• Monday, April 15, 2024
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BusinessDay

Airlines’ $812m trapped funds increase pressure on FX, external reserves

Fuel hike: Airlines don’t sign binding contracts, owe millions of naira – Oil marketers

Already pressured external reserves and foreign exchange (FX) are expected to worsen as Nigeria owes Airlines as much as $812.2 million trapped funds, the highest globally, a development set to test President Bola Tinubu’s reform agenda, two of which are the immediate repatriation of investment and profit, and a unified exchange rate, according to his inaugural address.

The International Air Transport Association (IATA) said on Sunday that Nigeria owes $812.2 million out of $2.27 billion trapped funds, making it the country with the highest trapped funds globally.

The association warned that rapidly rising levels of blocked funds are a threat to airline connectivity in the affected markets.

Ayodeji Ebo, managing director/CBO, Optimus by Afrinvest, said there will be initial pressure on the external reserves but once investors are guaranteed they will get their money, there will be more businesses.

“Unification of FX can bring Foreign Portfolio Investment,” he said, adding that inflows will be coming into the official market and there will be supply of FX, and the CBN will be able to defend the naira.

Nigeria’s external reserves, which give the Central Bank of Nigeria (CBN) the firepower to defend the naira have been on a steady declining, dropping by 8.80 percent to $35.09 billion as of May 30, 2023 compared to $38.48 billion a year ago in May 30, 2022, data from the CBN website indicated.

Read also: Airlines’ trapped $812.2m funds in Nigeria – highest globally IATA

Nigeria operates multiple exchange rates, which the central bank has used to manage demand, mask pressure on the naira and conserve its dwindling reserves.

Nigeria’s central bank has sold the dollar at 645 naira at its latest auction, results showed on Friday, lower than 465 naira where the currency is trading on the official secondary market.

Last week, the CBN denounced news of a devaluation of the currency after the media reported a big fall in the value of the naira following speculation over the outcome of a meeting President Tinubu had with Godwin Emefiele, the apex bank’s governor.

“Once we unify the exchange rate, most of these problems will be solved,” said Muda Yusuf, chief executive officer at the Centre for the Promotion of Private Enterprise.

He said the country is maintaining an artificially high foreign exchange rate and that because the FX is not unified, there is no liquidity in the market.

Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, said, “with the ongoing restructuring of the Nigerian economy, starting with the removal of the petrol subsidy, commissioning of the Dangote oil refinery and many initiatives that will come, I think Nigeria will be able to have access to foreign exchange that will enable the country and the international companies operating in Nigeria to repatriate their fund in short-term.”

Meanwhile, IATA in a statement on Sunday, listed top five countries that account for 68.0 percent of blocked funds to include Nigeria ($812.2 million), Bangladesh ($214.1 million), Algeria ($196.3 million), Pakistan ($188.2 million) and Lebanon ($141.2 million).

The industry’s blocked funds have increased by 47 percent to $2.27 billion in April 2023 from $1.55 billion in April 2022, IATA disclosed.

“Airlines cannot continue to offer services in markets where they are unable to repatriate the revenues arising from their commercial activities in those markets. Governments need to work with industry to resolve this situation so airlines can continue to provide the connectivity that is vital to driving economic activity and job creation,” Willie Walsh, IATA’s director-general said.

Last month, foreign airlines operating in Nigeria raised the Rate of Exchange (RoE) from N610 per dollar to N634 per dollar.

The implication of moving the airline foreign exchange rate to N634 per dollar implied that passengers would be paying more for international fares.

The development followed the rising of foreign airlines’ trapped funds which have now surpassed $800million.

Airlines trapped funds in Nigeria saw a sharp rise from $744million in March to $802 million in April despite several means deployed to avoid collection of their funds in naira, so as to reduce the amount of money trapped in Nigeria.

It was also gathered that the rate has risen three times in three months. In March 2023, the rate was increased from N460/$ to N551/$ and also in April to N610/$. In May it rose to N634 per dollar.

Despite deploying several measures to ensure ticket sales are collected in dollars, airlines’ trapped funds in Nigeria have continued to rise.

In addition to these measures, the National Association of Nigeria Travel Agencies (NANTA) recently disclosed that airlines are being paid their trapped funds in ‘tiny trickles’.

Despite these developments, airlines’ trapped funds have remained on the rise.

Stakeholders in the travel and aviation sector have said the continuous rise in trapped funds is because airlines have tripled fares for passengers paying in naira, causing the trapped funds in Nigeria to rise, instead of reducing.

For instance, a return ticket from Nigeria to London has risen in the last one year from N350,000 to about N1.5million to N1.8 million (For passengers paying in naira).

While these fares have discouraged passengers, forcing many to use their dollar cards, others who don’t have this option buy from travel agents with naira at exorbitant rates.

“A Lagos-London return ticket that cost N350,000 is now being sold for N1.8million. If you issue one economy class ticket, it should have been just N350,000 that is trapped, but now one economy ticket means N1.8 million is trapped.

“This means it will triple the effects of trapped funds because these are selling higher and because we are selling higher, the trapped funds are increasing but if we are selling N350,000, it should not have increased,” Susan Akporiaye, president of the National Association of Nigeria Travel Agencies (NANTA) had told BusinessDay

Akporiaye explained that high fare is the reason the trapped funds will keep increasing.

She said in such a short time, the trapped funds have moved from $700million to over $800 million because for instance a business class in the U.S that was sold for N2.5 million is almost N6 million.

Airlines also blocked low ticket inventories, leaving high inventories to be sold in naira only while the low ticket inventories on most airlines’ websites can only be bought with dollar cards only.

Airlines, however, opened a few low inventories a few weeks ago but stakeholders say the impact may not be felt so much because fares may continue to be high because of airlines’ exchange rate.