Economic analysts project that Nigeria’s trade surplus and foreign portfolio investment (FPI) inflows will persist into Q4 2024 and early 2025, driven by the weakened Naira, robust global demand for crude oil, and a high-interest-rate environment. While these factors present opportunities for foreign exchange earnings and trade balance, they pose challenges for domestic investment and long-term economic growth.
Key Drivers of Sustained Trade Surplus
1. Weakened Naira Boosting Export Competitiveness
The Naira’s depreciation has made Nigerian exports more competitive globally, particularly for crude oil, agricultural produce, and manufactured goods. According to Cowry Assets Management Limited, the devaluation has significantly enhanced Nigeria’s trade surplus by making exports more affordable for international buyers.
- Agricultural Exports: Cocoa, sesame seeds, and other cash crops have gained traction in global markets despite challenges such as infrastructure deficits.
- Non-Oil Exports: Increasing contributions from manufactured goods and agricultural products underscore the government’s efforts to diversify the economy.
2. Crude Oil and Refinery Expansion
Nigeria’s export capacity is poised to grow with improved crude oil production and the expected commencement of operations at the Dangote Refinery and the revitalized Port Harcourt Refinery in 2025. This development will enhance Nigeria’s ability to process crude locally, reducing import dependency while increasing export volumes.
3. Regional Trade Performance
Nigeria has recorded substantial trade surpluses with key regions in Q3 2024:
- Africa: N5.0 trillion
- America: N5.5 trillion
- Europe: N8.5 trillion
- Oceania: N37.4 billion
However, the country posted a trade deficit of N4.0 trillion with Asia, primarily due to the high demand for imports from countries like China and India.
Challenges in Non-Oil Export Growth
Despite the positive trade surplus, significant gaps remain in value-added non-oil exports, which are crucial for maximizing foreign exchange inflows. Analysts draw parallels to China’s export model, which leverages a competitive currency and robust industrial policy to dominate global trade. Nigeria could achieve similar outcomes by:
- Investing in Export-Oriented Industries: Focused subsidies and grants for sectors such as agriculture and manufacturing.
- Improving Supply Chains: Streamlined logistics and storage infrastructure to reduce export bottlenecks.
- Enhancing Product Standards: Meeting international quality certifications to compete in premium markets.
Foreign Portfolio Investments: A Mixed Blessing
1. High Interest Rates Attracting Capital
Nigeria’s Monetary Policy Rate (MPR), raised to 27.50% in December 2024, has attracted foreign portfolio investments (FPI) seeking high yields.
- Capital Inflows: $1.25 billion was recorded in Q3 2024, a 91.35% increase year-on-year.
- Speculative Nature: 82.81% of these inflows were directed toward money market instruments, including Treasury bills and bonds, offering limited benefits to the real economy.
2. Stagnation in Foreign Direct Investment (FDI)
While FPI surged, foreign direct investment (FDI), a more stable and growth-oriented inflow, totaled just $145.6 million in Q3 2024, representing a marginal 3.4% increase from 2023. Analysts attribute this stagnation to:
- High borrowing costs for businesses.
- Inconsistent policies deterring long-term investors.
- Poor infrastructure limiting economic opportunities.
Impact on Domestic Investment and Growth
1. Expensive Credit and SME Struggles
High interest rates have made borrowing prohibitively expensive for small and medium-sized enterprises (SMEs), which account for over 90% of Nigerian businesses and contribute nearly 48% to GDP.
- Average Lending Rates: Commercial loans range from 22% to 30%, stifling business expansion and innovation.
- Private Sector Credit Growth: Slowed to 4.1% in 2024, compared to 7.5% in 2023, according to the Central Bank of Nigeria (CBN).
2. Decline in Manufacturing Capacity
Data from the Manufacturers Association of Nigeria (MAN) revealed a decline in manufacturing capacity utilization from 55% in Q3 2023 to 49% in Q3 2024, further limiting industrial output.
Sectoral Impacts of High Interest Rates
Real Estate
The real estate sector has been heavily impacted, with mortgage rates rising as high as 26%, making homeownership unattainable for many Nigerians and constraining property development.
Agriculture and Non-Oil Exports
While the weakened Naira has boosted export competitiveness, high production costs and global competition have resulted in a 6.2% decline in non-oil export revenue in Q3 2024, according to the Nigeria Export Promotion Council (NEPC).
The Path Forward: Balancing Growth and Stability
The CBN faces a delicate balancing act in maintaining high interest rates to attract foreign capital while addressing their adverse effects on domestic investment and economic growth. Analysts recommend the following measures:
1. Gradual Reduction in MPR
Lowering the MPR as inflation eases could make credit more accessible, stimulate local investments, and support SME growth.
2. Infrastructure Development
Investments in power, transportation, and digital connectivity would reduce production costs and enhance Nigeria’s export competitiveness.
3. Diversifying Capital Inflows
Expanding local equity and bond markets could reduce reliance on short-term foreign investments.
4. Strengthening Non-Oil Exports
Government support for non-oil exports through subsidies, grants, and improved logistics would help stabilize foreign exchange earnings and diversify the economy.
Global Economic Dynamics and Risks
As global markets evolve, Nigeria’s economic trajectory will depend on how well it navigates external pressures:
- Potential U.S. Federal Reserve Rate Cuts in 2025: This could lead to capital outflows from emerging markets, including Nigeria, as investors seek safer assets in developed economies.
- Global Oil Prices: Sustained demand for crude oil is critical for Nigeria’s trade surplus, but price volatility poses a risk to revenue stability.
Conclusion: Opportunities Amid Challenges
While Nigeria’s high interest rate environment and weakened Naira have bolstered trade surplus and attracted foreign investments, they have also exposed the economy to significant structural challenges. Balancing these dynamics will require targeted reforms to boost domestic production, attract stable FDI, and enhance non-oil exports.
As 2025 approaches, Nigeria’s ability to sustain economic resilience will hinge on its commitment to diversification, strategic policy implementation, and addressing the constraints on local businesses.
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