Nigeria’s foreign trade payments, made via Letters of Credit (LCs), have plummeted by 57.04% in the first seven months of 2024, totaling $391.91 million compared to $912.35 million in the same period in 2023. This significant decline, highlighted in the Central Bank of Nigeria’s (CBN) weekly International Payments Data, reflects the ongoing foreign exchange (forex) crisis, escalating customs duties, and the exit of several multinational companies from Nigeria.
Letters of Credit are essential payment methods used for importing goods into Nigeria, where a bank guarantees payment to the exporter once the importer provides the necessary documentation.
The highest LC payments recorded in 2024 occurred in February at $102.59 million, with subsequent months showing a fluctuating trend. Analysts attribute the sharp decline to the unstable exchange rate and other economic challenges, such as high customs charges and the exit of major international companies from Nigeria.
Forex Market Challenges
The naira has depreciated by approximately 70% since President Bola Tinubu took office in May 2023, exacerbating the forex crisis. Attempts by the CBN to stabilize the naira and improve dollar liquidity have yet to yield significant results. The reduction in LC payments is seen as a direct consequence of these challenges, as Nigerian businesses struggle to secure the foreign currency necessary for trade.
Expert Opinions
Tunde Amolegbe, Managing Director of Arthur Steven Asset Management Limited, pointed out that the decline in LC payments was expected given the current economic instability. He suggested that recent tax waivers on essential food imports might offer some relief, and emphasized that a stable forex market, lower interest rates, and a harmonized tax regime could improve the situation.
Tajudeen Ibrahim, Director of Research and Strategy at Chapel Hill Denham, noted that some Nigerian companies, including MTN, have been clearing their LCs to mitigate the negative impact on their earnings and balance sheets. He expressed optimism about future LC payments, expecting an improvement in dollar liquidity.
Impact on the Economy
Rotimi Fakayejo, an economy and capital market analyst, highlighted the inconsistent availability of forex as a key factor in the decline of LC payments. He noted that the reduced supply of foreign currency has slowed down import activities, particularly in the automotive sector, where imports of new and used vehicles have significantly decreased.
Fakayejo also suggested that the slowdown in LC payments might ultimately benefit the economy by reducing reliance on imports and encouraging local production. With the expected start of operations at local refineries, including the Dangote Refinery, there is hope for increased dollar availability and reduced need for importing petrol.
This forex crisis has deeply impacted Nigeria’s foreign trade, with the ripple effects felt across various sectors of the economy. However, there is cautious optimism that ongoing adjustments and policy measures may eventually lead to stabilization and growth.
