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The Federal Government of Nigeria and Ethiopia’s central banks have reached a deal to swap $100 million in funds blocked as a result of a shortage of foreign currency in both countries, according to the Ethiopian news outlet, The Reporter.
The agreement will involve Dangote Cement and Ethiopian Airlines will swap $100m from revenue funds trapped in Nigeria and Ethiopia. Sources in the aviation industry reveal that Ethiopian Airlines will exchange $100 million out of the total $180 million in blocked funds in Nigeria for Ethiopian birr from Dangote Cement, Ethiopia.
“The National Bank will reimburse us with the equivalent amount in Ethiopian birr,” stated Mesfin Tassew, the CEO of Ethiopian Airlines, in an interview with The Reporter. He also mentioned that there are no current plans to swap the remaining amount.
The two African countries have struggled with the repatriation of funds, with millions of dollars trapped in the revenue of foreign companies owing to the massive decline in foreign currency inflow.
Sources from the Central Bank of Ethiopia, quoted by The Reporter, confirmed it had reached an agreement with its Nigerian counterpart to conduct a “temporary swap of foreign currencies.”
Dangote Cement, which produces about 2.5 million tons of cement yearly in Ethiopia, has more than $2 million held in the country, while Ethiopian Airlines – which is popular among Nigerian international travelers – has about $180 million to be repatriated.
The situation highlights the seriousness of the forex crisis in both countries. Ethiopia is currently facing a severe foreign exchange scarcity, reaching a critical stage that hampers the country’s ability to import crucial commodities such as pharmaceuticals and industrial resources.
The foreign exchange reserves held by Ethiopia are inadequate to support even a single month of imports, according to The Reporter.
Insufficient forex liquidity in the North African country has dampened the interest of investors, prompting the National Bank of Ethiopia to implement reforms aimed at mitigating FX obstacles faced by investors.
In Nigeria, the effect of the dollar shortage has not only inspired rising inflation, it has also forced the blocking of revenues of foreign companies operating in the country.
Last year, United Arab Emirates-based airline, Fly Emirates, twice, called off its operation in Nigeria due to its inability to repatriate more than $500 million in trapped funds.
But unlike the UAE’s Fly Emirates, Ethiopian Airlines, which is the largest foreign carrier operating in Nigeria – with international operations covering major cities like Lagos, Abuja, and Kano, shares a similar problem of dollar shortage with Nigeria.
Dangote Cement, which has been a major player in Ethiopia’s construction sector for over a decade, and Ethiopian Airlines, have over the years – accumulated millions of dollars in blocked funds.
In June, under the leadership of Nigeria’s new President Bola Tinubu, the Central Bank of Nigeria (CBN) floated the country’s forex market, in a move to collapse multiple exchange rates into one. Though the move has been applauded as a bold step in attracting foreign investment, it is yet to solve the forex shortage problem.
Nigeria has seen its foreign reserves drop to $34 billion as of May, following the massive decline in oil revenue – its major source of forex.
The accumulated trapped funds are said to have inspired investors’ suspicion that Nigeria’s dollar reserves are not as large as the CBN says. Investors are concerned that Africa’s largest economy is struggling to pay off debts that it should be able to pay easily given the volume of its foreign reserves.
“The suspicion is that Nigeria’s external reserves are much less than what the CBN reports,” a fund manager based in South Africa is quoted to have said on condition of anonymity. “The level of opacity is alarming and is a real drag on investor confidence.”
Given their shared forex challenge, the Ethiopian central bank offered Dangote Cement a currency swap proposal, allowing it to exchange its excess Ethiopian birr for US dollars held by overseas firms operating in Ethiopia.