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Nigeria’s forex crisis keeps accelerating, creating huge economic challenges along the way. The resulting weakling of the naira, the country’s currency, has forced the Central Bank of Nigeria to tighten monetary policies – which eventually now means that Nigeria can no longer meet some of its international financial obligations.

Reuters reports, citing a statement from an executive at the world’s largest airlines association, IATA, that Nigeria is withholding $450 million in revenue international carriers operating in the country have earned.

Per the report, the International Air Transport Association’s Vice President for Africa and the Middle East, Kamal Al Awadhi, on Sunday, described talks with Nigerian officials to release the funds as a “hectic ride”.

“We keep chipping away and hoping that it clicks that this is going to damage the country down the road,” he told reporters in Doha on the eve of IATA’s annual meeting of airline chiefs there this week.

Al Awadhi, a former chief executive of Kuwait Airways, said Nigerian officials had blamed the foreign currency shortage for not repatriating the airline revenue, Reuters reported.

This comes on the heels of the CBN’s struggle to curtail the wildling gap between the naira and dollar, which currently trades above N600/$1 in the parallel market and more than the official N419/$1 in the Investor & Export window.

As part of its efforts, Nigeria had repeatedly devalued the naira in the past few years, and also restricted forex access to a host of imported goods and services. In addition, Africa’s largest economy has restricted access to foreign currency for imports and for investors seeking to repatriate their profits as the nation tackles a severe dollar shortage.

The CBN has also introduced schemes such as Naira4Dollar designed to attract diaspora remittances. And as noted by Reuters, Nigeria has previously blocked revenue from foreign airlines before later repatriating the funds.

Reuters reports that IATA has so far held two rounds of talks with Nigerian officials, including from the Central Bank, who Al Awadhi said were “not responsive” to releasing cash.

Another round of talks between IATA and Nigerian officials is expected to start soon, the airline lobby group said, without specifying when.

“Hopefully, we can get some sort of solution where it starts going down (but) it won’t, I doubt, be paid in a single shot,” Al Awadhi said.

IATA says $1 billion of revenue belonging to foreign airlines is being withheld across Africa, although Nigeria is the only country where the value of blocked funds has risen.

The $450 million, the largest amount withheld by any African nation, in May was 12.5% higher than the previous month.

Algeria, Ethiopia and Zimbabwe, who combined are withholding $271 million from foreign airlines, in May marginally paid down what they owed. Eritrea was unchanged at $75 million, IATA said.

The aviation body didn’t say if there will be consequences for failure to repatriate the fund. However, this development supports the assertion that whatever Nigeria’s central bank is doing to boost dollar liquidity and save the naira from its current ordeal, is not working.

Nigeria spends more than 40% of its foreign exchange on fuel import, making it hard for the country to maintain enough dollar liquidity that will take pressure off the naira, especially now that oil prices are on the rise.

Central banks work mainly to stabilize or strengthen their currencies (to reduce inflation) and create employment by managing interest rates. Your Social Studies junior  secondary school teacher explained that in the section on the differences between commercial and central banks; he likely ended the class with “the central bank is the bank’s bank!”

When you reduce interest rates, companies and citizens can borrow cheaply. That triggers more economic activities, enabling the creation of more jobs. But excessive lowering of interest rates can “heat” up the economy and cause inflationary problems in the economy (money does not worth much as it is readily available, cheaply). 

The US central bank (Federal Reserve, as they call it) has increased the interest rate. The goal is to dampen and “slow” the economy by making it a little more expensive for companies and people to borrow money. So, right now in America, mortgage, credit cards, car loans, etc will see higher interest rates. As a result of those high rates, many people will think twice, and some will forgo acquiring some avoidable assets. If that happens at scale, you have slowed economic activity.

By doing just that, you can help the currency: it strengthens by reducing inflation. That strengthening of the currency is where I am interested in this note: Nigeria’s sovereign external loans are mainly in US dollars. If the dollars “appreciate”, it will cost Nigeria more to finance or obtain new loans.

The implication is that the pressure of this stronger US currency in a rising interest rate regime in the US can further cause the Naira to deteriorate; most Nigerian loans are denominated  in US dollars and some are not hedged or fixed which means there is a risk for them to float with US prime lending rates. Or even if the rates are fixed, Nigeria needs new loans to fund its budget, implying that next loans will be more expensive.

IMF projects that by 2026, more than 100% of Nigeria’s revenue will go into servicing debts. The debt service-to-revenue ratio has increased from 81.1% in 2020 to 96% in 2021, and continues to rise. A stronger US dollar will worsen the outlook.

Also, with higher interest rates, many US investors will see more avenues to deploy capital. During higher rates, safe assets like treasury bills will become more attractive. That change can affect how capital is allocated for emerging economies like Nigeria.

Watch out for stress on the Naira (more depreciation possible, black market is at N610/$ now). The cost of borrowing, for corporate and sovereign, will also rise. In other words, corporate bonds will be at higher rates; most of these bonds are Euro- or USD-denominated. 

For sovereign debts,  the government will borrow, even just to service old loans, and that can activate a vicious circle, triggering massive depreciation of Naira. Pay attention to the currency!

Comment on LinkedIn Feed

Comment: I think a stronger dollar may not cause much damage to the naira as Nigeria main revenue is also in dollar. Nigeria has no naira revenue to convert to dollar and pay debt, they either utilize the crude oil proceed or refinance through Eurobond. However, a higher rate in the US will reduce FPI. And I do not think the economy depends so much on FPI as Nigeria is not attractive to foreign investors. We also should not forget that OPEC has increased Nigeria’ quota and oil price is strong.

My Response: “I think a stronger dollar may not cause much damage to the naira as Nigeria main revenue is also in dollar.” Interestingly, Nigeria does not earn enough USD when compared to what Nigeria needs dollar for. If that is the case, it needs to find via other means. Your assumption is that Nigeria’s balance of trade and payment is optimal; not so. That is why we now use local tax revenue to service some of those debts.

“We also should not forget that OPEC has increased Nigeria’ quota and oil price is strong.” – Nigeria has not met its old quota due to theft. The issue of OPEC increasing Nigeria’s quota (to 1.772mbpd from 1.753mpbd) is a political statement EU needs to make Russia jealous. Nigeria is doing around 1.1mbpd now.

IMF Warns That Debt Servicing Might Gulp 100% Of Nigeria’s Revenue By 2026