imbalances, exchange rate pressures, and rising energy costs.

The CBN, addressing liquidity concerns, plans to review upward interest rates on Treasury bills and increase Open Market Operations ahead of the next MPC scheduled for the 25th and 26th of March 2024.

In February 2024, the Central Bank of Nigeria (CBN) reported a notable surge in foreign exchange inflow, attributed to substantial remittances from Nigerians overseas and increased purchases of naira assets by foreign portfolio investors. Mrs. Hakama Sidi Ali, the Acting Director of Corporate Communications at the CBN, revealed that overseas remittances soared to US$1.3 billion, a fourfold increase from January’s US$300 million.

Foreign investors displayed heightened interest, with purchases exceeding US$1 billion in Nigerian assets last month. The total portfolio flows for 2024 reached at least US$2.3 billion, a promising trajectory despite being marginally lower than the total for the entire previous year, which stood at US$3.9 billion.

March 2024 witnessed a sustained rise in foreign exchange inflows, driven by increased investor interest in short-term sovereign debt following a recent adjustment to benchmark interest rates.

Government securities issuances, particularly in March, were oversubscribed, with foreign investors accounting for over 75% of bids received at auctions.

Governor Olayemi Cardoso’s strategic measures, outlined during the Monetary Policy Committee meeting and a conference call with foreign portfolio investors, focused on curbing inflation, stabilizing the exchange rate, and fostering confidence in the banking system and economy.

The CBN’s proactive approach under Governor Cardoso’s leadership has successfully attracted increased dollar inflows, contributing to improved reserves and liquidity in the foreign exchange market

Nigeria faces soaring inflation driven by speculation-induced exchange rate volatility, global supply chain disruptions, and persistently high energy costs since a midyear global price spike in 2023.

While concerns linger that the CBN’s hawkish monetary policy may stifle credit to the real sector, structural constraints have already limited financial sector credit exposure to key sectors like agriculture and logistics, which collectively sit below 8%.

Targeted fiscal interventions should aim to bridge liquidity gaps for farmers and invest across the value chain, mitigating post-harvest losses and improving the risk profile of the sector.

Excess liquidity in the financial sector fuels speculative demand for the dollar, prompting the Central Bank of Nigeria (CBN) to clean up the market.

Despite progress in stabilizing the exchange rate, the timeline for real price discovery remains uncertain. Less than a third of the money supply is in demand deposits and currency outside banks, underscoring the need for redistributive measures to counter cost-push inflation which is outpacing growth in effective demand.

As the CBN navigates the market clean-up, the delicate balance between stabilizing inflation, supporting economic sectors, and fostering real price discovery will be pivotal for Nigeria’s economic resilience.

Ongoing fiscal initiatives play a crucial role in mitigating the impact on key sectors and fostering sustainable economic growth.

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