In a concerning turn of events, Nigerian businesses heavily reliant on imports are feeling the squeeze as foreign suppliers reject letters of credit (LC) and refuse to deliver goods without upfront payment. This dire situation has emerged as foreign currency shortages continue to worsen in Africa’s largest economy.
Letters of credit, a customary method of payment for imported tangible goods, have become increasingly unreliable. Typically, these LCs involve a written commitment from a bank to pay an exporter a specified amount within a designated timeframe upon presentation of specified documents in exchange for goods.
Amid growing skepticism in the Nigerian banking system due to the escalating dollar shortage, foreign suppliers are now demanding cash transfers into escrow accounts in lieu of LCs.
One banking insider, speaking on the condition of anonymity, lamented, “Nigeria is bad credit today. If the central bank cannot honor obligations, why take any risk on a bank from Nigeria?”
The Central Bank of Nigeria (CBN) had sold forward contracts to numerous Nigerian businesses, promising them access to dollars at predetermined future prices. Banks subsequently opened LCs based on these forward contracts to acquire goods from foreign suppliers.
Regrettably, the CBN has failed to settle these contracts since February 2023, resulting in a backlog of approximately $3 billion, according to an insider source.
With no clear resolution in sight for this mounting backlog, correspondent banks, acting as intermediaries and agents, are beginning to sever ties with local Nigerian banks. Correspondent banks are essential for domestic banks looking to conduct international transactions and access foreign financial markets without establishing overseas branches.
The CBN’s inability to clear the dollar backlog has placed local banks in a precarious position, severely impacting their foreign exchange liquidity. As a consequence, they have been compelled to suspend various transactions, including those related to school fees and Personal Travel Allowance applications.
Meanwhile, businesses are increasingly resorting to the black market, where the dollar is fetching a premium of over 20 percent, to secure funds for essential imports. This persistent reliance on the black market is driving up business costs, with potential repercussions for inflation.
August’s inflation rate marked the eighth consecutive monthly increase, climbing from July’s 24.08 percent. This exacerbates the ongoing cost-of-living crisis, which has been exacerbated by President Bola Tinubu’s reforms. Not since August 2005 have Nigerians faced such soaring inflation rates.
Razia Khan, Managing Director and Chief Economist for Africa and the Middle East at Standard Chartered, commented, “The inflation data in our view reflects only in part the lifting of the subsidy. Much of the pre-existing pressure came from Nigeria’s monetary policy stance in the months that preceded this outcome, and the continued naira depreciation on the parallel market.”
The naira, Nigeria’s currency, temporarily rebounded to trade at 995 per US dollar on the streets after plummeting to a new low of N1,050 the previous Friday. In contrast, the official exchange rate stood at N747 per US dollar. This disparity, which had briefly closed following the CBN’s reforms in June, has reopened due to the shortage of dollars in the official market.
Data compiled by BusinessDay reveals that liquidity in the official market has dwindled to a daily average of $99.81 million, significantly down from $295.58 million between May and June 2023 and $318.46 million between January and May 2023.
Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, emphasized, “The dollar illiquidity in the official market is why the rate in the black market is soaring and the gap between the official rate has reopened. That is why the new CBN governor must prioritize clearing the backlog in order to save manufacturers and other businesses.”
Last June, following President Tinubu’s electoral victory, the CBN allowed the naira to trade at market rates, ending eight years of exchange rate controls. However, recent actions indicate that the CBN is once again exerting undue influence over exchange rates, stifling the market and eroding the confidence initially built during the reform’s early days.
All eyes are now on Yemi Cardoso, the new CBN governor, to see how he addresses the escalating foreign exchange crisis threatening the Nigerian economy.
