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The Nigeria’s Option On The Naira FX Paralysis And Slowing Letters of Credit

The Nigeria’s Option On The Naira FX Paralysis And Slowing Letters of Credit
Boniface, a shoemaker, poses for a photograph with a set of finished women's shoes at a shoe factory in Araria market in Aba, Nigeria August 19, 2016. REUTERS/Afolabi Sotunde

This is one of Nigeria’s biggest economic perturbations: “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 mainly by a bank that guarantees a buyer will pay a seller on time and in full for goods or services. Largely, with the fall of LOC, it does mean that banks are not offering a lot of those guarantees.

Good People, that is a big problem. But it is expected. Indeed, the problem with our forex paralysis is not that the Naira has lost value, but that it is not stable. And with that volatility, LOCs take a hint, freezing economic activities along the way. Nigeria needs a stable currency urgently.

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The deal is clear: FX traders and speculators look at the exchange rate; investors, besides everything, look at the stability of Naira. Naira needs to stay within a variance percentage of -/+ 5% over six months to bring investors back at scale.

One way of doing that is to fix an official rate, and stop the current illusion that Naira can be floated to swim in the waters of international market when it is clear we do not have enough life jackets (factories, services, warehouses, etc) to save it, if it begins to drift, as it is now doing!

Nigeria’s Letter of Credit Payments Drops by 63% in Q1 2024


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