Forex crisis: Nigeria’s foreign trade payments plunges by 57%

Nigeria's Letter of Credit payments fell to $391.91 million in the first seven months of 2024 from $912.35 million in the same period of 2023, a decrease of 57.04 percent.

The Central Bank of Nigeria's weekly International Payments Data, which may be found on its website, support this.

When importing visible goods, one method of payment employed is a Letter of Credit.

In response to a request from a client, a bank (the issuing bank) makes a written undertaking, promising to pay the exporter a specific amount for products within a specified time period—so long as the customer produces the necessary documentation.
A number of causes, including the departure of multinational corporations, rising customs charges, and fluctuating foreign exchange, have been attributed by some analysts to the country's LCs payment losses of around $520.44 million during the study period, which hindered Nigeria's foreign commerce.

The greatest LC payments this year were $102.59 million in February, $79.65 million in July, and $58.33 million in January, according to a review of CBN data.

The payments from LCs were $269 million in March 2023, $43.53 million in March 2024, $54.02 million in April 2024, $21.48 million in May, and $32.26 million in June.

Managing Director of Arthur Steven Asset Management Limited Tunde Amolegbe discussed the pattern and said the drop 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.
"A lower interest rate, a unified tax system, and stability in the foreign exchange market should also help," he said in closing.

Bloomberg claims that since President Bola Tinubu assumed office in May 2023 and the currency was devalued, the value of the naira has decreased by almost 70%. The CBN has tried a number of times to increase liquidity, but the results have not been very noticeable.

Tajudeen Ibrahim, Chapel Hill Denham's Director of Research and Strategy, stated, "Nigerian businesses are making payments on their debts." The CBN's policy response to the dollar scarcity in the system is largely responsible for this improvement in dollar liquidity in the Nigerian financial system.

In order to assist businesses in repaying their foreign currency loans, the CBN did sell a certain amount of dollars to them in the most recent RDAS auction. MTN is among the significant businesses that have been repaying their credit letters. I estimate that they have paid out around $300 million in LCs. As a result, companies have begun paying off their LCs due to the detrimental effects they are having on their balance sheet and earnings.

"I believe that there is a bright future for letters of credit because I anticipate increased liquidity in the inflow of US dollars into the economy and that Nigerian companies will continue to make payments on their LCs."

According to Rotimi Fakayejo, an economist covering the economy and capital markets, dollar liquidity contributes to the decrease in LC payments.

FX availability is erratic, he stated. The banks were allowed to obtain whatever they needed at one point when the supply was limited, but I think the process was dragged significantly by the banks' usual focus on profit. There is a significant impact from the CBN's sluggish or curtailed supply.

"Importers' business will suffer if they wish to import but are unable to obtain foreign exchange or if the express undertaking of Letters of Credit on their behalf is not completed. There will also be a decrease in LCs if the market is unfriendly and the product they are importing is getting harder to sell.

For example, there has been a decrease in the imports of automobiles, both new and used. There is an increase in the purchase of used cars from Nigeria, but the government is inconsistent on the customs duty, which is known to be based on foreign exchange rates. It has an effect because we consistently observe increases.

Fakayejo conjectured that with the departure of the multinational corporations, the manufacturing sector had become obsolete and had instead transitioned to the oil and gas industry.

"I think the overall effect of the LC slowdown 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," he stated. I think that generally, it should work in our favour.

Therefore, there's a chance that the banks' import receipts will improve and that they'll make LCs more easily accessible. The situation will improve, in my opinion, and the slowdown is only temporary.

According to Tajudeen Olayinka, an investment banker and stockbroker, either consumers' resistance and the prohibitive cost of imported goods in the nation are slowing down the demand for imports, or importers are looking into other credit options, like open accounts, direct remittances, and bills for collection, to handle imports.

"Given worries from overseas exporters about the subpar credit standing of local importers, the possibility of these additional loan choices is quite unlikely. Thus, high exchange rates and the high cost of generating naira to finance imports could be additional factors contributing to the observed slowdown in the issue of credit letters by Nigerian banks.

"The scenario has both positive and negative implications: (i) Positive in that it will lead to a shortage of imported goods and a renewed motivation to turn to local manufacturing in order to prevent shortages, ultimately improving Nigeria's trade balance and naira exchange rate. Negative, in that it will persist in impeding the economy and raising inflationary pressure in the short to medium run," he stated.