Nigeria has experienced a significant decline in Letter of Credit payments, with a 57.04% drop in the first seven months of 2024. The payments, which totaled $391.91 million, are substantially lower than the $912.35 million recorded during the same period in 2023.
This information is based on the Central Bank of Nigeria’s weekly International Payments Data, available on their official website.
A letter of credit is a payment method for importing tangible goods. It is a written commitment from a bank (issuing bank) at the request of a customer, undertaking in writing that the bank will pay a certain amount to the exporter in exchange for the goods within a certain period of time, provided that the customer provides the bank with the relevant documents.
During the period under review, Nigeria’s LC payments fell by about $520.44 million, which some analysts attributed to factors such as the withdrawal of multinational companies, rising tariffs and unstable exchange rates that hampered Nigeria’s foreign trade during the same period. Analysis of CBN data shows that the highest amount of LC payments this year was $102.59 million in February, followed by $79.65 million in July and $58.33 million in January.
In March, LC payments stood at $43.53 million ($269 million for the same month in 2023), rising to $54.02 million in April 2024, declining to $21.48 million in May, but rising to $32.26 million in June.
Commenting on the trend, Mr. Tunde Amolegbe, the Managing Director of Arthur Steven Asset Management Limited, said the drop was expected given the volatile exchange rate, rising customs charges and of course the withdrawal of major international companies and the closure of other manufacturing facilities in the country.
However, he added that the situation may improve, albeit slightly, due to the recent granting of duty exemptions for the importation of some essential food items.
“Stability in the FX market and a lower interest rate and harmonised tax regime should also help,” he concluded.
According to reports, the naira has fallen by about 70% since May 2023, when President Bola Tinubu took office following the currency devaluation. Several attempts by the CBN to boost liquidity have so far not yielded any notable results.
Tajudeen Ibrahim, research and strategy director at Chapel Hill Denham, told Journalists: “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.”
Economic and capital market analyst Rotimi Fakayeho points out that dollar liquidity is influencing the decline in letter of credit 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.”
On the withdrawal of multinational companies, Fakayejo noted that multinationals are no longer just entering the manufacturing industry, but are now shifting to the oil and gas sector. He predicted: “The slowdown in LCs should have an overall positive impact on the economy as less foreign exchange will be used for imports and local production should dominate. I believe the overall impact 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.”
In his contribution, investment banker and stockbroker Tajudeen Olayinka said either the exorbitant prices of imported goods in the country and consumer resistance have dampened demand for imported goods or importers are availing other credit options such as open accounts, direct remittances and bills of exchange to collect payments for processing imports.
“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 said.
