New data from The Central Bank of Nigeria (CBN) shows that the letter of credit payments in Nigeria dropped significantly by 63% in the first quarter of 2024 compared to the same period last year, as reported by International payments data. In the first quarter of 2024, the official letter of credit payments amounted to $204.47 million, showing a significant decrease of $344.75 million compared to the $549.22 million recorded in the first quarter of 2023.
Also, the country is currently struggling with a noticeable drop in its International Trade and financial transactions, showcasing the various challenges it is up against. In January 2023, payments totalled $107.78 million, but by February 2023, the amount had risen to $171.95 million. The numbers showed a clear upward trend over the two months. The first quarter of 2023 set a new record with a total payment of $269.49 million in March. On the contrary, the financial landscape in the first quarter of 2024 differs greatly from that of the year before.
CBN decided to increase the timeframe for issuing letters of credit before.
In January 2024, there was a notable decrease in payments, totalling only $58.33 million. In February of the year 2024, this year, there was a rise in Revenue to $102.6 million; however, this amount was significantly lower than the earnings from the same month in 2023. The pattern persisted into March 2024, where payments decreased to $43.54 million. The method of payment known as a letter of credit is commonly used for importing physical goods.
When a customer asks for it, a bank will commit in writing to pay the seller a specific amount within a set period of time in exchange for goods, provided that the customer supplies the necessary documentation to the bank. Previously, it was mentioned that the CBN decided to increase the timeframe for issuing letters of credit from one day to a full work week due to ongoing challenges related to the scarcity of foreign exchange in the country.
Businesses faced challenges in opening letters of credit.
Furthermore, the CBN’s service charter for 2020 promised that letters of credit would be issued and managed within 24 hours. Surprisingly, the latest service charter for 2023 states that the new timeline for this process is now extended to five working days. Businesses faced challenges in opening letters of credit due to restricted access to foreign currency, which was exacerbated by Nigeria’s sharp decline in foreign exchange reserves by the end of the first quarter in 2024.
Yemi Cardoso, the governor of CBN, mentioned that the decline in reserves was mainly caused by fulfilling debt repayments and other financial commitments, as opposed to focusing on protecting the value of the naira. During the time frame being assessed, the Central Bank of Nigeria initiated the sale of US dollars to Bureau De Change operators beginning in February of 2024. The central bank conducted another sale in March but decreased the allocation by half, selling foreign exchange at a rate of ₦1,251 to $1.
Letters of credit play a vital role in global trade.
Additionally, Nigeria allocated a total of $1.12 billion towards payments for foreign debts, showing a significant rise of 39.7% in comparison to previous expenditures. Nigeria’s Economy may face various consequences due to the significant 63% decrease in the utilization of letters of credit. Letters of credit play a vital role in global Trade by providing exporters with the assurance of payment for their goods and services. A sudden decrease in these payments could imply a drop in the amount of goods being imported, possibly due to issues with foreign currency reserves, more stringent import rules, or other economic limitations.