Nigeria’s International Payments Up 31%, Letters of Credit Outlay Down 63.3%

Arthur Eriye

Data from the Central Bank of Nigeria (CBN) has revealed that Nigeria’s overseas payments rose by roughly 31 per cent between January and May 2024, despite the country’s weak foreign exchange liquidity.

The nation’s foreign payments are projected to quicken in the coming months as a result of the government’s intention to increase food imports to supplement domestic output.

Experts have argued that the apex bank’s willing buyer and willing seller FX policy would have a negative impact on the local currency due to the economy’s reliance on imported goods.

To effectively channel foreign currency resources to appropriate sectors, the Central Bank of Nigeria has begun selling US dollars to FX users as it restarts the retail Dutch Auction system that it had abandoned.

The naira has not benefitted as expected despite monetary authority’s efforts to boost foreign exchange inflows by offering government instruments at higher clearing rates to local and foreign investors.

The local currency plummeted to N1600 due to FX liquidity shortage in the currency market, though gross external reserves continue to maintain uptrend in the second half of 2024, reaching 18-month high, recent data from the apex bank showed.

“International payments by the apex bank increased by 30.8 per cent year on year to $3.31 billion in five months of 2024 from $2.53 billion in the comparable period in 2023,” Cordros Capital Limited said in a commentary note at the weekend.

A breakdown showed that foreign debt service and payments increased by 96.3 per cent year on year to $2.19 billion, while the amount accounted for 66.1 per cent of total international payments.

The investment firm highlighted that there was an increase in direct remittances underpinned by increased payments for international services by Nigerian residents. Within the period, direct remittances increased by 28.5 per cent year on year to $841.37 million, analysts stated.

Meanwhile, payments for letters of credit fell by 63.3 per cent to $279.99 million versus $762.03 million in the equivalent period in 2023. The contraction was partly attributable to reduced consumer demand underpinned by high inflationary pressures as well as the depreciation of the naira.

Analysts said they expect international payments to remain elevated, supported by the federal government’s repayment of maturing debts primarily from Multilateral and Bilateral sources as well as interest payments.

Trade imports have also been projected to improve in the short term due to reduced naira depreciation and the federal government’s 150-day import duty removal on certain agricultural produce, potentially increasing international payments.

Last week, the Central Bank of Nigeria re-initiated the Retail Dutch Auction System (RDAS), marking the first foreign exchange retail auction under the current CBN administration.

Broadstreet analysts highlight that the strategic move by the apex bank was aimed at achieving several objectives.

The CBN is seeking to satisfy the growing FX demand, which has been partly fuelled by seasonal factors such as summer tourism and businesses seeking the greenback for trade; stabilizing the naira, and facilitating transparent price discovery.

The results of the retail Dutch auction showed that the CBN received bids from end users amounting to $1.18 billion submitted through 32 authorised dealer banks.

However, bids valued at about $313.69 million from six banks were disqualified due to late submissions or failure to adhere to the required bidding format.

Consequently, the CBN successfully auctioned $876.26 million at a cut-off rate of N1,495.00 per US dollar, with settlement for the successful bids scheduled for Thursday.

Although the CBN has not specified the frequency of retail auctions, analyst said they expect the naira to stabilise in the short term due to reduced demand pressure and tight naira liquidity after a significant portion of bids were met at the auction.

“However, we note that the expected currency response may be short-lived if the CBN does not sustain interventions in the FX market,” Cordros Capital Limited stated.