Airlines’ trapped funds deal doing business in Nigeria another blow

Just as Anthony Joshua and Usman Kamaru were knocked out over the weekend, Nigeria’s business reputation has been dealt another blow as foreign airlines’ trapped funds running into millions of dollars are yet to be repatriated, BusinessDay findings show.

In the last six months, foreign airlines have been unable to access their funds from tickets sold in the country as a result of dollar shortage.

Most of them have resorted to buying dollars from the black market for as high as the current rate of N684 to a dollar against the official rate of N429 to a dollar rate.

Nigeria now holds about $600 million of blocked aviation funds as at June 2022, up from $450 million in the last two months.

This may lead to withdrawal of more foreign airlines, said Bismarck Rewane, managing director of Financial Derivatives Company, in his presentation during a recent breakfast session at Lagos Business School.

Emirates had last week announced that it would suspend all its flights from September 1, 2022, after the airline cut its operations from Dubai to Lagos from 11 per week to seven, due to its inability to repatriate its blocked funds from Nigeria.

The International Air Transport Association (IATA), on Thursday, expressed disappointment with the Nigerian government for the continued withholding of foreign airlines’ revenues, which prompted Emirates to stop flying to Nigeria.

Some Nigerians have gone to social media to express their displeasure over the trapped funds.

“One good thing that will come out of the International Air Transport Association (IATA) thread is that the central bank will find the money to sort out Emirates and other airlines quickly. One thing that gets Nigeria’s government moving quickly is international disgrace that affects officials on a personal level,” a Twitter user with the handle @CHxta said.

Analysts believe that the Central Bank of Nigeria (CBN) can repatriate the funds but it is being cautious of the demand pressure in the foreign exchange market.

The nation’s foreign exchange reserves, which give the CBN the firepower to defend the naira, have declined to $38.90 billion as of August 17, 2022 from the $40.5 billion recorded at the beginning of the year.

“In the short term, the CBN should work out a phased repatriation of foreign airlines’ trapped funds while they should be allowed to pay for aviation fuel and other local expenses in naira. Ultimately, the long-term solution to our FX problems will only come from rate harmonisation to disincentivise speculative behaviour, improve exports and promote import substitution,” Taiwo Oyedele, head of tax and corporate advisory services at PwC Nigeria, said.

According to him, there should be both an immediate and long-term strategy to address forex scarcity, which seems to be deteriorating by the day.

“Bear in mind that almost every sector of the economy is facing difficulties in sourcing FX including manufacturers; so the airlines are just one out of many,” he said.

Oyedele said this is not a problem that only the CBN can solve, adding that it requires a multi-prong approach.

“For instance, with the appropriate economic policies, Nigerian airlines should actually be the dominant airlines on major international routes for Nigeria. This way the pressure to source for FX to repatriate ticket sales will not only reduce, Nigerian airlines will in fact earn foreign currency from international passengers and become a net supplier of foreign exchange,” he added.

Ayodeji Ebo, managing director/chief business officer, Optimus by Afrinvest, said the development will impact negatively on the economy in terms of international perception and foreign direct investment.

He believes that with the level of Nigeria’s external reserves, the CBN can repatriate the trapped funds but the apex bank prefers to ration the dollar due to heightened demand pressure.

One of the reasons for external reserves decline, according to a report by FBNQuest, was the exit of foreign portfolio investors (FPIs) from Nigeria.

Portfolio investments, which declined by 2 percent year-on-year but grew by 49 percent quarter-on-quarter, accounted for the majority (61 percent) of total capital imports ($958 million) into the country.

Apart from exit of PFIs, other reasons for external reserves attrition are coupon payments (adjusted for $150 million in May) on Nigeria’s sovereign Eurobonds in May, other debt service costs, and a possible increase in the CBN’s interventions at its multiple windows.