Expensive letters of credit are one of several reasons why Nigerian importers are not using conventional methods for paying for goods bought from other countries.

At the root of the problem, however, is a parallel exchange market in which hard currency can be obtained at rates consistently more favourable than official exchange rates.

The official US dollar: Nigerian naira exchange rate is around US$1:N114 but in the so-called parallel market, the US dollar has recently been exchanging for between N125 and N135. Despite several interventions and devaluations engineered by the Central Bank of Nigeria, a stable exchange rate remains elusive.

Avoiding official routes

Importers use several mechanisms to reduce the cost of obtaining foreign goods. They may evade import duties by, for example, declaring they have bought goods from abroad at a much lower price than has in reality been paid.

An importer might, on a $100,000 deal, transfer $90,000 obtained on the parallel market to pay the supplier and open an L/C for the balance of $10,000, hence paying 25 per cent duty only on the lower figure. In such a deal, the total savings from currency exchanges made on the parallel market, the avoidance of duty and expenses associated with currency exchanges and lower L/C costs are significant.

Through official mechanisms the importer would pay costs of N12,500,000 on a $100,000 import deal. If the importer structures the same purchase by officially declaring the deal is worth only $10,000 then the costs are reduced by N900,000.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.