See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/315045965

Balance of Payments, with a Focus on Nigeria

Article  in  SSRN Electronic Journal · January 2016

DOI: 10.2139/ssrn.2898282

CITATIONS READS
0 7,746

1 author:

Hans E. Alagoa
UGSM-Monarch Business School
96 PUBLICATIONS   9 CITATIONS   

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

Global Merchandise Trade View project

Inter-Africa Trade 2019 View project

All content following this page was uploaded by Hans E. Alagoa on 26 September 2018.

The user has requested enhancement of the downloaded file.

 TITLE

Balance of Payments, with a Focus on Nigeria

By
Hans E. Alagoa

ABSTRACT
As acknowledged in Bekaert and Hodrick (2012), to understand the concepts of foreign

exchange markets, an understanding of the economic forces that cause exchange rate to fluctuate

is required. Exchange rates respond to demand and supply to trade currencies. Demands and

supplies to trade currencies arise from international trade flows and international capital flows.

A lot of useful information about these international flows is provided by the balance of

payments of countries. The balance of payments of countries record the payments between the

residents of one country and the rest of the world over a given time period. It thus sheds light on

the supply and demand for various currencies, the possible evolution of their exchange rates, and

the health of the global financial marketplace in general (Bekaert and Hodrick, 2012).

Balance of payments information are thus relevant to a slew of stakeholders. Stakeholders such

as the press, economists and other academics, politicians, currency analysts, and currency

traders, follow the trends in balance of trade information because they know that they influence

the movements, either up or down, of exchange rates.

In this essay, foreign exchange, international capital and trade flows, and the Balance of

Payments of countries, are discussed. How balances on various subaccounts of the balance of

payments, are linked to domestic and international saving and investment decisions; and the

Electronic copy available at: https://ssrn.com/abstract=2898282

relationship between the Balance-of-Payments of a country and its GDP (which is an important

indicator of a country’s financial and economic health); will be discussed in the process.

1.0 NIGERIA

1.1 Background
The World Factbook, CIA (2015) offers the following background information about Nigeria:

British influence and control over what would become Nigeria and Africa's most

populous country grew through the 19th century. A series of constitutions after World

War II granted Nigeria greater autonomy. After independence in 1960, politics were

marked by coups and mostly military rule, until the death of a military head of state in

1998 allowed for a political transition. In 1999, a new constitution was adopted and a

peaceful transition to civilian government was completed. The government continues

to face the daunting task of institutionalizing democracy and reforming a petroleum-

based economy, whose revenues have been squandered through corruption and

mismanagement. In addition, Nigeria continues to experience longstanding ethnic and

religious tensions. Although both the 2003 and 2007 presidential elections were marred

by significant irregularities and violence, Nigeria is currently experiencing its longest

period of civilian rule since independence. The general elections of April 2007 marked

the first civilian-to-civilian transfer of power in the country's history and the elections of

2011 were generally regarded as credible. The 2015 election is considered the most well

run in Nigeria since the return to civilian rule, with an umbrella opposition party, the All

Progressives Congress (made up of several opposition parties), defeating the long-ruling

Peoples Democratic Party that had governed since 1999.

Electronic copy available at: https://ssrn.com/abstract=2898282

1.2 Economy Overview

The World Factbook, CIA (2015) mentions the following regarding the economy of Nigeria:

Following an April 2014 statistical "rebasing" exercise, Nigeria has emerged as

Africa's largest economy, with 2014 GDP estimated at US$479 billion. Oil has been a

dominant source of government revenues since the 1970s. Regulatory constraints and

security risks have limited new investment in oil and natural gas, and Nigeria's oil

production contracted in 2012 and 2013. Nevertheless, the Nigerian economy has

continued to grow at a rapid 6%-8% per annum (pre-rebasing), driven by growth in

agriculture, telecommunications, and services, and the medium-term outlook for Nigeria

is good, assuming oil output stabilizes and oil prices remain strong. Fiscal authorities

pursued countercyclical policies in 2011-13, significantly reducing the budget deficit.

Monetary policy has also been contractionary. Following the 2008-9 global financial

crises, the banking sector was effectively recapitalized and regulation enhanced. Despite

its strong fundamentals, oil-rich Nigeria has been hobbled by inadequate power supply,

lack of infrastructure, delays in the passage of legislative reforms, an inefficient property

registration system, restrictive trade policies, an inconsistent regulatory environment, a

slow and ineffective judicial system, unreliable dispute resolution mechanisms,

insecurity, and pervasive corruption. Economic diversification and strong growth have

not translated into a significant decline in poverty levels - over 62% of Nigeria's 170

million people live in extreme poverty. President Maj.Gen. (ret.) Muhammadu BUHARI

has established an economic team that includes experienced and reputable members and

has announced plans to increase transparency, continue to diversify production, and

 further improve fiscal management. The government is working to develop stronger

public-private partnerships for roads, agriculture, and power.

1.3 Country Data

Table 1 below contains information about Nigeria that is relevant to this essay.

Table 1: COUNTRY DATA - NIGERIA

CATEGORY VALUE
Area 923,768 Sq Km

Population 181,562,056 (estimate 2015)

Government Federal Republic

Currency Nigerian Naira (N)

GDPNominal (2014) $568.5 Billion (2014)

GDP per CapitaNominal (2014) $3,203.30 Billion (2014)

GDP (PPP) (2014) $1,049.1 Billion (2014)

GDP (PPP) per Capita (2014) $5,911 Billion (2014)

Total Exports (2014) $91,530 Billion (2014)

Exports - Commodities (2014) Fuels 94%; Others 6%

Exports - Partners (2014) India 15.4%, Brazil 10.2%,

Netherlands 8.6%, Spain 8.5%
S. Africa 5.5%, France 5.4%
Germany 5.1%, Japan 4.4%

Total Imports (2014) $80.160 Billion

Imports - Commodities (2014) Machinery, Chemicals,

Transport Equipment,
Manufactured Goods,
Food, and Live Animals

Imports - Partners (2014) China 25.3%, U.S. 9.7%%,

India 4.7%

Human Development Index (HDI, 2013) 0.504 (Low)

Source: International Monetary Fund, UNCTADstat, World Factbook

2.0 BALACE OF PAYMENTS: CONCEPTS AND TERMINOLOGY

A country’s balance of payments (BOP) records the value of the transactions between its

residents, businesses, and government with the rest of the world for a specific period of time,
such as a month, a quarter, and usually a year. Thus, the balance of payments summarizes the

international flows of goods and services and changes in the ownership of assets across

countries. (Bekaert and Hodrick, 2012).

2.1 Major Accounts of the Balance of Payments

The BOP comprises two major accounts: the Current Accounts and the Capital Account.

Compliance with recommendations of the International Monetary Fund (IMF) has resulted in

most countries renaming the Capital Account as the “Financial Account”. However the

terminology Capital Account has a long tradition and continues to be used in the financial press,

and as such is used in this essay as Financial / Capital account.

As will soon become evident, the balances on the Current account and on the Capital / Financial

account play a much larger role than the balance of payments. (Abel, Bernanke, and Croushore,

2008).

2.1.1 Current Account Transactions

The Current Account records the following:

Goods and Services transactions (Imports, which are purchases of goods and services from

foreign residents; and Exports, which are sales of goods and services to foreign residents).

(Bekaert and Hodrick, 2012).

Transactions associated with the income flows from the ownership of foreign assets (Dividends

and Interest paid to domestic residents who own foreign assets as well as Dividends and Interest

paid to foreign residents who own domestic assets). (Bekaert and Hodrick, 2012).

Unilateral transfers of money between countries (Foreign Aid, Gifts, and Grants given by the

residents or governments of one country to those of another). (Bekaert and Hodrick, 2012).
Every Current Account transaction can be considered to have a corresponding flow of foreign

money associated with it, and this flow of foreign money is recorded as a Capital Account

transaction. The following examples illustrate the recording on the BOP of export and import

transactions;

Commercial Exports of Goods: Suppose Shell Nigeria, a subsidiary of Royal Dutch Shell an

Anglo–Dutch multinational Oil and Gas Company, sells $50 million worth of Petroleum Crude

Oil to BP Rotterdam Refinery. What are the credit and debit items on the Nigeria Balance of

Payments?

First, the Nigerian subsidiary of a multinational oil and gas company is selling goods to a foreign

firm, resulting in the export of goods from Nigeria. This is a Credit on the Nigerian Balance of

Payments because it give rise to a conceptual inflow of foreign money to Nigeria. Second, the

receipt of the $50 million (Naira equivalent) by Shell Nigeria increases foreign (Nigerian)

ownership of European assets. This is a debit transaction on the Nigerian BOP Capital Account

because if this transaction was done separately, Shell Nigeria would have had to buy dollar ($ )

equivalent of Nigerian naira (oil and gas transactions are almost always done in U.S. $). In

summary, the transactions on the Nigeria BOP are thus:

Table 2: Commercial Export of Goods on the Balance of Payments

NIGERIA BOP CREDIT DEBIT

Crude Oil Purchase by BP Rotterdam Refinery from Shell Nigeria $50 million (Naira equivalent)
(Current Account : Nigeria Goods Export)

Crude Oil Sold by Shell Nigeria to BP Rotterdam Refinery $50 million (Naira equivalent)
(Capital Account : Capital Outflow from Nigeria)

If the above transactions were listed without the Credit and Debit titles, the Export of goods

would receive a ( + ), and the Capital Outflow would receive a ( - ).

Commercial Imports of Services: Suppose the Niger Delta University, buys $2.0 million worth

of consulting services through the Lagos office of the New York headquartered McKinsey and
Company. What are the credit and debit items on the Nigeria Balance of Payments?

First, a Nigerian institution is buying services from a foreign firm, McKinsey and Company.

This is a Nigerian import of services. This gives rise to an outflow of funds from Nigeria and is

thus a debit to the Nigerian Current Account. Second, the receipt of the $20 million (Naira

equivalent) by McKinsey and Company increases foreign (U.S.) ownership of Nigerian assets.

This is a credit transaction on the Nigerian Capital Account because if this transaction was done

separately, McKinsey and Company would have had to buy Nigerian naira directly with dollars.

In summary, the transactions on the Nigeria BOP are thus:

Table 3: Commercial Import of Services on the Balance of Payments

NIGERIA BOP CREDIT DEBIT

Niger Delta U. purchase of Consulting Services from McKinsey and Co. $2.0 million (Naira equivalent)
(Current Account : Nigeria Goods Import)

Mckinsey Co. provides Consulting Services to Niger Delta U. $2.0 million (Naira equivalent)
(Capital Account : Capital Inflow to Nigeria)

If the above transactions were listed without the Credit and Debit titles, the Import of Services

would receive a ( - ), and the Capital Inflow would receive a ( + ).

Interest and Dividend Receipts and Payments

The Current Accounts also records receipts and payments of dividend and interest income across

countries. Dividends from foreign stocks and interest income on foreign bonds give rise to

inflows of foreign money and are, therefore, credit items on balance of payments. The following

example illustrates the recording on the BOP of investment income;

Receipt of Income from Foreign Assets: Suppose a Nigerian resident in previous years

invested in Japanese government bonds, and each year the Nigerian receives ¥ 500,000 of

coupon payments from his Japanese bonds. If these payments are paid to his Nigerian bank,

where he keeps a yen-denominated bank account, what are the credit and debit items on the

Nigerian balance of payments?

First, when the Nigerian resident receives coupon payments from the Japanese government, these

receipts are credits to Nigeria’s investment income part of the Current Account because they

provide an inflow of foreign currency to Nigeria.

Second, the fact that the Nigerian resident receives the yen implies that there is an increase in

Nigerian ownership of foreign assets. If the Nigerian had set out to increase the value of his yen

account directly, he would have had to use Nigerian naira to purchase yen in the foreign

exchange market, and thus increase the demand for foreign exchange (a debit item on the Capital

Account of the Nigerian balance of payments). If the Nigerian naira – Japanese yen exchange

rate is NGN1.65/JPY, so ¥500,000 represents NGN 825,000, the transactions on the Nigerian

BOP would be thus:

Table 4: Receipt of Income from Foreign Assets

NIGERIA BOP CREDIT DEBIT

Coupon receipts from Japanese Treasury NGN 0.825 million

(Current Account :Interest Income)

Acquisition of Foreign Assets NGN 0.825 million

(Capital Account : Capital Outflow from Nigeria)

If the above transactions were listed without the Credit and Debit titles, the Coupon receipts from

the Japanese Treasury would receive a ( + ), and the Capital Outflow from Nigeria would receive

a ( - ).

Transfer Payments Between Countries

The last items recorded on the Current Account of the Balance of Payments are transfers

between countries. Transfers are indicated as unilateral transfers in the IMF’s Balance of

Payments Manual, IMF (2010), which are given by the individual without an explicit receipt of

an item of equivalent value in return. (Bekaert and Hodrick, 2012). Examples are gifts sent to

relatives in another country, grants, or foreign aid from one country to another. The following

example illustrates the recording on the BOP of transfer payments between countries;
Gifts to Foreign Residents: Suppose a gift of NGN20 million by a Nigerian firm is made to a

Haitian university to create an endowed chair. Suppose, also, that the Nigerian firm finances the

gift by selling European Treasury bonds in which it previously invested. What are the credit and

debit items on the Nigerian balance of payments?

First, the Nigerian firm has to purchase the Haitian Gourde (HTG) equivalent of NGN20 million,

in order to make the gift. To do this the Nigerian firm uses Nigerian naira (NGN) and NGN20

million of foreign exchange. Hence the gift must be a debt item on the Current Account of the

Nigerian balance of Payments because it leads to an outflow of foreign exchange. Second, the

Nigerian firm NGN20 million equivalent of European bonds, which reduces the Nigerian

ownership of foreign assets. This transaction is a credit on the capital Account of the Nigerian

Balance of Payments because it leads to an inflow of foreign exchange. The transactions will be

as follows:

Table 5: Transfer Payments Between Countries

NIGERIA BOP CREDIT DEBIT

Gift by Nigerian Firm to Haitian university NGN 20 million

(Current Account : Nigerian Import of Goodwill)

Sale of European bonds NGN 20 million

(Capital Account : Capital Inflow to Nigeria)

If the above transactions were listed without the Credit and Debit titles, the Nigerian Import of

Goodwill would receive a ( - ), and the Capital Inflow to Nigeria would receive a ( + ).

Transactions in assets that are recorded on the Capital Account of the Nigerian Balance of

payments is discussed next.

2.1.2 Financial / Capital Account Transactions

Some Capital Account transactions arise as a result of Current Account transactions. Some

transactions involve situations in which both entries are recorded exclusively on the Capital

Account of the Balance of Payments.

Capital Outflows

An alternative way of describing the acquisition of foreign assets is, if for instance residents of

Nigeria purchase foreign assets rather than investing in domestic assets, there is said to be a

Capital outflow from Nigeria. The ‘Capital’ refers to the money that could have financed an

investment in Nigeria. The Apex bank of Nigeria institutes policies to discourage such ‘capital

flight’, especially when it occurs rapidly in response to a deteriorating investment climate,

because it can result in the crash of the exchange rate of the Nigerian naira (NGN). This

happened early in 2015, as Omoh Gabriel, the Business Editor of Vanguard newspaper of

Nigeria, reported in Omoh (2015).

Capital Inflows

If the resident of a foreign country purchases Nigerian Treasury bills, Nigeria is said to have a

Capital Inflow. This transaction is recorded as a credit on the Capital Account of the Nigerian

Balance of Payments because it supplies foreign money to the foreign exchange market of

Nigeria. In general, when foreigners buy Nigerian assets or when Nigerias reduce their

ownership of wealth abroad, Capital Inflows to Nigeria occur.

How the buying and selling of assets is recorded in the Nigerian Balance of Payments has been

discussed. The payment flows associated with these transactions are discussed next.

When a Nigerian resident buys the Treasury bond of a foreign country, such as a U.S. Treasury

bond, he/she must pay in dollars. This reduction of their dollar holdings is a Nigerian Capital

Inflow (“decrease in Nigerian ownership of foreign assets”) and produces the credit transaction

that balances the debit transaction of the original foreign bond purchase. Similarly when foreign

residents, such as U.S. investors buy Nigerian treasury bonds (a Capital Inflow into Nigeria),

they must pay in Nigerian naira (NGN). This reduction of their Nigerian naira (NGN) holdings is
a Nigerian Capital Outflow (“increase in Nigerian ownership of foreign assets”) and produces

the debit transaction that balances the credit transaction of the original purchase of Nigerian

Treasury bonds by the foreign residents.

2.1.3 Official Reserves Account Transactions

Changes in the Official International Reserves of a country’s Apex or Central Bank are also

recorded on the country’s Balance of Payments - in this case, in the country’s official reserves

account. If the Central bank acquires international reserves, a debit is entered on the Official

Settlements Account, just as it is recorded on the private Capital Account, and this debit receives

a (-) in a presentation of the BOP that just lists items even though the reserves of the central bank

are increasing. A draw down of the international reserves results in a credit on the Official

Settlements Account, recorded with a ( + ), though the Central bank’s reserves are declining.

Table 6 shows a summary of the accounts of the BoP.

Implications for Fixed Exchange Rates

In Nigeria, the Central Bank has the policy of fixing the exchange rate at a particular value

relative to the dollar. If the residents of Nigeria wish to purchase U.S. equities, they must first

purchase dollars from the central bank with Nigerian naira (NGN) at the fixed exchange rate

determined by the Apex bank. The Official Settlements Account records a credit that is offset by

the debit associated with the use of the dollars (the increase in foreign assets represented by the

equity purchase). Conversely, when residents of Nigeria acquire dollars in international

transactions, they must also sell dollars to the Central bank for Nigerian naira at the fixed

exchange rate. In this way the Nigerian Central bank’s stock of dollars increases and the

transaction is recorded as a debit on the Official Settlement Account.

Such restrictions on capital flows induces domestic residents to seek alternative sources of
foreign currency, which, as explained in Caporale and Cerrato (2005), results in the development

of black markets for foreign currency. The demand for foreign currency normally exceeds

supply, as such suppliers are able to charge a higher price than the official exchange rate. The

difference between the black market (or parallel) exchange rate and the official rate is known as

the black-market premium. As argued in Kiguel and O`Connell (1995), a significant spread may

exist between the black market and official rate which may be a signal of macroeconomics

misalignments. This often requires intervention of the Central bank to eliminate. For instance as

Olu Akanmu, in Akanmu (2016) noticed:

Whereas the Nigerian monetary authorities fixed the official exchange rate at NGN196 to

a dollar, there is today a near 50% differential in the parallel market rate to the official

rate. The fact that the exchange rate is not market determined, in that the official price of

the dollar is not determined by the equilibrium of demand and supply, means that the

official price of the dollar could be significantly higher or lower than its true market

value.

3.0 Surpluses and Deficits in the Balance of Payments Accounts

The Balance of Payments system uses a double-entry accounting system, thus the value of

credits on a country’s balance of Payments must equal the value of its debits. This means that the

overall Balance of Payments must always sum to zero. That notwithstanding, the total value of

credits generated by a particular set of transactions, such as the sales of goods and services to

foreigners (Exports), need not be equal to the value of debts generated by the purchase of goods

and services from foreigners (Imports). (Bekaert and Hodrick, 2012). If credit transactions on a

particular account are greater than debit transactions on that account, the account is said to be in
surplus, and if debit transactions on a particular account are greater than credit transactions on

that account, the account is said to be in deficit. (Bekaert and Hodrick, 2012).

3.1 Important Balance of Payment Identity

The two major accounts in the Balance of Payments are the Current Account and the Capital

Account. A Current Account deficit must have a Capital Account surplus. This means that if all

the credit items with a ( + ) and debit items with a ( - ) are listed, the accounts can be added and

they must sum to zero. (Bekaert and Hodrick, 2012). Below, Equation 1 shows an important

Balance of Payments identity.

Equation 1: 1st Balance of Payment Identity

Current Account + Capital Account = 0

(Source: Bekaert and Hodrick, 2012).

If the transactions that change a country’s stock of International Reserves at its central bank, are

highlighted as a separate part of the balance of payments, the result would be Equation 2, another

important Balance of payments identity.

Equation 2: 2nd Balance of Payment Identity

Current Account + Regular Capital Account + Official Settlements Account = 0

(Source: Bekaert and Hodrick, 2012).

The statistics of the Balance of Payments of Nigeria will now be studied in more detail to better

understand the economic meaning of the various surpluses and deficits. Detailed statistics of the

Nigerian Balance of Payments are provided on Tables 7 and 8. Table 9 presents data for the most

recent year that the data was available. The various subaccounts are now discussed, one by one.

3.2 Nigeria’s Current Account

The Current Account, and its subcategories, of the Balance of Payments for Nigeria, for the years

2005 to 2015 is shown on Table 7 above. The source provided information about all of the

subcategories, each of which will be discussed beginning from the nest section.

Goods

The first category in Table 7 is “Exports and Imports of Goods”. This subcategory of the Current

Account of the Nigerian balance of Payments covers trade in commodities such as Oil, and in

physical goods such as Cars. The Goods in this subcategory can be raw materials, semi-finished

or finished goods. (Bekaert and Hodrick, 2012). Each year between 2005 and 2015, Nigeria’s

exports of goods exceeded, or are expected to exceed, the imports into the country. Thus Nigeria

has consistently had a merchandise trade balance surplus from 2005 to 2013, and is expected to

through 2015.
Services

The “Exports and Imports of Services” subsection of the Current Account of the Nigerian

Balance of Payments, involves economic transactions that must be produced and utilized at the

same time. Services include education, financial services, insurance, consulting, and the fee and

royalties repatriated to Nigerian corporations. Every year between 2005 and 2015, Nigeria’s

imports of Services exceed (or is expected to exceed) its exports of Services. Nigeria has, thus,

consistently had a Service trade deficit from 2005 to 2013, and is expected to through 2015.

Balance on Goods and Services

The balance of the net positions on the Goods sub account, and the Services sub account, gives

the balance on the Goods and Services account. (Bekaert and Hodrick, 2012). Largely due to

Nigeria’s merchandise trade surplus, compared with its Services trade deficit, between 2005 and

2015, there has been, and there is expected to be a surplus in the Nigerian Goods and Services
trade balance. The expected decline trend between 2012 and 2015 is due primarily to the

expected increase trend in the balance of Services.

Investment Income

Income receipts and payments, which are the dividend and interest income received by Nigerian

residents (credits) because of their ownership of assets in foreign countries as well as the

dividend and interest income paid to foreigners (debits) who own Nigerian assets. Each year

between 2005 and 2010, Nigerian residents received more income receipts than the dividend and

interest income paid to foreigners. Thus between 2005 and 2010, there was a surplus in the

Investment Income and payments subaccounts of the Current Account of the Nigerian Balance of

Payments. Each year between 2011 and 2015, Nigerian residents received less income receipts,

or are expected to receive less income, than the dividend and interest income paid to foreigners.

Thus between 2011 and 2015, there was, or there is expected to be, a deficit in the Investment

Income and payments subaccounts of the Current Account of the Nigerian Balance of Payments.

Unilateral Current Transfers, Net

The negative values shown under this sub account between 2005 and 2013 means that during

these years the Nigerian government and other Nigerian residents gave more money to foreign

countries to foreign countries and residents as gifts and grants than Nigeria received from

abroad. The net deficit on the sub account during these years represents a net import of goodwill

to Nigeria.

Balance on Current Account

When the Investment Income account and the Unilateral Transfers account are added to the

Balance on Goods and Services, the result is the Current Account surplus or deficit, which is
recorded on Table 7 as the Balance on the Current Account. Table 7 shows that Nigeria has a

Current Account surplus from 2005 through 2012, and this is expected through 2015.

3.3 Nigeria Financial / Capital Accounts

Table 8, shown below, presents the details of the information available regarding the Nigerian

Capital / Financial account. The Current account balance and the Capital / Financial account

balance must sum to zero. If there is, therefore a Current account deficit or surplus, it must be

financed by a Capital account surplus or deficit, and vice versa.

When Current account balance and the Capital / Financial account balance does not sum to zero,

a net Error and Discrepancy value is provided to account for the errors that resulted in making

the sum of the Current account balance and the Capital / Financial account balance not being

zero.

The Nigerian Financial / Capital account consists of the following sub accounts; Net value of

Nigerian – Owned Assets Abroad [increase / financial outflow (-)], Net value of Foreign –

Owned Assets in Nigeria [increase / financial inflow (+)], and the sum of both of these sub
accounts of the Nigerian Financial / Capital accounts is the Net Financial account of the Nigerian

Balance of Payments. The primacy source of the information used for this essay, the IMF, only

provides information about the Regular Financial account, the Officials Settlements account, as

well as the value of the Net Error and Omissions (which is the former name of what is referred to

today as the Statistical Discrepancy).

As shown on Table 8, between 2005 and 2012, there was consistently a deficit in the Net

Financial account (which is a sum of the Regular Financial account and the Officials settlements

account) of the Nigerian Balance of Payments.

There was a surplus in the account only in 2009 and 2010. A surplus is also expected for the

account between 2013 and 2015. A surplus in the Net Financial account can occur in several

ways. First, there could be a decrease in Nigeria’s private and official assets abroad as the result

of sales of its foreign assets to finance a Current account deficit. A second way that a Current

account deficit can be financed is through a net increase in foreign private and official assets in

Nigeria. Any combination of these Capital account transactions that results in a Capital account

surplus of the appropriate magnitude will also finance the Current account deficit.

The global economic crisis, described by Larry Elliot, Economics Editor of the Guardian, in

Elliot (2011), resulted in the deficit in the Current account of the Nigerian BoP in 2009 and

2010. Plummeting crude oil prices, as shown on Table 9, can be held responsible for the

expected deficits in the Current account of the Nigerian BoP from 2013 to 2015 (at the writing of

this essay, the official figures of these years were yet to be published). An explanation of the

relationship between the plummeting crude oil prices and the deficits in the Current account of

the Nigerian BoP will be made in detail in section 6.0 when the Savings, Investment, Income,
 Table 9: AVERAGE PRICES FOR OPEC CRUDE OIL (2005 - 2015)
Year Value (U.S. dollars)
2005 50.59

2006 61.00

2007 69.04

2008 94.10

2009 60.86

2010 77.38

2011 107.46

2012 109.45

2013 105.87

2014 96.29

2015 49.51
Source: STATISTA (www.statista.com/statistics/262858/change-in-opec-crude-prices-since-1960)

and the BoP is discussed, and specifically in 6.1 when the linkage between the Current account

of the Nigerian BoP and national income is discussed. To give a foretaste of that discussion, the

overreliance of Nigeria on the sale of Petroleum Crude oil and Natural Gas and their products, is

at the heart of the matter. Table 10, on the next page, shows the sum of Petroleum Oil and Gas

Exports as a percentage of Total Exports of Nigeria from 2005 to 2014.

Table 10 Petroleum Oil and Gas Export as a Percentage of Total Nigerian Exports, 2005-2015 (billions of dollars)
YEARS
No. Product Group Description
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Total of All Products 45.79 59.22 66.61 81.82 56.74 86.57 125.64 116.00 104.00 97.00
Petroleum Oils, Oils from
333 40.84 51.69 56.88 68.18 48.16 69.56 99.69 89.94 83.66 74.07
Bituminous Materials, Crude
343 Natural Gas, whether or nor Liquified 1.47 2.79 4.47 7.14 3.49 5.20 9.24 10.69 9.79 10.71
Total Petroleum Oil and Gas 42.31 54.48 61.35 75.32 51.65 74.76 108.93 100.63 93.44 84.79
Total Petroleum Oil and Gas Exports as
92.41 92.00 92.11 92.05 91.02 86.36 86.70 86.75 89.85 87.41
a Percentage of Total Exports ( % )
Source: Authors Calculations, and UNCTAD Stats

The Official Settlements, or Reserves, Account

No distinction has been made so far, in the discussion of the Financial / Capital account of the

Nigerian Balance of Payments, between the transactions of private individuals and those of the

government. The IMF divides the Net Financial account into the Regular Financial account and
the Official Settlements or Reserves account.

The Nigerian Official Reserves account measures, in addition to others, changes in the official

stock of international reserve assets, consisting of gold, foreign currencies, special drawing

rights, and the Nigerian Reserve Position with the IMF.

Table 11, on the next page, shows Nigeria’s balance of Payment for 2012, the last year for which

the IMF has information available for Nigeria’s balance of Payments (at the time this essay was

written).

Table 11 Nigeria's Balance of Payment for 2012 (billions of dollars; Credits, +; Debits - )
Current Account

Trade Account

Exports of Goods 95.68

Imports of Goods -53.36

Exports of Services 2.41

Imports of Services -24.04

Net Unilateral Transfers -0.17

( A ) Trade Balance 20.52

Investment Income Account

Receipts on Nigerian Assets Abroad 23.35

Payments on Foreign Assets in Nigeria -23.52

( B ) Investment Account Balance -0.17

Current Account Balance ( A ) + ( B ) 20.35

Regular Financial / Capital Account

Balance on Regular Financial / Capital Account -59.98

Official Settlements Account

Balance on Official Settlements Account 47.55

Financial / Capital Account Balance -12.43

Statistical Discrepancy 7.92

(Sum of All the Items with the sign Reversed)

Source: Tables 7 and 8
 3.4 Balance of Payments Deficits and Surpluses & the Official Settlements Account

The expression “…the Central Bank gained international reserves because the Balance of

Payments was in Surplus”, refers to the fact that if the sum of the private and government

transactions on the Current account and the Regular Financial / Capital account is positive, the

Central Bank must have increased its holdings of foreign money. Thus a deficit on the Official

Settlements account exists when the other accounts are in surplus. Conversely, if private

residents and agencies, other than the Central Bank have more debits than credits in their

accounts, the Central Bank must be in surplus. (Bekaert and Hodrick, 2012).

4.0 The Dynamics of the Balance of Payments Accounts

The meaning of the surplus and deficits on the various subaccounts of Nigeria’s balance of

Payments having been discussed, the discussion on the economic importance of these surpluses

and deficits will now follow.

Specifically, how Current account deficits today affect the Balance of Payments in the future and

ultimately Nigeria’s debt position relative to the rest of the world, will be discussed next.

4.1 The Trade Account and the Investment Income Account

In Tables 6 and 11, all of the Current account items, other than those associated with flows of

investment income, are lumped into the Trade account of the Balance of Payments. Service

assets and liabilities payment flows were put into the International Investment Income account.

The Current account is the sum of the Trade account and the Investment account, as shown on

Formula 3 below.
 Equation 3: Relationship between Current Account, Balance on Goods & Services (Trade
Account), Investment Account, and Net Unilateral Current Transfers
Current Account = Trade Account (Balance on Goods & Services)

+ International Investment Account

+ Net Unilateral Current Transfers

(Source: Bekaert and Hodrick, 2012).

The “Trade account” is not the same as the Goods or Merchandise Trade Balance. The Trade

account includes transactions in the economic services, such as education, banking, tourism,

shipping, insurance, and transfers, that the Goods or Merchandise Trade Balance does not. The

advantage of such a breakdown of the Balance of Payments is that it facilitates the discussion of

the dynamics of the Balance of Payments and the accumulation of the international assets or

debt.

Between 2005 and 2012, Nigeria’s Trade account, as shown on Table 7, was consistently in the

surplus, and varying from a high of 24.37 billion dollars in 2005, to a low of 8.91 billion dollars

in 2009. Between 2013 and 2015, the value is estimated to lie between 12.51 billion dollars in

2013 and 9.81 billion dollars in 2015.

4.2 Countries as Net Creditors or Net Debtors

The flows of Goods and Assets, over a period of time, are recorded in a country’s Balance of

Payments. According to Bekaert and Hodrick (2012):

A country’s Net International Investment Position, with the rest of the world, is the

difference between the value of a country’s ownership of foreign assets and the value

of the foreign ownership of the country’s assets, at a given point in time. If the Net

International Investment Position is positive, the country is referred to as a Net

Creditor nation, and if the net International Investment Position is negative, the
 country is referred to as a net Debtor nation (the investment in question not being

restricted to debt securities.

A breakdown of a country’s Regular Financial / Capital account reveals the following

subaccounts;

The Country’s Assets Abroad (Net) subaccount of which:

The Country’s Other Government Assets account, and

The Country’s Private Resident’s Assets account, are subaccounts.

A Foreign owned Private Assets in the Country subaccount,

A Financial Derivatives (Net) subaccount,

A Capital Account Transfers (Net) subaccount, and

The Balance on Regular Financial / Capital subaccount

It seems obvious, then, that the Regular Financial / Capital account is the record, 1. of the value

of a Country’s ownership of foreign assets, and 2. the value of the foreign ownership of the

country’s assets, at a given point in time. This means that the Balance on the Regular Financial /

Capital account is, in fact, the country’s Net International Investment Position, or Net Foreign

Assets.

4.3 Nigeria’s Net International Investment Position

Nigeria’s Net International Investment Position, as shown in the second column of Table 8,

which is the Balance on the Regular Financial / capital account, has, between 2005 and 2012,

consistently been negative. This means that Nigeria has, at least between 2005 and 2012, been a

Net Debtor nation. The negative values estimated for 2013 to 2015, for the Balance of Nigeria’s

Regular Financial / capital account, means that the trend of Nigeria being a Net Debtor nation is

likely to continue through 2015.

 5.0 Savings, Investment, Income, and the Balance of Payment

The link between the Current account surpluses and deficits and the Savings and Spending

patterns of a Country (including that of its Government) is discussed in this section.

Understanding these links facilitates the recognition that the policies of different governments

around the world affect the international economic environment and the determination of

exchange rates. The discussion uses the information from Nigeria’s National Income and Product

Account (NIPA).

5.1 Linking the Current Account to National Income

From NIPA, Gross National Income (GNI) equals Gross Domestic Product (GDP) plus Net

Foreign Income (NFI).

Equation 4: Relationship between Gross National Income (GNI), Gross Domestic Product
(GDP), and Net Foreign Income (NFI)
GNI = GDP + NFI

(Source: Bekaert and Hodrick, 2012).

Subtracting the Country’s Total Expenditures, that is its Consumption Purchases (C), Investment

Purchases (I), and Government Purchases (G), from both sides of Equation 4, and replacing GDP

with Equation 5 below;

Equation 5: 1st Fundamental National Income Identity

Gross Domestic Product = Consumption + Investment + Government + Net Export
GDP = C + I + G + NX

(Source: Bekaert and Hodrick, 2012).

that is,

GNI – (C + I + G) = GDP + NFI – (C + I + G) = NX + NFI

produces an important National Income Accounting Identity, shown in Equation 6,

 Equation 6: 1st National Income Accounting Identity
Gross National Income – National Expenditures = Current Account
GNI – (C + I + G) = CA

(Source: Bekaert and Hodrick, 2012).

It can be deduced from Equation 6 that if a Country has a Current account surplus, it must have

National Income that exceeds its National Expenditures. Table 7 shows that, between 2005 and

2015, the Current account balance of Nigeria was, either in surplus or is estimated to be in the

surplus. This means that, between 2005 and 2015, the National Income of Nigeria exceeded, or is

expected to exceed, its National Expenditures. Table 7 shows that, between 2005 and 2015, the

Current account balance of Nigeria is, either surplus or is estimated to be surplus. This means

that, between 2005 and 2015, the National Income of Nigeria exceeded, or is expected to exceed,

its National Expenditures.

The overall balance of Payments always being balanced, if a Country has a Current account

surplus, it must have a Capital account deficit. (Bekaert and Hodrick, 2012). The fact that

between 2005 and 2015 the Current account of Nigeria was in surplus, or estimated to be so,

implies that the Capital account of Nigeria was in deficit, or expected to be in deficit, during the

same period.

Considering that the Capital account records transactions that result in changes in ownership of

net Foreign Assets, if the stock of Net Foreign Assets is denoted by NFA, and changes in NFA

by ∆NFA, then according to Equation 1, the 1 st Important Balance of Payment Identity, that is

Current Account + Financial / Capital Account = 0,

or Current Account = Financial / Capital Account

results in Equation 7;
 Equation 7: Relationship between Current Account and Net Foreign Assets
Current Account = Change in Net foreign Assets
CA = ∆NFA

(Source: Bekaert and Hodrick, 2012).

Substituting CA in Equation 7 in Equation 6 results in yet another significant relationship in

Equation 8;

Equation 8: Relationship between National Income (GNI), National Expenditure (C+I+G), and
Change in Net Foreign Assets (∆NFA)
National Income – National Expenditure = Change in Net foreign Assets
GNI – (C + I + G) = ∆NFA

(Source: Bekaert and Hodrick, 2012).

Hence, a Country’s Net Foreign Assets must increase when its Expenditures are less than its

Income; in addition, the Net Foreign Assets is simply the Net Creditor or Debtor position of the

country. (Bekaert and Hodrick, 2012).

On Table 12 on the next page, information about Nigeria, obtained from the National Accounts

Statistics at the United Nations, is used, with Equation 8, to confirm the International Investment

Position of Nigeria.

Table 12: Alternative Determination of Nigeria's

11
International Investment Position (x 10 US dollars)
Gross National Consumption Gross Private Government Change in Net Foreign
Year Income Expenditures Domestic Purchases Assets (∆NPA)
(GNI) (C) Investment ( I ) (G) GNI - (C+I+G)
2010 3.31 2.44 0.64 0.32 -0.09

2011 3.67 2.69 0.67 0.35 -0.04

2012 4.12 2.69 0.69 0.38 0.36

2013 4.62 3.75 0.77 0.37 -0.27

2014 5.10 4.03 0.90 0.42 -0.25

Source: Authors Calculations & United Nations National Accounts Statistics

The negative values of the ∆NPA for the years 2010, 2011, 2013, and 2014, implies that during

these years Nigeria was a Net Debtor Nation. Alternatively, the positive value of the ∆NPA for

the year 2012, implies that during that year Nigeria, according to the available data, was a Net

Creditor Nation.

5.2 National savings, Investment, and the Current Account

By definition, National Savings are equal to National Income minus the Consumption of the
Private and Public sectors;
Equation 9: Relationship between National Income (GNI), National Savings (S), Private
Consumption (C), and Public Consumption (G).
National Savings (S) = Gross National Income (GNI) – Private and Public Consumption
S = GNI – C - G)

(Source: Bekaert and Hodrick, 2012).

After substituting the definition of GNI from Equation 4, into Equation 9, results in Eqn 10;
Equation 10: Relationship between National Savings (S), Gross Domestic Product (GDP), Net
Foreign Investment (NFI), Private Consumption (C), and Public Consumption (G).
S = GDP + NFI – C - G

(Source: Bekaert and Hodrick, 2012).

Substituting the components of GDP and simplifying results in

S = C + I + G + NX + NFI – C - G

and Equation 11;

Equation 11: Relationship between National Savings (S), National Investment (I), and Current
Account (CA).
National Savings (S) – National Investment (I) = Current Account (CA)
S - I = CA

(Source: Bekaert and Hodrick, 2012).

Equation 11 shows that if a Country’s purchases of Investment Goods are more than its Savings,

the Country must run a Current Account Deficit that must be funded from abroad by a Capital

Account surplus. Nigeria’s Current account Deficit has consistently been in the Surplus every

year between 2005 and 2015. This implies that the National Saving (S) of Nigeria has

consistently exceeded its National Investment (I).

6.0 Summary

In this essay concepts associated with a Country’s Balance of Payments (BOP) and its Net

International Investment position; and how these concepts are related to National Income and the

determination of the exchange rates, have been discussed.

A Country’s Balance of Payments records the economic transactions between its residents and

government and those of the rest of the world. The Balance of Payments comprises two major

accounts: the Current account and the Capital account.

The Current account records transactions in Goods and Services, transactions that are associated

with the Income Flows from Asset stocks, and Unilateral transfers.

The Capital account, which is also called the Financial account in some presentations of the

BOP, records the purchases and sales of assets, that is, changes in the domestic ownership of the

assets of other nations and in the foreign ownership of assets of the domestic country.

The Balance of Payments uses a double-entry accounting system. As such, each transaction gives

rise to two entries, a credit and a debit of equal value.

The purchase of Goods and Assets by foreign residents from domestic residents are recorded as

credits. Credit transactions result in an inflow, or source, of foreign currency.

The purchase Goods and assets by domestic residents from foreign are debits. Debit transactions

result in an outflow, or use, of foreign currency.

Sales of domestic Goods and Services to foreign residents are domestic exports. Sales of

domestic assets to foreigners are capital inflows to the home country. Both types of transaction

are credits on the domestic Balance of Payments.

Purchases of foreign Goods and Services by domestic residents are domestic imports. Purchases

of foreign assets by domestic residents are capital outflows from the home country. Both types of

transaction are debits on the domestic Balance of Payments.

If the sum of the credits on a particular account is greater than the sum of the deficits on that

account, the account is said to be in surplus. If the sum of the debits on a particular account is

greater is greater than the credits on that account, the account is said to be in deficit. Nigeria’s

Current account balance, between 2005 and 2015, has consistently been positive and, as such,

been in surplus. Nigeria’s Capital account balance, between 2005 and 2015, has consistently

been negative and, as such, been in deficit.

The Current account is sometimes decomposed into the sum of the Trade account and the

International Investment Income account. The Trade account, a broader concept than the

Merchandise Trade account balance, includes trade in Economic Services, whereas the latter

does not.

International Reserves, a component of the Capital / Financial account, are the assets of a

country’s Central/Apex bank. These Assets are not denoted in the domestic currency, but

denominated in Gold and Assets in foreign currency. (BIS, 2010).

The Official Settlements account of the Capital / Financial account measures changes in the

International Reserves that a country’s Central bank holds.

If a Central bank wishes to maintain a Fixed Exchange rate, it uses its International Reserves to

fix the price of the domestic currency in terms of a foreign currency.

The Central bank of Nigeria has such a policy of a Fixed Exchange rate. International Reserves

rise and fall with the surpluses and deficits on the Current account and the Private Capital

account.

Many Balance of Payments entries are estimated, thus the sum of the Balance of Payments

entries are estimated, thus the sum of the Current account and the Capital account does not

always equal to zero, as it normally should in a double-entry system. If the sum of the Current

and capital accounts is not zero, a balancing item called the Statistical Discrepancy or Errors and

Omissions, is added.

The value of all the final Goods and Services produced within a Country is called the Country’s

Gross Domestic Product (GDP).

The value of what is produced in a Country must be purchased either by domestic or foreign

residents. Thus, the Country’s Total Consumption purchases (C), plus its Total Government

purchases (G), plus its Total Investment purchases (I), plus the value of its Net Exports (NX),

must equal its GDP. GDP = C + I + G + NX

National Savings and National Investment decisions affect a Country’s Current account, Interest

rates, and other Rates of Return around the world influence, and in turn are influenced, by the

Current account. (Lane and Milesi-Ferretti, 2007).

 7.0 REFERENCES

1. Abel, A.B., Bernanke, B.S., and Croushore, D. (2008). Macroeconomics, 6th Edition.

Boston, MA: Pearson Addison Wesley.

2. Akanmu, O. (2016). Nigeria’s Fixed Exchange Rate Policy: Like an Ostrich that

Buries its Head in Sand. Vanguard Online Newspaper, February 1. Retrieved

from www.vanguardngr.com/2016/02/nigerias-fixed-exchange-rate-policy-

like-an-ostrich-that-buries-its-head-in-sand/

3. Bank of International Settlements (BIS) (2010). 80th Annual Report, Basel,

Switzerland:BIS

4. Bekaert, G. and Hodrick, R. (2012). International Financial Management.

Upper Saddle River, NJ: Pearson Prentice Hall

5. Caporale, G.M. and Cerrato, M. (2005). Black Market and Official Exchange Rates:

Long-Run Equilibrium and Short-Run Dynamics. College of Business, Arts

and Social Sciences, Brunel University, London, Working Papers

6. CIA (2015). The World Fact book. Cia.gov. Retrieved 26 June, 2015.

7. Elliot, L. (2011). Global Financial Crisis: Five Key Stages 2007 – 2011. The

Guardian Online Newspaper, 7 August. Retrieved from

www.theguardian.com/business/2011/aug/07/global-financial-crisis-key-stages

8. International Monetary Fund (IMF). (2010). World Economic Outlook,

Washington, DC: IMF.

 9. Kiguel, M.A. and O’Connell, S.A. (1995). Parallel Exchange Rates in Developing

Countries. The World Bank Research Observer, 10,21-52.

10. Lane, P.R. and Milesi-Ferretti, G.M. (2007). A Global Perspective on External

Positions. In Richard Clarida, editor G7 Current Account Imbalances:

Sustainability and Adjustment, Chicago: University of Chicago Press.

11. Omoh, G. (2015). Capital Flight: Nigerian Economy Hard Hit by $22.1 billion

Outflow in 5 weeks. Vanguard Online Newspaper, February 23. Retrieved

from www.vanguardngr.com/2015/02/capital-flight-economy-hard-hit-by-22-

1-bn-outflow-in-5-weeks/

12. United Nations, UN (2016). National Accounts Statistics, New York, NY: UN.

View publication stats