The rising cost of Travel: How Airfares soar thanks to new Forex Policy
For many of us, the dream of a summer getaway is something that gets us through the long, hard winter months. Whether you like to explore exotic hideaways or simply bask in the warmth of the blazing sun, travelling abroad is something that we all look forward to at one time or another.
It is also something that may soon be out of reach for Nigerian citizens, however, after their Federal Government introduced a new exchange rate policy that has increased airfares along foreign routes by an incredible 57%. These fares may even increase further as the summer progresses, preventing many from travelling while creating potential opportunities for forex investors.
What is the New Policy and how does it work?
The policy is driven by a new, interbank exchange rate for the conversion of flight tickets, which are generally priced globally in US dollars. The adoption of the N238/dollar rate has triggered a significant increase in the cost of international airfares along Nigerian routes, which has been highlighted through recent price points set by the International Air Transport Association (IATA).
Take the famous Lagos to Dubai route, for example, which previously sold economy tickets for between N130,000 and N180,000. These cost thresholds have been revised to N220,000 and N320,000, however, representing a sharp increase of 74.1% overall. This is the largest increase overall, and one that is likely to have an impact on both tourism levels of Dubai (which attracts a high volume of South African visitors annually) and Nigerian citizens themselves.
Several prominent airlines will also suffer in the form of sales volumes, with Emirates, Etihad, Qatar Airways and Ethiopian Airlines all operating multiple carriers along this popular and much-travelled route.
Will this Create Opportunities for Investors?
While some may miss out thanks to the implementation of this new exchange rate, however, forex traders may be able to leverage this for their own advantage. This reflects the liquidity and versatility that exists within the foreign exchange, where investors can profit even in a depreciating and volatile marketplace.
The trigger for the recent policy change occurred when the interbank exchange rate moved from N197 to N280 per dollar, as this encouraged the IATA to move its own rate of exchange for the conversion of airline tickets. This the development that will interest forex traders the most, as it offers an opportunity for investors to back against the Nigerian naira as it continues to fall against the US Dollar and the Euro.
According to IG, the shift in the interbank exchange rate underlines the weakening on the Nigerian naira, which has recently hit a succession of record lows. As the nation's forex reserves continue to dwindle so too does the value of the native currency, with one US Dollar now capable of buying a vast amount of naira. So while this fundamental weakness has begun to impact on international travel and the cost of airline tickets, it has also offered a new opportunity for forex traders to profit from an emerging market.
And Finally
At first glance, the change in the interbank exchange rate appears to be more of a consumer issue in terms of the rising cost of airfare and the impact on tourism to nations such as Dubai. If we delver deeper, however, we see that it also offers an opportunity for forex traders to profit, so long as they act decisively and recognise fluctuating market trends.
