Nigeria’s foreign trade conducted through Letters of Credit (LCs) has experienced a 4.4% year-on-year increase, reaching $269.83 million in the first four months of 2025, up from $258.46 million during the same period in 2024. This development reflects a growing confidence in Nigeria’s external sector and a positive shift in the country’s trade dynamics.
Understanding Letters of Credit
A Letter of Credit is a financial instrument issued by a bank guaranteeing a buyer’s payment to a seller will be received on time and for the correct amount. In international trade, LCs are crucial as they provide security to exporters, ensuring that payment will be made upon fulfillment of the agreed terms.
Historical Challenges
Historically, Nigerian importers faced significant challenges with LCs due to the country’s weak foreign reserve position. This situation led to a lack of acceptance of Nigerian LCs by foreign partners, forcing importers to make advance payments before shipment, thereby increasing the risk and cost of international trade.
Recent Developments
The recent increase in LC usage indicates a reversal of this trend. The Central Bank of Nigeria (CBN) attributes this growth to steady increases in net foreign reserves since the beginning of the year, which have bolstered confidence in Nigeria’s ability to honor international trade commitments.
Monthly Fluctuations
Despite the overall positive trend, monthly LC transaction volumes have shown fluctuations:
- January 2025: $64.55 million
- February 2025: Increased by 48% to $95.6 million
- March 2025: Decreased by 54.4% to $43.53 million
- April 2025: Increased by 47.7% to $64.3 million
These variations suggest that while confidence is growing, external factors and market dynamics continue to influence trade volumes.
Economic Implications
The rise in LC-backed trade is a positive sign for Nigeria’s economy. It suggests improved liquidity and a stronger foreign reserve position, which can lead to increased trust from international trading partners. This development may also encourage more Nigerian businesses to engage in international trade, knowing that financial instruments like LCs are more readily accepted.
