Nigeria’s Forex Crisis: Business in Peril as Foreign Suppliers Reject Letters of Credit — Nigerian businesses, heavily dependent on imports, are facing an unprecedented crisis. Their foreign suppliers, skeptical of the country’s financial health, are now spurning letters of credit (LCs). Instead, they demand cold, hard cash transfers into escrow accounts. Why? A profound shortage of foreign currency in Nigeria, Africa’s economic behemoth.
At its core, a letter of credit is a bank’s written assurance, ensuring exporters get paid upon presenting the necessary documents. But with faith in the Nigerian banking system dwindling, courtesy of the dollar dearth, foreign suppliers are wary. As one banking insider put it, “Nigeria is bad credit today. If the central bank cannot honour obligations, why risk banking with Nigeria?”
The Central Bank of Nigeria (CBN) once sold forward contracts, promising businesses dollars at future agreed prices. Banks, in turn, opened LCs based on these contracts to purchase goods from foreign counterparts. However, since February 2023, the CBN has left these contracts in limbo, leading to an alarming backlog of around $3 billion.
The repercussions? Correspondent banks, intermediaries facilitating international transactions, are cutting ties with Nigerian banks. This shift has cornered domestic banks into a suffocating FX liquidity crisis, halting transactions, from school fees to personal travel allowances.
Businesses are now in a quandary, resorting to the black market, paying exorbitant premiums of over 20% for the coveted dollar. This constant black market dependence is inflating operational costs, ominously hinting at an inflation surge.
Indeed, Nigeria’s annual inflation rate skyrocketed to a staggering 25.8% in August, the highest in 18 years. This surge, following President Bola Tinubu’s reforms, is reminiscent of the inflationary crisis of August 2005.
“The inflation spike isn’t solely due to subsidy removal. Nigeria’s monetary policies and the naira’s parallel market depreciation are significant contributors,” commented Razia Khan of Standard Chartered.
The naira’s volatile journey continues. After plunging to N1,050 against the dollar, it rebounded to 995 per dollar on the streets. However, the official rate remains at N747 per dollar. Alarmingly, the official market’s liquidity has plummeted, with the daily average down to $99.81 million from its peak of $318.46 million earlier in 2023.
Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, stated, “The dollar’s scarcity in the official market is the black market rate’s Achilles heel, widening the gap with the official rate. The new CBN governor needs to prioritize clearing this backlog to rescue businesses.”
In June, following Tinubu’s electoral win, the CBN permitted the naira to float with market dynamics, ending eight years of stringent exchange rate controls. But old patterns resurface, with the CBN once again manipulating rates, eroding the initial optimism.
The nation now looks to Yemi Cardoso, the new CBN governor, with bated breath. How he navigates this forex tempest will shape Nigeria’s economic future.