• Monday, May 27, 2024
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BusinessDay

Letters of credit impasse fades as dollar shortage eases

Letter-of-Credit (1)

Foreign suppliers are no longer rejecting letters of credit from Nigerian businesses, in a boost for manufacturers who had struggled to import critical inputs and ran the risk of shutting down.

The improved dollar supply in Africa’s most populous nation is behind the acceptance of the letters of credit that had been rejected following an acute dollar shortage that saw the Central Bank of Nigeria (CBN) default on forward contract obligations.

“The improved dollar supply has led to the easy access of LCs since last month,” Femi Egbesola, national president of the Association of Small Business Owners of Nigeria, said.

“Manufacturers will now be able to project their plans now that they can access LCs. It will also help stabilise the naira more,” Egbesola said.

Read also: Explainer: What is a letter of credit?

He said he expected the prices of goods to begin to cool in the short term in line with the new exchange rate that is about N1,250-N1,300/$.

A letter of credit is a mode of payment used for the importation of visible goods.

It is a written undertaking given by a bank at the request of its customer, in which the bank obligates itself to pay the exporter up to a stated amount within a prescribed time frame upon presentation of stipulated documents in exchange for goods.

An official at Manufacturers Association of Nigeria (MAN), who spoke on condition of anonymity, also confirmed the acceptance of LCs, saying that the situation has improved.

“The government was able to settle some of the forex forward payments that the Central Bank of Nigeria had and that was a game-changer,” he said.

“The loan settlement of all the forward payments that Nigeria had created a confidence crisis for exporters, making them not trust our LCs by not honouring them. But now they have started doing it,” he said.

He added that the situation is better now compared to last November to around March when it was terrible.

“This just shows that things are getting back to normal in the sector where there was an abnormal situation over the last six months. The CBN governor has normalised a lot of things, not just paying off the outstanding LCs but by normalising the whole process of applying and booking the process,” Gabriel Idahosa, president of Lagos Chamber of Commerce and Industry, said.

The CBN has since the beginning of this year introduced measures to improve liquidity, including raising its benchmark rate 600 basis points to attract capital inflows and dumping the currency’s peg to allow the market to determine the naira’s exchange rate.

This was after years of unorthodox currency management deterred investors and caused a scarcity of the greenback.

Dollar liquidity jumped 90 percent to $160.8 million on Tuesday from a day earlier, Chapel Hill Denham said in an emailed note on Wednesday.

According to a Bloomberg report, the apex bank is also selling dollars to money traders to boost distribution to retail users.

BUA Foods, the country’s biggest food and beverage company, took advantage of the improved dollar liquidity to prune debts by about six percent in the first quarter of this year, said Ayodele Abioye, the company’s MD.

“Dollar availability will no doubt have a positive impact going forward and we are optimistic of better performance for half-year 2024,” he said.

Similarly, Cadbury Nigeria has been able to access all its dollar needs from the official market since the beginning of the year.

“Our local-currency cash has dropped because of us being able to buy foreign exchange in advance for the materials we need,” Ogaga Ologe, finance director at Cadbury Nigeria, said.

Adetilewa Adebajo, economist and chief executive at Lagos-based CFG Advisory, said by phone that the increased dollar liquidity is providing a respite for companies to pay down debts and cushion the effect of the devaluation.

The liberalisation of the foreign exchange regime as part of measures to revive the economy led to a large devaluation of the naira. The currency measures are part of bold steps introduced by President Bola Tinubu after he took power in May to end Nigeria’s years of economic stagnation.

The reforms, which included scrapping fuel subsidies, have sent inflation to a record high and fanned a cost-of-living crisis that’s caused severe hardship for ordinary Nigerians.

The naira’s collapse, after many years of having its level artificially supported by the central bank on the official market, contributed significantly to the high inflation.

BusinessDay reported last October that foreign suppliers were demanding cash transfers into escrow accounts in place of LCs.