Before the storm

I know I know. You all want to know what the deal is with the collapsing oil prices and the turbulence in global financial markets, and what all that means for the Nigerian economy. More on that later in the week once the dust settles a bit. But before then we have more data points on the conditions before the storm.

Last week the NBS released the foreign trade report. For context the Naira has been rather heavily overvalued over the past year or two. And we know that overvalued currencies tend to tip the scales towards imports. The foriegn trade report is yet another data point showing the effects of that macro-imbalance.

For the first time since 2016 we had a quarterly negative trade balance in goods. We have not had one since 2016 and remember, 2016 was when oil prices and production really collapsed. So, that trade balance was as a result of a collapse in exports. This time around it was due to a surge in imports, although exports fell a bit too.

The largest imports still remain machinery and transport equipment at just about 50 percent of all imports, followed by fuels at about 16 percent, and then chemicals at about 10 percent. In case you were wondering, food imports which are often the target of protectionist rhetoric accounted for only seven percent of imports in the fourth quarter.

The official surge in imports might be related to the border restrictions implemented through most of the fourth quarter. If unofficially smuggled imports become official then offical numbers rise. One to keep in the back your minds. Still, there is an interesting statistic in the report published by the NBS with regards to the border closure.

Majority of our manufactured imports come from the rest of the world, specifically outside Africa. But most of our manufactured exports go to Africa. Only 1.4 percent of manufatured imports was from Africa (down from 2.1 percent in Q3) whereas 81 percent of our manufactured exports were to African countries in Q4. Down from 94.7 percent in Q3. You can think about that in the context of who the border closure is hurting more.

It is also good to remember that this is just a trade in goods deficit. We typically have a very large services trade deficit so imagine adding that on top of this. I guess the CBNs Q4 balance of payments data will be explosive when it is eventually released. Which should be soon.

All this just demonstrates that the Naira, even before this round of oil price hiccups, was already seriously overvalued. So what happens when an overvalued currency hits a negative terms of trade shock? Stay tuned.