FX Outflow on Letter of Credit Sinks 46% in 12-Month
International payments for transactions related to letter of credit issued to foreign businesses by deposit money banks (DMBs) on behalf of their customers sank by 46.10% year on year to about $806 million in May 2024, data from the apex bank revealed.
The decline followed foreign exchange reform in Nigeria with the primary intention of unifying FX rates across the forex markets in the country, suggesting a decline in import business activities in 12 months.
In the preceding year, payment obligation on letter of credit issuances gulped about $1.5 billion from the Nigeria’s external reserves among other international payments made in the last 12 months, data from the Central Bank of Nigeria (CBN) revealed.
Letter of credit issuance allowed foreign sources to sell to eligible Nigerian companies using correspondence banks means as mode for settlement while the Central Bank acts as intermediary.
Some Nigerian companies depend strongly on foreign raw materials and other inputs in their production processes. While some players in the food production segment are returning gradually to home grown inputs through backward integration, such allure has eluded operators in the service industries.
Generally issued by an importer’s bank, the letter of credit guarantees the beneficiary will be paid once the conditions of the letter of credit have been met. The face value on letter of credit issued has maintain successive decline amidst exchange rates fluctuation driven by FX scarcity challenges. Nigeria’s spending on external debt obligation shifted higher.
FX inflows into external reserves continue to improve as data from the Central Bank of Nigeria (CBN) revealed it has surged to $34.66 billion. The surge to the level seen 13 months ago followed improved investors’ confidence in Nigerian economy and elevated rates on government borrowing instruments. Banks Borrow N5.4Trn from CBN Window to Augment Liqudity
