Nigeria’s foreign trade payments through Letters of Credit (LCs) significantly declined in the first seven months of 2024, dropping by 57.04% to $391.91 million compared to $912.35 million during the same period in 2023.
This data, sourced from the Central Bank of Nigeria (CBN), highlights a sharp decrease of about $520.44 million in LC payments.
A Letter of Credit is a financial instrument used for importing goods, where a bank guarantees payment to the exporter on behalf of the importer, provided the required documents are submitted. This mode of payment is critical for facilitating international trade.
The drop in LC payments has been attributed to several factors, including the departure of multinational companies, soaring customs duties, and an unstable foreign exchange market.
These challenges have severely impacted Nigeria’s foreign trade during the period under review.
According to CBN data, February 2024 recorded the highest LC payments of the year at $102.59 million, followed by July with $79.65 million, and January with $58.33 million.
In contrast, March saw a significant drop to $43.53 million, compared to $269 million in the same month of 2023. Payments fluctuated in the following months, with a low of $21.48 million in May and a partial recovery to $32.26 million in June.
Tunde Amolegbe, Managing Director of Arthur Steven Asset Management Limited, suggested that the decline was expected due to the unstable exchange rate, increased customs charges, and the exit of major international companies.
He noted that the situation might improve slightly with recent tax waivers on essential food imports.
Amolegbe also emphasized the need for stability in the foreign exchange market, lower interest rates, and a harmonized tax regime to help address the issue.
Bloomberg reports that the naira has depreciated by approximately 70% since May 2023, following the currency devaluation when President Bola Tinubu took office. Despite efforts by the CBN to improve liquidity, the results have been limited.
Tajudeen Ibrahim, Director of Research and Strategy at Chapel Hill Denham, noted that Nigerian businesses are making progress in paying down their LCs, indicating an improvement in dollar liquidity within the financial system.
He attributed this to CBN’s policy responses aimed at addressing the dollar shortage. Ibrahim pointed out that companies, such as MTN, have been actively reducing their LC liabilities, with MTN reportedly paying down around $300 million in LCs.
Economy and capital market analyst Rotimi Fakayejo highlighted the role of inconsistent dollar liquidity in the decline of LC payments.
He explained that fluctuations in FX availability, coupled with profit-driven decisions by banks, have slowed the process.
The reduced importation of goods, including vehicles, due to high customs duties and the challenging market environment, has also contributed to the decline.
Fakayejo further noted that the exit of multinational companies from the manufacturing sector has extended to the oil and gas industry.
However, he expressed optimism that the slowdown in LCs might ultimately benefit the economy by reducing the demand for foreign exchange and encouraging local production.
He projected that by September, the start of production at local refineries, including the Dangote Refinery, could lead to improved dollar availability and better access to LCs from banks.
Investment banker and stockbroker Tajudeen Olayinka offered a different perspective, suggesting that the slowdown in LC payments might be due to the high cost of imported goods and consumer resistance.
He also mentioned that importers could be exploring alternative credit options, although these options might be limited due to poor credit ratings of local importers.
Olayinka highlighted that while the reduction in LC issuance could positively impact Nigeria’s Balance of Trade and the naira’s exchange rate in the long run, it could also lead to immediate economic challenges and increased inflationary pressures.
