Nigeria recorded a significant current account surplus of $5.14 billion, or 11.46% of GDP, in the second quarter of 2024. This marked an improvement from the $3.38 billion (7.35% of GDP) surplus reported in the previous quarter, reflecting a positive shift in the nation’s external balance. According to data from the Central Bank of Nigeria (CBN), this surplus was largely driven by reduced import bills, steady remittance inflows, and a trade surplus. These factors helped stabilize the naira against the U.S. dollar, which stayed in the N1,450-N1,500 range during the quarter.
Key Drivers of the Current Account Surplus
- Trade Surplus:
- The main contributor to Nigeria’s current account surplus was the trade balance, which strengthened due to lower merchandise imports and stable oil prices.
- Crude oil production slightly decreased from 1.33 million barrels per day (mbpd) in Q1 to 1.27 mbpd in Q2. Despite the drop in production, the average price of Bonny Light crude rose to $86.97 per barrel from $85.58 in the previous quarter, providing some buffer against the revenue shortfall caused by lower output.
- Merchandise imports dropped by 20.59%, from $10.88 billion in Q1 to $8.64 billion in Q2, primarily due to a reduction in petroleum product imports, which fell from $4.31 billion to $2.79 billion. This decline, along with lower non-oil imports, contributed significantly to Nigeria’s improved trade balance.
- Robust Remittance Inflows:
- Remittances from Nigerians living abroad continued to provide a strong cushion for the economy, with $5.78 billion in inflows in Q2 2024, up from $5.14 billion in Q1.
- The steady remittance inflows helped stabilize the naira, mitigating volatility in the foreign exchange market.
- Secondary Income Surplus:
- The secondary income surplus, driven largely by remittances, continued to support the current account, further helping to stabilize Nigeria’s external balance.
Challenges and Growing Deficits
Despite the overall positive performance in the current account, some areas continued to show signs of strain:
- Service Account Deficit:
- Nigeria’s service account deficit grew to $3.47 billion from $3.26 billion in Q1 2024, primarily due to a rise in payments for business and travel services. Outlays for business services nearly doubled, increasing to $1.41 billion from $0.71 billion, and travel payments grew by 4.76% to $1.10 billion.
- While this increase in service payments did not threaten overall foreign exchange stability, it contributed to the widening gap in Nigeria’s external payments.
- Primary Income Deficit:
- Nigeria’s primary income deficit also grew by 2.07%, reaching $2.47 billion in Q2 2024, up from $2.42 billion in Q1.
- This increase was driven by reinvested earnings by non-resident investors, suggesting that while foreign interest in Nigeria remains, the country’s reliance on foreign capital continues to impact its primary income balance.
Financial Account: Surge in Portfolio Investment Inflows
On the financial account, Nigeria saw a notable increase in portfolio investment inflows, which were a significant contributor to the overall growth in liabilities.
- Liabilities surged to $2.27 billion in Q2 2024, reversing a net reduction of $5.03 billion in Q1.
- Portfolio investments, particularly in short-term debt securities, accounted for a large portion of this shift, with portfolio investment liabilities rising sharply from $1.40 billion in Q1 to $4.42 billion in Q2.
- This reflects a growing attraction of short-term debt securities to global investors, seeking Nigeria’s relatively high yields. However, the reliance on portfolio investments, as opposed to direct foreign investment, could expose Nigeria to future vulnerabilities if global market conditions change.
Outlook: Stability Amid External Pressures
While Nigeria’s current account surplus in Q2 2024 helped strengthen the naira and contributed to forex stability, concerns about rising forex demand began to emerge in Q3.
- The naira depreciated sharply in the second half of 2024, as demand for dollars surged, driven by businesses seeking to meet year-end obligations and speculative activities in anticipation of potential government reforms.
- As oil revenues remain volatile and the country’s reliance on short-term portfolio inflows persists, Nigeria’s forex stability is likely to face challenges in the coming months, particularly if external factors or policy shifts disrupt the forex supply chain.
What Does This Mean for Nigeria’s Economy?
The current account surplus in Q2 2024 represents a positive development for Nigeria’s external balance, with lower import bills, stable oil prices, and consistent remittance inflows supporting the naira. However, external vulnerabilities remain, particularly with:
- The rise in service payments and primary income deficits, which may weigh on the longer-term sustainability of the current account balance.
- Rising forex demand and speculative pressures, which have put downward pressure on the naira as the year progresses.
- A reliance on portfolio inflows instead of direct foreign investment, which may not be as resilient in the face of global market fluctuations.
As Nigeria navigates these challenges, the future of its foreign exchange stability will depend on its ability to diversify sources of forex inflows and manage its external deficits, particularly in services and primary income, which continue to exert pressure on the country’s balance of payments.
