Nigeria’s payments through Letters of Credit have significantly declined, dropping by 57.04% to $391.91 million in the first seven months of 2024, compared to $912.35 million during the same period in 2023.
This reduction, as reported by the Central Bank of Nigeria, highlights a sharp decrease in the use of this payment method for the importation of visible goods.
A Letter of Credit, a critical tool in international trade, is a formal promise by a bank to pay an exporter on behalf of its customer, contingent upon the presentation of the required documentation.
This trend may indicate shifts in import activities, currency management, or economic conditions impacting trade practices.
Understanding the causes behind this drop and its potential impacts is crucial for stakeholders involved in importation, trade financing, and economic planning in Nigeria.
During the first seven months of 2024, Nigeria’s Letter of Credit payments decreased by approximately $520.44 million.
Analysts attribute this decline to factors such as the exit of multinational companies, rising customs duties, and an unstable foreign exchange rate, all of which have negatively impacted the country’s foreign trade.
An analysis of CBN data reveals that the highest LC payments this year occurred in February at $102.59 million, followed by $79.65 million in July and $58.33 million in January.
March saw a significant drop to $43.53 million compared to $269 million in the same month in 2023.
Payments slightly increased to $54.02 million in April, fell to $21.48 million in May, and then rose again to $32.26 million in June.
Commenting on this development, the Managing Director of Arthur Steven Asset Management Limited, Tunde Amolegbe, opined that the decline was expected given the unstable exchange rate, skyrocketing customs clearing charges and of course the exit of major international companies and the closure of other manufacturing in the country.
He, however, added that the situation may improve even if it is slightly on the as a result of the tax waivers given recently for the importation of some essential food products.
“Stability in the FX market and a lower interest rate and harmonised tax regime should also help,” he concluded.
Bloomberg reports that since President Bola Tinubu assumed office in May 2023, the naira has depreciated by around 70% due to the devaluation of the currency.
The CBN has made a number of initiatives to increase liquidity, but none of them has shown promise.
Meanwhile, The Director of Research and Strategy at Chapel Hill Denham, Tajudeen Ibrahim, said “Nigerian businesses are paying down on their Letters of Credit. This is an indication of an improvement in the dollar liquidity in the Nigerian financial system, largely on the back of CBN’s policy response to the dollar shortage in the system.
“The CBN at the last RDAS auction did sell some volume of dollars to companies to help them pay down on their foreign currency loans. One of the major companies that has been paying down on their letters of credit is MTN. I reckon they have paid about $300m in LCs, so corporations have been clearing their LCs because of the negative impact it is having on their earnings and balance sheet.
“The outlook in Letters of Credit to my mind is positive because I expect improvement liquidity in US dollars inflow into the economy and I reckon that Nigerian companies will pay down further on their LCs.”
For economy and capital market analyst, Rotimi Fakayejo, dollar liquidity plays a role in the decline recorded in the LCs payments.
He said, “FX availability is inconsistent. At a point, the supply was less and the banks were given the leeway to get whatever they needed, but typical of the banks, they were targeting profit and I believe that slowed down the process. The slow or reduced supply from the CBN has so much impact.
“If importers want to import and there is no access to FX or the express undertaking of Letters of Credit on their behalf is not done, it will affect their business. Also, if what they are importing is becoming increasingly difficult to sell and the market is no longer friendly, then you will also see a reduction in the LCs.
“For instance, the importation of vehicles has reduced, whether new cars or tokunbo. People are buying more Nigerian used cars, but the customs duty we know is subject to the foreign exchange rate and the government is flip-flopping about it. Every time, what we see is an increase, so it has an impact.”
