July 10, 2023/CSL Research

According to a report from an Ethiopian news outlet, the Central Bank of Nigeria and Ethiopia’s central bank have reached an agreement to conduct a temporary swap of funds blocked as a result of FX shortage in both countries. The agreement will involve Dangote Cement and Ethiopian Airlines swapping US$100m of funds trapped in Nigeria and Ethiopia. Sources in the aviation industry reveal that Ethiopian Airlines will exchange US$100 million out of the total US$180 million in blocked funds in Nigeria for Ethiopian birr. The currency swap entails trading Ethiopian Airlines’ revenues from Nigeria for Dangote Cement’s earnings in Ethiopia.

Since the inception of its operations in Ethiopia in 2015, Dangote Cement has been a major player in the Ethiopian construction sector, producing an average of 2.5million tons of cement per annum and has c.US$300 million held in Ethiopia. In the same vein, Ethiopian Airlines – the largest foreign carrier operating in Nigeria with international operations covering key cities like Lagos, Abuja, and Kano has about US$180 million in trapped funds in Nigeria. To avoid stalling crucial businesses between the two nations, a currency swap is a proven and viable way companies can use to get their trapped funds out of illiquid economies.

Following directives from President Bola Ahmed Tinubu, the Central Bank of Nigeria (CBN) merged the various official FX windows into the I&E window and allowed for a willing buyer, willing seller model. Though the move has been applauded as a bold step in attracting foreign investments, it is yet to solve the forex shortage. Nigeria has seen its foreign reserves drop to US$34bn as of May from US$37bn in January. The accumulated trapped funds are said to have spurred investors’ suspicion that a lot of Nigeria’s dollar reserves may be encumbered given the quantum of trapped funds.

In our view, swap arrangements such as these are a good way to reduce the quantum of these trapped funds. With this arrangement, Ethiopian Airlines will have US$80 million left trapped in Nigeria while Dangote Cement will have US$200 million left in Ethiopia.The arrangement sees total airline trapped fund of US$812 million owed by Nigeria reduced by 12.3%.