Nigeria has experienced a significant decline in foreign trade payments conducted through letters of credit (L/Cs), with a reduction from US$1.07 billion in 2023 to just US$506.1 million in 2024.

The depreciation of the Nigerian naira has been a critical factor in this decline. Since President Bola Tinubu took office in May 2023, the naira has depreciated by about 70 per cent, exacerbating the forex crisis.

This depreciation has made imports more expensive and complicated the issuance of L/Cs, as banks require stable forex reserves to back them.

Multinationals exit, duty rises

The departure of several multinational companies from Nigeria has likely further contributed to the reduction in L/C usage. These companies were significant players in international trade, and their exit has led to a decrease in the volume of imports and exports facilitated by L/Cs.

Increased customs duties and stricter import regulations meanwhile have also probably played a role. Higher duties raise the cost of imported goods, discouraging importers from engaging in trade that requires L/Cs. Additionally, complex regulations can delay the processing of L/Cs, making them less attractive to businesses.

Economic uncertainty and supply chains

Economic instability and rising inflation have eroded consumer purchasing power, leading to reduced demand for imported goods. This decrease in demand has, in turn, contributed to the decline in the use of L/Cs for facilitating imports.

Global supply chain disruptions, partly due to the Covid-19 pandemic, have affected Nigeria's trade dynamics. Delays and increased costs in international shipping meanwhile have made importers cautious, reducing their willingness to rely on L/Cs for trade transactions.

Policies and prospects

The Nigerian government's efforts to stabilise the forex market and implement tax waivers for essential products may help mitigate the decline in L/C usage.

However, the effectiveness of these measures will depend on their implementation and the broader economic context.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.