Kenya Airways is seeking to unlock more than Sh1.5 billion frozen in Ethiopia due to foreign exchange restrictions that have seen the company struggle to repatriate profits amid a crippling dollar crunch.
Chief Executive Allan Kilavuka told the Everyday Business The governments of Ethiopia and Kenya are in talks to ease the blockade of funds that have lost value in Addis Ababa’s banks.
For years, foreign companies operating in Ethiopia have struggled to recoup profits due to a lack of currency in the landlocked country of 123 million people that is heavily dependent on imports.
The talks came as KQ suffered a double blow after the value of the Ethiopian currency fell 30 percent against the US dollar after the government eased currency restrictions.
This has undermined the value of Ethiopia’s locked-in income as analysts predict that the foreign exchange shortage will take longer to resolve.
“We have a blocked amount of funds. We have $12.0 million that is blocked and cannot be used because it is stuck in a restricted country,” said Mr. Kilavuka in an interview.
“This is our problem because like now in Ethiopia, our currency has been devalued significantly and there is nothing we can do. In that market, we try to sell more in US dollars as a natural hedge and unfortunately again because of the forex regime, you cannot do this ,” he said.
Kenya Airways earns almost half of its revenue from African routes and foreign exchange issues remain the biggest risk for the national carrier, especially in markets such as Nigeria.
“Nigeria has done well to be fair because after liberalisation, we can remove our money,” Mr Kilavuka said of the frozen cash in Lagos.
In June last year, Nigeria abandoned its long-standing currency and allowed the naira to trade freely, tipping off foreign exchange rationing and encouraging direct investment flows.
Foreign airlines are among the hardest hit by the shortage of Nigerian dollars.
The International Air Transport Association said at its annual conference in June last year that the carrier has $812mn (Sh105 billion) stuck in Nigeria, more than any other country and almost half of the world total.
Ethiopia has followed Nigeria’s path and adopted a flexible exchange rate policy supported by the International Monetary Fund (IMF) as part of new measures to stabilize its economy.
This helped Ethiopia secure a $3.4 billion four-year IMF loan plan.
The IMF deal unlocks more financing from lenders including the World Bank and paves the way for a new debt restructuring push.
Ethiopia says the new exchange rate regime is “critical to eliminating (forex) shortages.”
Commercial banks can now set foreign exchange prices and non-bank entities are allowed to operate forex bureaus for the first time, a historic change in a country where the government for decades fixed prices, allowing the black market to flourish.
The birr currency has almost halved its value this year to trade at 103.97 per dollar – according to data from the Commercial Bank of Ethiopia, the country’s largest lender, closing on the black market rate of 115-120.
This has reduced KQ’s birr holdings.
The Horn of Africa nation has been struggling with a chronic shortage of foreign currency and high inflation – largely blamed on the two-year civil war in Tigray, which ended in 2022.
Kenya Airways said efforts to shift bills in the restricted market from local currency to hard currency with an eye on hedging against foreign exchange losses have proved futile.
“When it comes to our operations, since most of our sales are in foreign currencies especially the US dollar, Euro and Pound Sterling, it tends to provide a natural hedge for the costs we incur,” Mr Kilavuka said.
The national carrier last week reported its first half-year profit in more than a decade thanks to a rise in passenger numbers and a reduction in debt service costs.
Kenya Airways hopes to break even within a year.
The airline posted a profit after tax of Sh513 million in the six months to June, reversing a Sh21.7 billion loss in the first half of 2023.
The government took out a $641 million (Sh82.7 billion) loan to the US Exim Bank. Kenya will repay the US debt and expects Kenya Airways to repay it over a longer period of time and in local currency.
This saw KQ’s expenses in other expenses drop to Sh687 million from Sh22.8 billion reflecting the effects of balance sheet restructuring.
The airline’s revenue rose 22 per cent in the first half to Sh91.4 billion, helped by a 10 per cent rise in passenger numbers.
Mr Kilavuka said the company was racing to complete negotiations with strategic equity investors, without elaborating.
