PwC, Citi raise concerns on letter of credits rejections

PwC Nigeria and Citibank have raised concerns about foreign suppliers rejecting letters of credit amid unsettled foreign exchange obligations to domestic lenders.

In its Bi-monthly Economic Outlook report, PwC said the rejection of letters of credit may lead to less imports of the much-needed inputs and goods for manufacturing and retail/wholesale trade.

“This may heighten inflationary pressures and negatively impact Gross Domestic Product growth,” the report added.

Analysts at Citibank said corporates cannot get new letters of credit, and banks are owed dollars.

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“The question is: does the Central Bank need to find $ 6.8 billion of fresh dollars? We’d argue probably not – considering it is all in ‘the family’, a partial repayment and subsequent ‘restructuring’ of the balance would probably be ok,” they said in a report.

They added that clearing out the backlog needs to be paired with a more refined FX market.

“As the Central Bank governor put it: an ‘elegant’ one. There are all kinds of regulations that need to be removed to get rid of the tiered FX system: the glaring one is the restriction of FX provision for 43 items. An elegant system may persuade more transactions to move from the parallel to the formal rate.”

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Before the CBN collapsed all segments of the FX market into the Investors & Exporters window in June, the country’s dollar liquidity crisis worsened on the back of the Russia-Ukraine crisis, which took place last February.

The naira depreciated from 416.52/$1 as of February 28, 2022, to N 773.54/$1 on Monday, at the official market. At the parallel market, popularly called the black market, the dollar increased to N1,007/$1 from N575/$1.

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The high cost of sourcing FX was one of the major factors that pushed Nigeria’s inflation rate to an 18-year high of 25.80 percent in August from 24.08 percent in July, according to the National Bureau Statistics.

The report also revealed that real income is still under pressure as inflation (25.8 percent as of August) continues to rise and the national minimum wage remains unchanged in the short-term.

“Input costs (including the year-on-year increase of 216 percent in Petrol Motor Spirit from January to September) will continue to pass through to consumer prices further worsening the affordability of goods and services in the economy in short to medium term,” PwC said.