Nigeria’s Letter of Credit Payments Plunge by 57% in First Seven Months of 2024 Amid Forex Crisis....KINDLY READ THE FULL STORY HERE▶

Nigeria’s Letter of Credit (LC) payments witnessed a significant drop of 57.04% in the first seven months of 2024, amounting to $391.91 million compared to $912.35 million during the same period in 2023. This sharp decline was highlighted in the Central Bank of Nigeria’s (CBN) weekly International Payments Data.

A Letter of Credit is a crucial payment method used in the importation of goods, involving a bank’s written commitment to pay the exporter within a specified time once the importer provides the necessary documents.

The $520.44 million reduction in LC payments has been attributed to several challenges, including the exit of multinational companies, soaring customs duties, and a volatile foreign exchange (FX) market, all of which have severely impacted Nigeria’s foreign trade.

A detailed analysis of the CBN data reveals that February 2024 recorded the highest LC payments at $102.59 million, followed by July with $79.65 million, and January with $58.33 million. Payments fluctuated throughout the period, dropping to as low as $21.48 million in May before slightly rebounding to $32.26 million in June.

Tunde Amolegbe, Managing Director of Arthur Steven Asset Management Limited, noted that this decline was anticipated due to the unstable exchange rate, high customs clearing charges, and the departure of major international companies from Nigeria. He suggested that the situation might improve slightly, thanks to recent tax waivers for essential food imports. “Stability in the FX market, along with a lower interest rate and a harmonized tax regime, should also help,” Amolegbe added.

The naira’s devaluation by approximately 70% since May 2023, following President Bola Tinubu’s assumption of office, has exacerbated the situation. Despite efforts by the CBN to enhance liquidity, the results have been limited. Tajudeen Ibrahim, Director of Research and Strategy at Chapel Hill Denham, pointed out that some Nigerian businesses have started paying down their LCs, which could signal a slight improvement in dollar liquidity within the financial system. He mentioned that companies like MTN have cleared about $300 million in LCs to mitigate the negative impact on their earnings and balance sheets.

Rotimi Fakayejo, an economy and capital market analyst, emphasized that inconsistent FX availability has played a significant role in the decline of LC payments. He highlighted the challenges importers face due to the fluctuating supply from the CBN and the increasing difficulty of selling imported goods in a less favorable market. Fakayejo also pointed out the reduction in vehicle imports, driven by rising customs duties tied to the foreign exchange rate.

Fakayejo further commented on the exit of multinationals from Nigeria’s manufacturing and oil & gas sectors, suggesting that the slowdown in LCs could have a silver lining. He projected that local production might increase, reducing the country’s reliance on imports and potentially improving the overall economy. “With the expected production from local refineries like Dangote’s, we may see better dollar availability and improved LC accessibility from banks,” he stated.

Investment Banker and stockbroker Tajudeen Olayinka offered another perspective, suggesting that the slowdown in LCs might be due to reduced demand for imports, driven by the high cost of goods and consumer resistance. He also noted that importers might be exploring other credit options, although the likelihood of this is low given the poor credit ratings of local importers.