The linkage that exists in international trade has put Nigeria at the receiving end of the current economic misfortunes of its trading partners in US and Eurozone, but a shift of attention to emerging markets could save the day, reports Festus Akanbi
One burning economic issue in the country today is the controversy generated by the implementation of the 2012 budgets. Responding to an enquiry during a summon by the National Assembly a fortnight ago over the speculation that Nigeria was broke, Co-ordinating Minister of the Economy and Minister of Finance, Dr.Ngozi Okonjo-Iweala, insisted Nigeria is not broke. However, with the ominous signals coming from the nation’s export market, analysts said there are fresh challenges that threaten the Nigerian export market and the economy as a whole.
There is Cause for Alarm
Insisting there is cause for alarm over the fresh threats posed by the escalation of the economic misfortune currently plaguing Nigeria’s major trading partners in Europe and America, analysts warned that a further contraction in the US and Euro zone could result in a significant drop in the demand for oil, as those regions together account for 64.43 percent of Nigeria’s total export value.
They warned that the overall effect would put a dent on Nigeria’s export receipts and could result in major adjustments to the country’s revenue, expenditure and growth. Nigeria’s major trading partners remain Europe and the US.
However, these regions are currently experiencing slow growth and are in an economic recession. The US unemployment rate remained above eight percent in June, recording a slow job growth of 80,000 jobs. In Q1’12, the US GDP grew by only 1.9 percent, reflecting a weakening demand by Nigeria’s top oil consumer.
Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, who raised the alarm said the problem is exacerbated by the fact that the campaign build-up towards the November election is expected to promote domestic industries and products, which will result in a decline in the US import level, saying categorically that a decline in importation will result in a possible decrease in the US demand for Nigerian exports. Speaking in a bio-monthly publication of the company, released a fortnight ago, Rewane said, “The euro zone is on the brink of a collapse with the possibility of some major economies defaulting on their budgetary targets. Spain, which is the destination for 7.86 percent of Nigeria’s exports, is already in recession, while the Netherlands’ economy, Nigeria’s largest trading partner in the euro zone, has contracted by 1.3 percent (y-o-y) in the last three quarters.”
Nigeria’s Revenue Stream
This scenario, he warned could affect Nigeria’s revenue, which is dominated by oil (which accounts for over 80 percent of total exports). An economic slowdown of any of Nigeria’s trading partners will have serious negative consequences on Nigeria’s terms of trade and economic performance. However, our view is that a modest output expansion in the US in Q3’12 will result in a steady performance in the Nigerian economy. This will guarantee continued growth in government revenue and spending, with positive implications for Nigeria’s trade balance.
Similar fears were raised by a Lagos-based financial analyst, Mr. Kingsley Udofia, who said the turmoil in the US and Eurozone could cause upsets in Nigeria’s export proceeds.
Recent statistics on Nigeria’s crude oil export to the US are also scary. For instance, Nigeria’s crude export to the US, which was over one million barrels per day (bpd) in December 2009, has declined to 352,000bpd, representing a loss of about 70 per cent of its oil exports to the country.
Citing recent data from the United States Energy Department, the Global Water and Energy Strategy Team (GWEST), a Washington-based consulting firm said in its latest report that Nigeria was the third-largest supplier of crude oil to the United States in 2010, with the US accounting for 43 per cent of Nigeria’s exports. GWEST, which specialises in the geo-politics of strategic resources, noted that Nigeria was closely behind Canada and Mexico in oil export to the United States.
The report indicated that in September 2011, Nigeria’s crude exports to the United States dropped to 580,000bpd, with the country assuming the sixth position, after Canada, Saudi Arabia, Mexico, Venezuela and Russia.
Nigeria’s crude export to the United States further dwindled to 352,000bpd by February 2012, signaling a decline in trade between the two countries that dates back to 1961, when Texaco Overseas began operations in Nigeria.
Emerging Economies to the Rescue
In order to hedge the country’s economy against the danger signal from its major trading partners, Rewane said Nigeria can enhance its trade ties with emerging economies such as China and India because despite the global economic contraction, these countries continue to show fast and stable growth. China is the world’s second-largest economy growing, at 7.6% (Q2’12) while India, Nigeria’s leading trade partner by country of destination, is growing at 5.3% (Q1’12).
According to the FDC boss, fostering trade with African countries is another avenue that needs to be explored to ensure a positive trade balance in Nigeria.
“Trading with neighbouring countries will minimise costs and will encourage bilateral agreements. For instance, importing palm oil from the Ivory Coast is both easier and faster than importing from Malaysia and Indonesia.
“Finally, encouraging production (for example, through the provision of tax incentives for local manufacturers) and stimulating domestic demand will reduce exposure to external shocks. In China for instance, the government has employed various measures to stimulate domestic demand and balance trade growth. Nigeria can take a cue from this,” he said.
Nigeria’s Balance of Trade
A breakdown of the Nigeria’s balance of trade reveals that Nigeria’s import bill stood at N1.65 trillion in Q1’12, representing a decline of 46.95% from Q1’11. The importation of motor vehicles, aircraft and associated parts contributed the most to total imports, characterising 35 percent of the total import value. Available data also shows that Nigeria’s top five trading partners in Q1’12 were China, US, UK, Brazil and India. By region, Asia ranks first, constituting 37.4 percent of total imports (N617.7bn). Europe and the US constitute 32.5 percent and 23.9 percent respectively of Nigeria’s total imports, while African countries contribute 3.6 percent.
Meanwhile, Nigeria’s balance of trade (BoT) increased significantly year-on-year (y-o-y) by almost 3,000 percent to N3.32 trillion in Q1’12, as against the Q1’11’s figure of N110.17 billion. The substantial y-o-y increase, according to the National Bureau of Statistics (NBS), was largely a result of a decline in the importation of mineral products in the first quarter of 2012.
However, on a quarterly basis, the BoT declined by 42.16 percent over the Q4’11 figure of N5.74trn, which is attributed to a drop in the exports of non-oil items. With regards to the total merchandise trade (i.e. the sum of exports and imports), Nigeria’s trade value in Q1’12 rose y-o-y by 4.7% to N6.62 trillion, from the N6.32 trillion recorded in Q1’11, and declined by 22.4% in comparison to Q4’11.
The lower import bill is largely attributed to the decline in the importation of mineral products especially processed fuels and lubricants. This decline coincides with the probe into fuel subsidy payments, which has exposed the oil and gas sector to a lot of scrutiny.
In contrast to imports, Nigeria’s exports rose by 54.4% to N4.97trn y-o-y in Q12. This rise was driven by both crude and non-crude oil exports. Europe is currently leading the pack, with respect to Nigeria’s top five destination markets by region in Q1’12, purchasing 36.6% of total exports valued at N1.82 trillion. The US follows with 27.9%, Asia with 22.4% and Africa purchasing 10.8%. Nigeria’s top five leading export trading partners by country are India, the US, the Netherlands, Spain and Brazil..