ALIIWO, IBADAN AND THE GLORY OF A CITY ON SEVEN HILLS by Princess Bolanle Hassan-Fasan

NIGERIAN ECONOMIC CRISIS: 

FOREIGN SUPPLIERS REJECT LETTERS OF CREDIT

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.

As a result of continued shortage of foreign exchange (forex), foreign suppliers are now demanding cash transfers into escrow accounts in place of Letters of Credit (LCs) as faith in the Nigerian banking system wanes owing to the dollar shortage.

“The CBN has however not settled the contracts since February 2023 which means there’s a backlog of around $3 billion,” a source familiar with the matter said.

A correspondent bank acts as an intermediary or agent, facilitating wire transfers, conducting business transactions, accepting deposits, and gathering documents on behalf of another bank.

Correspondent banks are most likely to be used by domestic banks to execute transactions that either originate or are completed in other countries. Domestic banks generally use correspondent banks to gain access to foreign financial markets and to serve international clients without having to open branches abroad.

Foreign suppliers are now demanding cash transfers into escrow accounts in place of LCs as faith in the Nigerian banking system wanes owing to the dollar shortage

.The immediate past acting CBN governor, Folashodun Shonubi, on September 6, 2023, said the apex bank had concluded negotiations on dollar debts with commercial banks, disclosing that all forex exchange backlogs would be cleared within one to two weeks.

More than two weeks after the apex bank promised to clear the over $10bn foreign exchange debts owed to the Deposit Money Bank, local manufacturers’ letters of credit (LC) for raw materials importation are now being rejected by suppliers.

Worried by the growing backlog and with no assurance of when it will be cleared, correspondent banks are pulling the plugs on local Nigerian banks.

The Central Bank of Nigeria (CBN) sold what are called forward contracts to several Nigerian businesses with the promise of dollars at an agreed price in the future. The banks opened LCs on the back of the forward contracts which were then used to buy goods from foreign suppliers.

Several Nigerian businesses that rely on imports have been cut off by their foreign suppliers who are rejecting letters of credit (LC) and refusing to deliver goods without payment as foreign currency shortages worsen in Africa’s biggest economy.

In the meantime, businesses are compelled to turn to the black market to get dollars at over 20 percent premium to fund critical imports.

The persistent recourse to the black market is pushing up the cost of business, with severe implications for inflation.

The implication on Trade and Industry is very dire and if this persists many businesses may be forced into bankruptcy.

The August inflation figure rose for an eighth straight month from July’s 24.08 percent, compounding raising apprehensions about a cost of living crisis worsened by President Bola Tinubu’s reforms.