Nigeria’s Letter of Credit payments in the first seven months of 2024 have dropped by 57.04 per cent to $391.91m compared to $912.35m in the same period of 2023.
This is according to the weekly International Payments Data provided by the Central Bank of Nigeria on its website.
A Letter of Credit is a mode of payment used for the importation of visible goods.
It is a written undertaking given by s bank (issuing bank) at the request of its customer in which the bank promises in writing to pay the exporter a certain sum within a certain time frame in return for goods, as long as the customer provides the bank with the proper paperwork.
In the period under review, the country’s LCs payment shed about $520.44m, which some analysts have blamed on factors like the exit of multinationals, skyrocketing customs duties, and the unstable foreign exchange, which hampered Nigeria’s foreign trade in the period under review.
An analysis of the CBN data showed that the highest LC payments this year were recorded in February at $102.59m, followed by July at $79.65m and $58.33m in January.
In March, LCs payments stood at $43.53m compared to $269m in the same month in 2023, rose to $54.02m in April 2024 and dropped to $21.48m in May before rising to $32.26m in June.
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, told The PUNCH, “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.
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.”
On the exit of the multinationals, Fakayejo posited that it was no longer new in the manufacturing sector and had since moved to the oil & gas sector.
He projected, “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.”
An Investment Banker and stockbroker, Tajudeen Olayinka, in his submission, opined that it is either that demand for imports is slowing down as a result of the prohibitive cost of imported goods in the country and consumers’ resistance, or importers are exploring other credit means, such as open account; direct remittances; and bills for collection to deal with 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.