Nigeria’s Letter of Credit Payments Declined  by 57.04% in Seven Months

Kayode Tokede

Nigeria’s Letter of Credit (LC) payments have dropped by 57.04 per cent in the seven months of 2024 compared to the same period in the previous year, according to the International payments data of the Central Bank of Nigeria (CBN).

The total letter of credit payments made via official channels for seven months of 2024 was $391.91 million, reflecting a shortfall of 57.04 per cent or $520.45 million Year-on-Year (YoY) compared to seven months of 2023 when it was at $912.36 million.

A letter of credit is a mode of payment for the importation of visible goods. As requested by the customer, 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. 

This significant decrease highlights the challenges the country faces in its international trade and financial transactions.

A breakdown of the CBN numbers showed that LC in January 2024 was at $58.33 million, about 46 per cent decline from $107.78million January 2023. However, in February 2024, it stood at $102.6million, representing a 40.33 per cent YoY decline when compared to $123.95million February 2023.

The trend continued in March 2024, with payments dropping to $43.54 million, a significant decline of 83.6 per cent YoY from $269.49million March 2023.

It closed April 2024 at $54.03million, a decline of 64.58 per  cent from $152.52million April 2023 and dropped to its lowest figure in May 2024 at $21.49million, a drop of 64.4 per cent when compared to $60.29million May 2023.

In addition, LC stood at $32.3million June 2024, a 59 per cent YoY from $79.18million June 2023, while in July 2024, the CBN reported $79.65million, an increase of 12 per cent from $71.14million July 2023.

The 12 per cent YoY increase in July 2024 followed the sale of about $122.67million to 46 authorised dealers by the CBN, in its determination to promote stability and reduce market volatility in the foreign exchange market.

A statement signed by the Bank’s Director in charge of Financial Markets, Dr. Omolara Duke, disclosed that a total of $67,500 million was sold to 27 dealers, while the sum of $2.5million was bought from one authorised dealer on July 10, 2024.

The range of the bid for the July 10, 2024 sales was N1,480.0/US$- N1,500.0/US$, while the value date for the payments, going by the settlement cycle of two days, is July 12, 2024.

The CBN had extended the timeline for the issuance of letters of credit from 24 hours to five working days as the country continues to struggle with foreign exchange scarcity. 

In the approved 2020 service charter of the CBN, the timeline for the issuance and management of LC was 24 hours. However, the newly approved 2023 service charter shows that the timeline is now five working days.

It is likely that weaken naira at the foreign exchange hindered the ability of businesses to open LC. Towards the end of July 2024, Nigeria’s naira depleted significantly to $1,611.21 against the dollar from $757.522 as of July 2023.

On the flipside, the foreign reserves rise to $36.6 billion as of July 2024 when compared to $33.95billion July 2023.

Analysts believe the reduction in letters of credit could have several implications for Nigeria’s economy.

“A sharp decline in such payments could indicate decreased import activity, which might be a result of foreign exchange shortages, stricter import regulations, or other economic constraints,” said Vice President, Highcap Securities Limited, Mr. David Adnori.

The CBN Governor, Mr. Olayemi Cardoso, had noted that the country’s foreign reserves at $36.89 billion as of July, 16 2024, could finance over 11 months of imports for goods and services, or 14 months for goods alone.

Cardoso explained that this is significantly higher than the international benchmark of 3.0 months, indicating a strong buffer against external shocks.

He also noted that the banking sector remains robust and diverse, comprising 26 commercial banks, six merchant banks, and four non-interest banks.

He said, “The spread between official and BDC rates has narrowed significantly from N162.62 in January to N47.22 in June indicating successful price discovery, increased market efficiency and reduced arbitrage opportunities.

“The stock of external reserves increased to $36.89 billion as of July 16, compared with 33.22 billion dollars as at end-Dec 2023, driven largely by receipts from crude oil-related taxes and third-party receipts. In the first quarter of 2024, we maintained a current account surplus and saw improvements in our trade balance.”

Cardoso mentioned that while the CBN was encouraged by positive trends, it remained vigilant and committed to implementing policies that support sustainable growth in the financial markets and maintain overall economic stability.