Nigeria faces a severe forex crisis as foreign trade payments drop by 57%, impacting economic stability and trade relations.
There has been a 57.04% decline in Nigeria’s Letter of Credit payments, with the first seven months of 2024 recording only $391.91m compared to $912.35m for the same period in 2023.
As per the weekly International Payments Data available on the website of Nigeria’s Central Bank, this information holds true.
The mode of payment utilized for the importation of tangible goods is referred to as a Letter of Credit.
At the behest of its client, a financial institution (i.e. the issuing bank) provides a written assurance to pay an exporter a specified amount within an agreed-upon timeframe in exchange for goods, provided that all necessary documentation is given by the customer to said bank.
During the reviewed time frame, Nigeria’s LCs payment decreased by approximately $520.44 million due to various factors such as multinational companies leaving the country and increased customs duties that caused instability in foreign exchange rates ultimately leading to hindered foreign trade within Nigeria. Some analysts have placed blame on these aforementioned circumstances for this decrease in payments.
The CBN data indicated that the largest LC payments in 2021 occurred in February with a sum of $102.59m, trailed by July at $79.65m and January had recorded figures of $58.33m respectively.
LCs payments were $43.53m in March, a decrease from the same month in 2023 which amounted to $269m. In April of 2024, there was an increase as it reached $54.02m but took a dip down to just $21.48m for May before seeing another rise up with June’s payment totaling at approximately $32.26m .
Tunde Amolegbe, the Managing Director of Arthur Steven Asset Management Limited, expressed his belief that the current decrease in trend was predictable due to several factors such as fluctuating exchange rates and high customs clearing fees. Additionally, major international companies exiting Nigeria and other manufacturing businesses shutting down has contributed towards this decline.
However, he went on to mention that the condition could potentially get better with slight improvements due to the recent tax exemptions granted for importing certain essential food items.
He concluded that a harmonized tax regime, lower interest rates and stability in the FX market would provide assistance.
Since President Bola Tinubu took office in May 2023, following the devaluation of the currency, Bloomberg reports that the naira has experienced a depreciation of approximately 70%. Despite several liquidity-boosting measures taken by CBN, significant results are yet to be seen.
Tajudeen Ibrahim, Chapel Hill Denham’s Director of Research and Strategy, informed The PUNCH that Nigerian enterprises are reducing their Letters of Credit payments. This suggests a rise in the availability of dollars within Nigeria’s financial system which is largely due to CBN’s measures taken against dollar shortages.
At the most recent RDAS auction, CBN sold dollars to companies for them to pay off their foreign currency loans. MTN is one of these major corporations that has been diligently paying down its letters of credit, having already paid around $300m in LCs. This trend can be attributed to how negative impacts on earnings and balance sheets have led other companies towards clearing out their own LCs as well.
I believe that the outlook for Letters of Credit is optimistic as I anticipate an increase in US dollar liquidity flowing into the economy, and Nigerian businesses will likely make more payments towards their LCs.
Rotimi Fakayejo, an analyst specializing in economy and capital markets, believes that the reduction observed in LCs payments can be attributed to a lack of readily available dollars.
According to him, there are irregularities in FX availability. There was a time when the supply reduced and banks were granted permission to obtain as much as they required; however, being profit-oriented entities, their focus on profits hindered speedy processing. The decreased or sluggish allocation from CBN has considerable implications.
Businesses importing goods will face adverse consequences if they lack access to foreign exchange or the necessary express undertaking of Letters of Credit. Furthermore, declining market demand and unfriendly business conditions can lead to a decrease in LCs availability for those dealing with increasingly challenging sales situations.
To illustrate, the importation of automobiles has decreased, whether they are brand new or used. The populace is opting for more Nigerian second-hand cars; however, we’re aware that customs duty depends on foreign currency rates and the government’s inconsistency in handling it makes a difference. It appears to rise every time which results in an effect.
Fakayejo stated that the departure of multinational corporations from the manufacturing industry was not surprising, as they had already shifted their focus to the oil and gas sector.
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In his projection, he expressed that the economy is likely to benefit from the slowdown in LCs. With a decrease in foreign exchange used for importation, more attention will be given to local production which is expected to have an overall positive effect on the economy. He strongly believes this will work out favorably for us.
I believe the impact going forward will be minimal. This is due to the anticipated commencement of local production in September by a nearby refinery, as well as Dangote Refinery’s entry into sales within the domestic market. These developments should lead to more dollars available since there would likely be less importation of PMS required.
“It is possible that we will witness an enhancement in bank import receipts and greater accessibility to LCs from banks. I am confident that the current slowdown is only temporary, and conditions will improve.”
Tajudeen Olayinka, an Investment Banker and stockbroker, stated that either the cost of imported goods in Nigeria is becoming too expensive for consumers to afford resulting in a reduction of demand or importers are utilizing alternative credit means like open accounts, direct remittances or bills for collection to facilitate their imports.
Given concerns about the poor credit ratings of local importers, it is highly doubtful that these other credit options will be viable. This may also be due to the high cost of raising naira for imports and a steep exchange rate, which are likely contributing factors in the observed decrease in Nigerian bank-issued letters of credit.
According to him, the development will have both favorable and unfavorable effects. On one hand, it will lead to a shortage of foreign goods and encourage domestic production as a means of tackling scarcity. This could benefit Nigeria in terms of its Balance of Trade and Exchange Rate over time. However, on the other hand, there may be short-term negative consequences such as economic stagnation and increased inflationary pressures.
