Nigeria’s Letter of Credit Payments Drop by 57% in Seven Months
Nigeria’s Letter of Credit (LC) payments have plummeted by 57.04% in the first seven months of 2024, dropping from $912.35 million in the same period last year to $391.91 million. This significant decline has been attributed to several factors, including the exit of multinationals, skyrocketing customs duties, and the unstable foreign exchange rate, which has hampered Nigeria’s foreign trade.
According to the Central Bank of Nigeria (CBN), the highest LC payments this year were recorded in February, with a total of $102.59 million, followed by July, which saw $79.65 million in payments. March, April, and June also witnessed notable payments, although at a much lower rate than the previous years.
Analysts have pointed to the volatile exchange rate, customs duties, and the exit of multinational companies as major factors contributing to the decline. The managing director of Arthur Steven Asset Management Limited, Tunde Amolegbe, stated that the situation may improve slightly due to the recent tax waivers for the importation of essential food products, as well as a stabilized FX market, lower interest rates, and harmonized tax regime.
The Director of Research and Strategy at Chapel Hill Denham, Tajudeen Ibrahim, believes that Nigerian businesses are paying down on their Letters of Credit, indicating an improvement in dollar liquidity in the financial system. He attributes this improvement to the CBN’s policy response to the dollar shortage and major companies such as MTN paying off their LCs due to the negative impact on their earnings and balance sheet.
Economy and capital market analyst Rotimi Fakayejo noted that dollar liquidity plays a significant role in the decline, as well as the inconsistent availability of foreign exchange, which has slowed down the process of obtaining LCs. He also highlighted the impact of the exit of multinationals from the manufacturing sector and the reduced importation of vehicles due to high customs duties and foreign exchange rates.
While some experts believe that the decline may have positive effects on the economy, with less foreign exchange being spent on imports and a potential increase in local production, others warn of a potential drag on the economy and high inflationary pressure in the near term.
In conclusion, the decline in Letter of Credit payments is a complex issue with multiple factors contributing to its causes and potential effects on the Nigerian economy. As the situation evolves, it is crucial to monitor the developments closely and adapt to the changing landscape of international trade and finance.
