Nigeria’s letter of credit payments has plummeted by 63% in the first quarter of 2024 compared to the same period in the previous year, according to international payments data from the Central Bank of Nigeria (CBN).
A letter of credit (LOC) is a document issued by a bank or financial institution that guarantees a buyer will pay a seller on time and in full for goods or services. LOCs are often used in international trade to protect both buyers and sellers, and can help businesses win new clients in foreign markets
The total payments via official channels for Q1 2024 amounted to $204.47 million, a significant shortfall of $344.75 million compared to $549.22 million in Q1 2023.
This steep decline underscores the challenges the country faces in its international trade and financial transactions, reflecting broader economic difficulties emanating from foreign exchange shortages.
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Payment Breakdown
In Q1 2023, January recorded payments of $107.78 million, followed by an increase in February to $171.95 million. March 2023 saw the highest payments for the quarter, totaling $269.49 million. However, the situation in Q1 2024 presents a stark contrast. January 2024 recorded significantly lower payments of $58.33 million. February saw an increase to $102.6 million, still far below the corresponding month in 2023. The trend continued downward in March 2024, with payments dropping to $43.54 million.
Other details
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, provided the customer supplies the proper paperwork.
Earlier, the CBN 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. The approved 2020 service charter of the CBN stipulated a 24-hour timeline for the issuance and management of letters of credit.
However, the newly approved 2023 service charter extended this to five working days. This change likely reflects the ongoing difficulties in accessing foreign currency, which in turn hindered the ability of businesses to open letters of credit.
Towards the end of Q1 2024, Nigeria’s foreign exchange (FX) reserves depleted significantly. CBN Governor Yemi Cardoso explained that the decreasing reserves were primarily due to debt repayments and other standard financial obligations rather than efforts to defend the naira.
During this period, the CBN started selling dollars to Bureau De Change operators (BDCs) in February 2024 and made another sale in March but reduced the allocation by 50% and sold FX at a rate of N1,251/$1. Additionally, Nigeria spent about $1.12 billion on foreign debt service payments, marking a 39.7% increase.
Implications for the Economy
The 63% reduction in letters of credit could have several implications for Nigeria’s economy. Letters of credit are a crucial component of international trade, assuring exporters they will receive payment. A sharp decline in such payments could indicate decreased import activity, possibly due to foreign exchange shortages, stricter import regulations, or other economic constraints.
This decline can lead to reduced availability of imported goods, impacting various sectors of the economy, including manufacturing and retail, which rely on imported materials and products.
The situation also highlights the broader economic challenges Nigeria faces, including foreign exchange scarcity, rising debt obligations, and pressures on the national currency.
Moving forward, business leaders have noted that the ability of Nigeria to stabilize its foreign exchange reserves and improve access to international financial instruments like letters of credit will be crucial in supporting its trade and economic growth.
The recent policy measures and economic strategies implemented by the CBN and the federal government are expected to play a vital role in addressing these challenges and fostering a more robust economic environment.