By Khadijat Kareem and Ode Uduu
Nigeria recorded a N3.171 trillion trade balance within the first half of 2022. This shows that the country has enjoyed a positive trade balance in the year, recovering from the deficit of N1.936 trillion experienced in 2021.
Nigeria recorded a trade surplus in 2018 of N5.37 trillion. This dropped to N2.23 trillion in 2019. However, foreign trade activities in 2020 and 2021 ended in trade deficits, depicting that Nigeria imports more than it exports. In 2020, the country recorded an N178.26 billion trade deficit, which increased to N1.94 trillion in 2021.
There was an improvement in 2022, as Nigeria returned to its pre covid era of trade surplus. Within the year’s first half, the country recorded N3.17 trillion in trade surplus. This was attributed to the increase in crude oil export within the period.
When the volume of goods imported exceeds that exported, it results in a negative trade deficit. This negatively affects the country’s exchange rate, devaluing the local currency compared to foreign currency. A positive trade balance is the opposite of that and translates to increasing demand for the country’s goods.
By extension, increasing demand for the country’s goods also means increasing demand for its currency and Nigeria’s export exceeding import shows an increasing demand for the naira vis-à-vis the dollar.
The increase in a country’s export relatively influences the value of its local currency, increasing its value vis-à-vis international currencies. In simple terms, the country’s currency performs better against the dollar. In Nigeria’s case it would mean the exchange rate of naira to dollars, during a period of trade surplus will be lesser.
The Paradox: Positive Trade Balance, Imbalanced Currency
However, when Nigeria experienced an increase in its trade balance, its exchange rate reached an all-time peak, averaging N415.01 to a dollar in June 2022. The country is yet to benefit from the impact of its trade surplus and foreign exchange rates have only increase within the period.
The exchange rate movement shows a steady rate from 2018 to 2019, where it moved from N305 to N306 to a dollar as the trade surplus dropped from N5.37 trillion to N2.23 trillion.
When the country experienced a trade deficit in 2020, the exchange rate increased to N327 at the beginning of the year and ended at N360 by year-end. In 2021 when the trade deficit deepened, the exchange rate went from N397 to N411 to a dollar from the beginning of the year to the end.
However, while the country had a trade surplus in 2022, closing at N3.17 trillion by June, the exchange rate has increased over its 2021 figure to N415.
This abnormal relationship between Nigeria’s trade surplus and its currency’s depreciation might be explained by the Marshall-Lerner condition. This refers to the proposition that the devaluation of a country’s currency will lead to an improvement in its balance of trade if the sum of the price elasticities of its exports and imports is greater than one.
Nigeria does not appear to fit the bill to assert this condition.
Nigeria is largely a one-sector export economy and this trade surplus can perhaps be explained by the increase in crude prices, Nigeria’s chief export. The price of crude per barrel hit an all time high of $122.7/bbl in June and in the period under review (January to June) crude prices have gone up for the most part and has far exceeded the country’s crude price benchmark of $57 per barrel.
It is a logical assumption that the increase in crude prices is what is accounting for the increase in export value and so the trade surplus. In fact, Nigeria’s crude exports have actually reduced and in July, Nigeria slipped behind Angola as Africa’s largest exporter according to OPEC figures.
Which means the oil export trade actually suffered within the time period and the increase in crude prices could potentially be covering for what might have been a greater trade deficit.
The paradox is yet another pointer to the urgent need for Nigeria to diversify its economy to improve real trade balance that will actually impact on the value of its currency. The agricultural sector is one whose potential value could greatly improve Nigeria’s diversification efforts but investments in the sector needs to increase to match its potential.
Dr Geraldine Nzeribe, senior lecturer at Nnamdi Azikiwe University’s Department of Economics described Nigeria’s positioning as a largely mono-economic country as precarious, exposing the country to unhealthy external shocks and macroeconomic instability. According to her, “Diversifying Nigeria’s mostly oil-based economy to increase the contributions of other sectors like agriculture, manufacturing, mining etc. will boost its positioning as a strong contender in the global market. Diversifying the economy away from oil, will improve the country’s trade balance and the value of the naira.