Nigeria’s use of Letters of Credit (LCs) for international trade grew by 3.68% year-on-year in the first four months of 2025, reaching $267.96 million, up from $258.46 million during the same period in 2024.
The data, published by the Central Bank of Nigeria (CBN) on Sunday, reflects gradual improvements in trade finance activity, even as the economy continues to grapple with foreign exchange (FX) constraints and rising external debt servicing costs.
Letters of Credit are formal payment guarantees issued by banks on behalf of importers, assuring exporters of payment once goods are shipped and necessary documentation is provided. They are widely used in the importation of visible goods and are critical to ensuring trust and liquidity in cross-border trade.
Fluctuating Monthly Trends Signal Volatility
While the overall increase suggests a mild rebound in trade, monthly LC transactions showed notable volatility:
- January 2025: $64.55m (↑10.7% from January 2024: $58.33m)
- February 2025: $95.59m (↓6.8% from February 2024: $102.6m)
- March 2025: $43.53m (↓19.4% from March 2024: $54.03m)
- April 2025: $64.29m (↓1.6% from April 2024: $65.36m)
On a month-to-month basis:
- February jumped 48% from January.
- March plunged 54.4% from February.
- April rebounded 47.7% from March.
These swings reflect uncertainty in trade financing conditions, possibly tied to FX liquidity issues, geopolitical shocks, or fluctuating importer confidence.
Mounting Debt Payments Raise Concerns
Despite a mild recovery in trade-related payments, the CBN data also reveals mounting foreign exchange outflows for external debt servicing:
- Between January and April 2025, Nigeria spent $2.01 billion on external debt service, a 50% increase compared to the same period last year.
- These payments now account for more than 75% of the country’s total FX outflows.
Analysts warn that this growing debt burden could undermine gains in trade finance, as it tightens available FX for businesses and critical imports.
Despite the debt strain, Nigeria’s external reserves remain relatively strong, standing at $38.56 billion as of May 22, 2025. The CBN credits recent FX reforms, improved oil receipts, and diaspora remittances for supporting the reserves.
Still, FX access remains limited for many businesses, especially small and mid-sized importers, who continue to face hurdles in opening LCs and often resort to prepayment arrangements.
Analysts view the increase in LC issuance as a sign of cautious optimism, reflecting growing confidence in Nigeria’s external sector amid better FX management and modest reserve growth. However, they caution that:
- Debt repayments could limit future FX allocations for trade.
- Exchange rate volatility may continue to disrupt import planning.
- Structural reforms are needed to sustain and expand trade finance access.
