Nigeria’s Letter of Credit (LC) payments have experienced a significant drop, falling by 57.04% in the first seven months of 2024. The payments totaled $391.91 million, compared to $912.35 million during the same period in 2023. This data is based on the Central Bank of Nigeria’s (CBN) weekly International Payments Data available on its website.
A Letter of Credit is a method of payment used for the importation of visible goods. It involves a written commitment from a bank to pay an exporter a specified amount within a set timeframe, provided the exporter submits the necessary documents.
During the period under review, Nigeria’s LC payments decreased by approximately $520.44 million. Analysts attribute this decline to several factors, including the exit of multinational companies, rising customs duties, and an unstable foreign exchange (FX) market, all of which have disrupted Nigeria’s foreign trade.
The CBN data analysis revealed that February 2024 recorded the highest LC payments at $102.59 million, followed by $79.65 million in July and $58.33 million in January. Payments were $43.53 million in March, significantly lower than the $269 million recorded in March 2023. The payments increased to $54.02 million in April 2024 but then fell to $21.48 million in May before rising again to $32.26 million in June.
Tunde Amolegbe, Managing Director of Arthur Steven Asset Management Limited, commented on the trend, stating that the decline was anticipated due to the unstable exchange rate, increasing customs charges, and the exit of major international companies from Nigeria. He suggested that the situation might improve slightly due to recent tax waivers on the importation of certain essential food products.
“Stability in the FX market, lower interest rates, and a harmonized tax regime could also help improve the situation,” Amolegbe added.
According to Bloomberg, the naira has depreciated by about 70% since May 2023, when President Bola Tinubu took office and the currency was devalued. Despite several attempts by the CBN to enhance liquidity, substantial results have yet to be achieved.
Tajudeen Ibrahim, Director of Research and Strategy at Chapel Hill Denham, noted, “Nigerian businesses are paying down their Letters of Credit, indicating improved dollar liquidity in the Nigerian financial system, largely due to the CBN’s policy response to the dollar shortage.”
He added, “The CBN’s recent RDAS auction provided some companies with dollars to help settle their foreign currency loans. One of the major companies clearing their LCs is MTN, which has paid about $300 million in LCs. Corporations are reducing their LCs due to the negative impact on their earnings and balance sheets. I am optimistic about the outlook for LCs, expecting better dollar inflows into the economy and further paydowns by Nigerian companies.”
Economic and capital market analyst Rotimi Fakayejo highlighted the role of dollar liquidity in the decline of LC payments. He explained, “FX availability has been inconsistent. When supply was low, banks had more freedom to source dollars, but they prioritized profit, slowing down the process. The reduced supply from the CBN has had a significant impact.”
Fakayejo added, “If importers lack access to FX or cannot secure Letters of Credit, their business is affected. Additionally, if imported goods become harder to sell due to market conditions, LC issuance will decline. For example, vehicle imports have decreased as people opt for Nigerian-used cars, partly because customs duties fluctuate with the FX rate. The government’s inconsistent policies also play a role.”
On the exit of multinationals, Fakayejo noted that this trend, which started in the manufacturing sector, has now spread to the oil and gas sector. He projected that the slowdown in LCs could have a positive effect on the economy, as less foreign exchange would be used for imports, encouraging local production.
“I believe the impact will be minimal in the future. By September, the local refinery should begin production, and the Dangote Refinery will start selling to the local market, reducing the need to import PMS. This should increase dollar availability and improve LC accessibility from banks. I think the current slowdown is temporary, and the situation will improve,” he said.
Investment banker and stockbroker Tajudeen Olayinka offered his perspective, suggesting that either import demand is slowing due to high costs and consumer resistance, or importers are using alternative credit options like open accounts, direct remittances, and bills for collection.
“However, the likelihood of these other credit options is doubtful, given concerns about the poor credit ratings of local importers. The high cost of raising naira to finance imports and the high exchange rate may also be reasons for the slowdown in LC issuances by Nigerian banks. This development has both positive and negative implications: positively, it could lead to a scarcity of foreign goods and a push for local production, improving Nigeria’s Balance of Trade and Exchange Rate in the long run; negatively, it could drag on the economy and increase inflationary pressure in the short term,” Olayinka explained.
