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Challenges foreign airlines face to access blocked funds in Africa

BLOCKED funds are defined as money or capital realised when a foreign operation involving the transfer of funds is blocked because of regulations imposed by the government of the country where the money was generated (businessprofessor.com).

This definition has been broadened to include the severe economic challenges faced by some countries that often national reserves are depleted to the extent that there is a shortage of foreign currency in these countries.

Despite the substantial increase in capital flows to the African continent, African countries remain marginalised in financial globalisation and are highly dependent on Foreign Direct Investment (FDI).

Some parts of Africa have been plagued by deteriorating economic pressures, which are inextricably interwoven with political issues.

This in turn has caused significant challenges that have resulted in several African countries sanctioning debt management controls that have limited the export of foreign currency to keep their economies afloat.  It is worth pointing out that there is an economic and moral argument that supports halting the export of foreign currency in support of preserving the financial stability and welfare of future generations of these countries.

Nevertheless, the controversy of these strategies has not escaped criticism from academics, agencies and observers, who argue that the implementation of the African Continental Free Trade Area (ACFTA)  and the Single African Air Transport Market (SAATM) is a better way to achieve social and economic sustainability in Africa rather than sanctioning these penalising debt controls.

The issue of blocked funds is growing and a source of increasing concern for airlines that operate in some parts of Africa. According to the International Air Transport Association (IATA), it is estimated that a total of US$1,3 billion of airline funds is being blocked in 12 African countries as of June 2022, and this has increased by 40% in the last six months. Globally Africa accounts for 67% of airlines blocked funds.

There is some evidence to suggest that the increase in blocked funds has been caused by an increase in sales in all markets as we come out of the Covid-19 pandemic and Nigeria has the highest amount of blocked funds (currently standing at US$282 million) of any African country.

The issues in Nigeria stem from a high percentage (approximately 90%) of foreign exchange earnings coming from oil exports and in the past few months, production fell below its daily OPEC quota. This has mainly been caused by oil pipeline vandalism and a lack of infrastructure.

Several other countries that still hold blocked funds include Zimbabwe which holds US$100 million (as of April 2019), Algeria holds US$80 million (as of April 15 2019), Eritrea US$79 million (as of June 2022), and Ethiopia holds US$59 million (as of August 2021).

In these countries, procedures for the repatriation of funds are cumbersome, restrictive, and erratic, and ever-changing fiscal policies affect foreign currency exchange rates.

As a result, some airlines have been left with no choice but to threaten the suspension of operations.

 A recent case that is well documented is the case of Emirates, which announced plans to suspend all flights to and from Nigeria. It was reported this announcement was made after many months of negotiations with the Nigerian Government to move US$85 million out of the West African country.

The matter was resolved temporarily when it was reported that the Central Bank of Nigeria released US$265 million out of the total of US$ 464 million of blocked funds to foreign airlines.

However, the issue has not ‘gone gently into that good night. It is reported that the Nigerian Government is pushing laws that make it mandatory for foreign airlines to sell air tickets in their local currency (Naira) as opposed to US dollars.

It has not been all doom and gloom because credible organisations, such as IATA and African Airlines Associations (AFRAA), in association with other stakeholders, have been engaging with governments to find meaningful solutions.

Some progress has been made but it does not go far enough. Some examples include:

Angola (as of 15 April 2019): The country was on the verge of clearing over US$500 million in 2018. IATA observed that most airlines at the time were receiving a regular allocation of blocked funds.

Sudan (as of 15 April 2019): An embargo was lifted to allow airlines to sell their tickets in foreign currency to foreign residents, foreign non-residents, and Sudanese non-residents.

Zimbabwe (as of 15 April 2019): IATA and the Airlines operating in Zimbabwe were able to get a written commitment from the Reserve Bank of Zimbabwe to protect the value of US$192 million.

This in essence protects the value of the outstanding backlog of blocked funds against any possible devaluation of the currency, which would have meant a potential loss of US$130 million.

A full discussion of airline blocked funds in the countries mentioned above lies beyond the scope of this paper and further updated information is needed to expand this subject. Aviation demand (in terms of revenue passenger kilometres) in Africa is forecasted to reach 72% of the pre-Covid crisis (2019) levels with capacity reaching 75,2% (IATA,2022).

These findings have several implications for how governments create confidence and improve their understanding of how aviation operates and work closely with airlines and airports.

After all, it is in the interest of all stakeholders to ensure airlines are paid on time and in full at a fair exchange rate. With airline confidence, aviation can better support jobs and trade.

Mambara is a Zimbabwean who has demonstrable working senior management and board experience within the Airline industry. He holds a BA (Hons) Degree in Business with Marketing from the University of West London and an MSC in Travel Business Leadership from Leeds Beckett University in the United Kingdom. He writes in a personal capacity.

 

 

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