Nigeria’s foreign trade landscape in the first four months of 2025 witnessed a nuanced interplay of growth and volatility, characterized by a modest increase in Letters of Credit (LCs) utilization for import transactions amid persistent foreign exchange constraints and a heavy burden of external debt servicing. LCs, acting as crucial instruments guaranteeing payment to exporters upon fulfillment of shipment and documentation requirements, saw a 3.68% year-on-year rise, reaching $267.96 million compared to $258.46 million in the same period of 2024. This uptick suggests a tentative recovery in import activity, potentially fueled by a slight easing of foreign exchange restrictions and nascent improvements in economic conditions. However, the overall picture is far from uniformly positive, with significant underlying challenges impacting Nigeria’s ability to navigate the complexities of international trade.
A closer examination of the monthly LC transaction data reveals considerable fluctuations, highlighting the volatile nature of Nigeria’s trade environment. While January 2025 saw LC transactions at $64.55 million, surpassing the $58.33 million recorded in January 2024, February experienced a substantial surge to $95.59 million, albeit representing a 6.84% dip compared to February 2024. This peak was followed by a significant contraction in March, with transactions plummeting to $43.53 million, considerably lower than the $54.03 million recorded in March 2024. April witnessed a rebound to $64.29 million, a significant 19% increase from March 2025 but still slightly below the April 2024 figure. This erratic pattern underscores the persistent uncertainties and challenges impacting trade dynamics.
The observed volatility in LC utilization can be attributed to a combination of factors influencing Nigeria’s economic and financial landscape. Analysts point to gradually improving confidence in the country’s external sector, supported by steady growth in net foreign reserves throughout the year. This positive development has facilitated greater access to foreign exchange for some importers, allowing them to utilize LCs for import transactions, a departure from the previous reliance on prepayment methods due to forex scarcity. However, access to foreign currency remains a significant constraint for many businesses, limiting their ability to engage in international trade and hindering broader economic growth.
Further compounding the challenges is the substantial burden of external debt servicing, which continues to strain Nigeria’s foreign reserves and exert pressure on the country’s financial stability. Data from the Central Bank of Nigeria (CBN) reveals a staggering $2.01 billion spent on external debt servicing between January and April 2025, representing a concerning 50% surge compared to the same period in the previous year. This escalating debt service burden absorbs a significant portion of the country’s foreign exchange resources, diverting funds away from crucial investments in infrastructure, social programs, and other growth-enhancing initiatives. Economic experts warn that this unsustainable debt trajectory poses a significant threat to the long-term viability of Nigeria’s trade finance recovery and overall economic prospects.
The CBN data paints a stark picture of the dominance of debt service payments in Nigeria’s foreign exchange outflows, accounting for over three-quarters of the total. This alarming statistic underscores the immense pressure the country faces in managing its external obligations amidst persistent foreign exchange scarcity and a fragile revenue base. The heavy reliance on external borrowing to finance development projects and budgetary deficits has created a vicious cycle of debt accumulation, further constraining the country’s ability to invest in critical sectors and address pressing socio-economic challenges. The increasing proportion of foreign exchange earnings allocated to debt servicing leaves fewer resources available for productive investments, hindering long-term economic growth and development.
Despite these formidable challenges, Nigeria’s foreign exchange reserves have demonstrated resilience, maintaining a relatively strong position at $38.56 billion as of May 22, 2025. This reserve level provides a crucial buffer against external shocks and supports the stability of the Naira, the national currency. However, the sustainability of this reserve position is contingent on effectively managing the country’s external debt burden and implementing sound fiscal and monetary policies to stimulate economic growth and diversify foreign exchange earnings. Addressing the structural impediments to trade and investment, promoting export diversification, and strengthening the domestic revenue base are essential steps towards achieving sustainable economic development and reducing reliance on external borrowing. The interplay between these factors will ultimately determine Nigeria’s ability to navigate the complexities of its current economic landscape and realize its vast potential for growth and prosperity.
