Nigeria’s Letter of Credit (LC) payments decreased by 57.04% in the first seven months of 2024, dropping from $912.35 million in 2023 to $391.91 million. This report is according to the Central Bank of Nigeria’s weekly International Payments Data on its website.
A Letter of Credit (LC) is a financial instrument used in international trade. It’s a written guarantee issued by a bank on behalf of a buyer (importer) to a seller (exporter). The bank promises to pay the exporter a specified amount within a set timeframe, provided the seller delivers the goods as agreed and presents the required documentation.
During the review period, Nigeria’s LC payments declined by approximately $520.44 million. This decline is attributed to factors such as the departure of multinational companies, increased customs duties, and a volatile foreign exchange market, which collectively hampered the country’s foreign trade.
An analysis of the CBN data reveals that the highest LC payments this year occurred in February at $102.59 million, followed by July at $79.65 million and January at $58.33 million.
In March, LC payments fell to $43.53 million from $269 million in the same month of 2023. They subsequently rose to $54.02 million in April before declining again to $21.48 million in May. June saw a slight recovery with payments reaching $32.26 million.
Speaking on the trend, 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 back 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.
According to Bloomberg, the naira has fallen by about 70 per cent since May 2023 when President Bola Tinubu took office following the devaluation of the currency. Several attempts by the CBN to boost liquidity have yet to yield significant results.
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.”
Fakayejo noted that the exit of multinationals from the manufacturing sector is not new and has now spread to the oil and gas industry
He said, “I believe with the slowdown in the LCs, the overall effect should be positive for the economy because less of our foreign exchange will be used on importation and local production should be the order of the day. I believe that the overall effect should be positive for us.
“Going forward, I don’t think the impact would be much. It is expected that by September, the local refinery will start producing and Dangote Refinery will start selling to the local market, which should mean more dollar availability because there would be less need to import PMS.
“So, we may see an improvement in the import receipts from the banks and increased LCs accessibility from the banks. I believe the slowdown is just for some time and the situation will improve.”
According to Tajudeen Olayinka, an Investment Banker and stockbroker, the decline in LC payments could be attributed to several factors. One possibility is a decrease in demand for imports due to the high cost of imported goods and consumer resistance. Another explanation is that importers may be exploring alternative financing options, such as open account trade, direct remittances, or bills for collection.
“The likelihood of these other credit options is very doubtful, given concerns of foreign exporters to poor credit ratings of local importers. Therefore, high cost of raising naira to finance imports and high exchange rate may be the other reasons for the observed slowdown in letters of credit issuances by Nigerian banks.
“The development has both positive and negative implications: (i)Positive in that it will create scarcity of foreign goods and a new desire to resort to local production to arrest scarcity, with improvement to Nigeria’s Balance of Trade and Exchange Rate of the naira in the long run. Negative, in that it will continue to cause a drag on the economy and high inflationary pressure in the immediate to near term,” he mentioned.
This article was written by Tamaraebiju Jide, a student at Elizade University
