Nigeria: Trade balance records NGN 927bn surplus in Q1 as oil production improves

• Crude oil exports drop 8% y/y on lower oil prices; Nigeria's oil production remains way below target
• Imports drop 26% due to FX rationing, lower commodity prices, and economic activity disruptions
• Fuel imports got more expensive as costly petrol subsidy encourages consumption
• Nigeria plans to remove petrol subsidy in H2, which has become unsustainable, but unions threaten with action
• Pressures on trade balance to intensify in Q2 as oil production dropped in April due to oil workers' strike

Nigeria's external trade balance recorded NGN 927bn (USD 2.0bn) surplus in Q1 compared to NGN 997bn surplus in Q4 2022 and a deficit of NGN 394bn in the first quarter of 2022, according to the statistics office. The improvement in the balance in comparison to Q1 2022 was entirely due to falling imports, reflecting softer commodity prices and slowing demand, as export revenues fell on the year. Consequently, the 12-month rolling balance recorded NGN 2.5tn surplus in March (1.2% of full-year GDP) compared to NGN 1.0tn deficit as of end-December 2022. It should be noted the trade deficits recorded since the pandemic broke out were larger than the deficits recorded during the previous oil shock (2014-2016), when militant attacks crippled the oil sector. This sharp deterioration suggests Nigeria's economy has become more vulnerable to external shocks due to the lack of structural reforms. Further, the official FX rate is much stronger than the one used by consumers and the informal economy, which means the trade balance should be interpreted with caution. Finally, we believe the weak imports also reflect FX rationing that has crippled the economy and worsened the supply challenges.

Despite the 2022 oil price rally, Nigeria is not reaping that much from its crude sales because oil production has remained significantly below target and Nigeria continues to buy refined crude at high prices due to the moribund state of domestic refineries. Food and fuel together account for one third of total import, underlining Nigeria's vulnerability to external shocks. Looking at Q2, we expect the trade balance to come under severe strain as oil prices weakened further and Nigeria's oil production tanked in April after a two-week strike by ExxonMobil workers. Overall, the external account has remained vulnerable to shocks due to the lack of structural reforms, Nigeria's heavy reliance on oil revenues, and security challenges that cripple the onshore oil production sector.

In the breakdown, total export revenue (fob) fell 8.7% y/y, due to lower crude oil and gas prices, which offset the marginal gains in oil output (1.51 bpd in Q1 2023 vs 1.49mn bpd in Q1 2022). Nigeria has been struggling to meet its output target agreed with OPEC+ due to numerous production setbacks, although oil production is set to improve this year from the lows of 2022. Meanwhile, the share of non-oil exports (adjusted for re-exports) is still very low and the economy remains dependent on the oil sector and thus exposed to external shocks. Some of Nigeria's cash crops are vulnerable to adverse weather conditions, while the rising insecurity drags on the country's food production and supply, while the acute infrastructure deficit makes local manufactured products not competitive on the foreign markets.

Imports dropped strong 26% y/y in the review quarter after falling 10% y/y previously. In the breakdown, lower imports of machineries, boilers and appliances; vehicles; and chemicals helped contain the import bill and offset increases in fuel and food imports. It should be noted that Nigeria experienced severe cash shortages during Feb-March on top of crippling fuel shortages that had negatively affected manufacturing and the industry, hence part of the drop in imports. Private consumption has been under pressure due to double-digit inflation and persistent unemployment. Many manufacturing companies work below maximum capacity due to a myriad of economic challenges, but the country relies heavily on food and fuel imports, so the import bill is set to remain elevated. Overall, Nigeria's heavy reliance on oil exports and food and fuel imports suggest the external account will remain under pressure in 2023, but there is some hope for 2024 when the massive Dangote's refinery becomes fully operational. Fuel imports account for a large chunk of the import bill so the refinery has the potential to lift the economy, save FX liquidity and provide jobs. Nigeria had also decided to remove the costly petrol subsidy in June, which had eroded the gains from export revenues and poses debt sustainability concerns. The labour unions have already kicked against the announced decision and it remains to be seen whether President Tinubu will succeed in abolishing the subsidy, which has been mired in corruption and waste.