In the first seven months of 2024, Nigeria’s Letter of Credit (LC) payments plummeted by 57.04%, falling to $391.91 million from $912.35 million during the same period in 2023, according to data from the Central Bank of Nigeria.
Lettters of Credit are a payment method used for importing goods, where a bank guarantees payment to an exporter upon receiving proper documentation.
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The significant drop in LC payments, about $520.44 million, is attributed to factors such as the exit of multinational companies, rising customs duties, and instability in the foreign exchange market.
Monthly LC payments varied, peaking at $102.59 million in February, and dropping to $21.48 million in May before rising again to $32.26 million in June.
Tunde Amolegbe, Managing Director of Arthur Steven Asset Management Limited, suggested that the decline was expected due to the unstable exchange rate and high customs charges.
However, he noted that recent tax waivers for essential food imports might slightly improve the situation, along with potential benefits from a more stable foreign exchange market and lower interest rates.
Bloomberg reports that the naira has depreciated by about 70% since May 2023, and efforts by the Central Bank of Nigeria to boost liquidity have had limited success.
Companies, including MTN, have been paying down their LCs to mitigate the impact on their finances.
Analysts like Rotimi Fakayejo and Tajudeen Olayinka highlight that inconsistent foreign exchange availability and high costs of imports are significant contributors to the decline in LC payments.
Fakayejo notes that the slowdown in LC payments might ultimately benefit the economy by reducing foreign exchange spent on imports and encouraging local production.
Olayinka points out that the high cost of imports and alternative credit options may also be factors.
While the decline has short-term negative impacts, it could lead to positive long-term effects by boosting local production and improving the balance of trade.
