The way to strengthen Naira is via production, says Bernard

An analyst explains how FX market was recently manipulated to strengthen the Naira, and suggests policy options to improve Naira’s strength.

On Friday, last week, the Nigerian stock exchange witnessed a rise in the Naira’s strength as it traded between N780 and N806 for a dollar on the official window. On the parallel market, a dollar was sold for between N950 and N1110 to the dollar. While some speculators claim that the rise was caused by the panic-selling of USD, others said it was because the CBN pumped money into FX. Mikael Bernard, a Crypto Market Analyst, shares his thoughts on the currency’s strength with Opeyemi Lawal in this interview.

Interview by Opeyemi Lawal for © FIJ

Speculation, arbitrage, whatever you are seeing today, is just the symptom of a deeper problem. The problem is not the speculator; it is not the arbitrage, not even the crypto traders. They are there because Nigeria as a country is not being productive. If we were exporting, if we created incentives for people to produce, mass export, we wouldn’t have this problem. For instance, people who are doing bureau de change would be able to buy dollars from exporters and sell to importers. But when there are almost no exporters or exporters don’t even have dollars, then how would they get dollars to give to importers? The demand for the dollar is still there for imports. So, you need to solve the basic problem of production

What happened to the Naira on Friday?

I will start by explaining how exchanges work. In an exchange, whether a crypto exchange or a currency exchange or the central bank trading index, there is something called an order book. An order book is a platform where buyers and sellers come and place bids. It is a bit like peer-to-peer (P2P), but it differs from it.

This is how the platform works. Let’s say somebody wants to buy dollars with the Naira and another wants to buy the Naira with dollars. If you come on the order book, you place your order and say this is how much I am willing to pay. Your bid is there. If someone comes to place another bid that is similar to your bid, like someone that wants to sell for that amount, the platform automatically matches both of you and transfers your dollar to that person and his Naira to you. When you post a sell ad, it means you are looking for someone to buy, and when you post a buy ad, it means that you are looking for someone to sell.

What the order book does is that it automates all of this so you do not need to do a direct P2P transaction. It accumulates all the buy and sell ads and then matches them automatically, which is similar to what the CBN does with FMDQ ads. If you check a Binance app spot market, what you will see on the chart there is not set by Binance. It is a reflection that shows what is happening in the market. That chart can be manipulated when there is not enough liquidity. Liquidity is the actual amount of money being traded, not the volume. This means the total amount of money people are trading.

The actual P2P is where real transactions happen and you see real people trading with one another, where you have crypto, sending money to your bank account and receiving the money. What mostly happens on the spot market is that people trade numbers, which is exemplified by the total volume. The total volume is not the actual money; it is the total calculation. For example, if you sell 10 USDT to me for N1000 each, that is N10,000. The volume will be N30,000 because they will calculate one person buys N10,000, one person sells N10,000, and then the swap is N10,000. All this amounts to N30,000, but in reality, the money that actually moved was N10,000. The figures you will get from this transaction won’t be the real rate. It might not even be up to five (5) percent of what actually happened. Only numbers are being traded on the spot market.

What happened on Friday was, a bunch of people found a way to manipulate the order book. The CashLink wasn’t working and people used what we call NGN P2P. On this NGN P2P window, you will pay three percent premium to get normal Binance NGN balance and then trade it on the spot market. At that point, they had manipulated the order by posting low amounts within the range of $1 – $4.

When they did that, the rate was going as low as N700. So, when they get the Binance NGN balance, they used it to buy USDT in small amounts and then go to normal P2P where there is liquidity and sell it. At a point, they were making up to 17 percent profit from it. Then, it was as if there was a media angle to it because people started taking the news of the spot markets and it caused a panic. People on the streets, who were smart enough, started taking advantage.

So, you had informal BDCs on the streets telling people the rate is N800. Because what many of them do is, they just go on Binance, check the rates and tell people.

But if you are buying dollars from them, they would try to make you sell it at the worst rate possible. They would go on Binance or even go on Google, get a very low rate and tell you this is the rate. But, if you are actually buying from them, then they will use the real rate which is N1,000 and above.

The Friday incident can also be referred to as a speculative attack. This happens when there is low liquidity or a dysfunctional market. Arbitragers or speculators take advantage to make good money. It had nothing to do with the Naira or the economy. It was just a speculative attack.

Also, the Naira is always expected to gain strength by this time because this is past the peak period. People took advantage of that low peak period to run their arbitrage. It had nothing to do with the Naira appreciating.

Are you saying the Naira didn’t gain any form of strength at all?

Yes, the Naira did gain a bit of strength. As expected, it gained from N1,150 to N1,000. But that is expected everywhere., both in Argentina, in Bolivia, Mexico, Chile. It happens everywhere by this time. Everything that happened on Friday was just order book manipulation.

What are the effects of this kind of speculative attack on our currency?

Yes, there are consequences for it because it erodes trust in the platform where the attack happened. A lot of people now no longer trust the Binance spot market or trust the P2P rates.

Another consequence is that some FinTechs would be affected because most of them hold their treasury in USDT.

The economical consequence is even more far fetching. This is because the rates are fake and any real investor will be able to spot it. This will prevent them from investing their money in the Nigerian economy.

What happened during the Emefiele era?

Godwin Emefiele, the immediate past Governor of the Central Bank of Nigeria (CBN) tried to defend the Naira from the black market. This was before crypto was banned in 2021.

Prior to the crypto ban in Nigeria, before Binance and P2P became the major hubs of trading crypto and conducting currency exchange, the black market was manned by informal bureau de change (BDC) operators, also known as money changers.

If you needed to buy dollars from the black market back then, it would be from these people. Up until 2017, they were the ones running the BDCs.

Back then, the whole scope of BDC was to travel to Dubai with your Nigerian card and then withdraw dollars via their automated teller machine there and come back to sell your dollar in Nigeria. This was how the black market thrived back then.

But the Naira was falling rapidly, and when the crumbling wouldn’t stop, Emeifiele intervened with $5.0 million a week. Around this time, every Thursday, BDCs would go to the CBN office in Lagos to bid for FX. People who had the license – I didn’t have one then – would go for the bid. There was a maximum amount everyone could buy. It was like an auction but at the CBN rate. But you were allowed to buy as much as $20,000.

What the licensed BDCs did at the time was that they would buy the dollars at the official rate and resell at the black market rate. Back then, Emefiele mandated that when you bought at the CBN rate, you’d sell it at not more than N2 – N3 profit. The dollar was sold for N360 at this time, but the black market rate was about N450-N500. With this, people who had the license would buy the dollars and sell it to those who did not have it. They sold it at the official rate but this transaction was fake. They did it only for legal reasons. After buying dollars from CBN, the licensed BDCs then sold them to the unlicensed ones, and those ones would sell at N500 or N510 and then spilt the profit with the licensed guys.

This is because the licensed guys couldn’t sell at a rate of their choice. They depended on the unlicensed ones to rake in profit.

At the end of the day, we had a situation where the margin between the official rate and the black market rate was really wide. Even those with the license were deeply involved in racketeering, as you could bribe them to get access to more FX. All of this led to a huge Naira crumble that forced CBN to ban BDCs and stop giving them licences.

It then issued a directive that anyone who wanted to buy the dollar should go to banks. But the same problem was happening at the banks. They were also involved in massive racketeering, although not as bad as the BDCs but it is not something they cannot deny.

On the macro scale, this policy was one of the worst Emefiele ever enacted, introducing the dollar auction to BDCs to manipulate the market by selling legal dollars in the black market at an official rate leading to a massive fall in the value of the Naira.

If my memory serves me right, this was the year the Naira destruction began. Things were already bad, but in 2021, it moved from N460 up to N600, and by the end of the following year, we were close to N950.

I am quite familiar with the progression rate because I had to move in and out of the country at intervals that year. I remember that it was around N500 first and then N600. The following year, it came to crumble despite the huge amount of money used to defend it, around $20 million per week.

In all, it was a terrible policy, trying to defend the Naira by interfering in the black markets because the CBN would waste the money. The spread between the official and the black markets will still increase, and the Naira will still not appreciate.

What are the implications of what the CBN is doing to the Naira currently?

There is a speculative attack and the reason we are having this problem is because there’s no liquidity; there’s no money. Nigeria is not producing; we are not exporting. Unless you fix the fundamental issue, just trying to use the policy to boost the Naira or to manipulate the Naira will not solve any problem. It’s just a waste of time… The CBN should remove every restriction and focus on inflation, on interest rates, on ensuring that the Naira has value locally and forget about dollar rate and trying to manipulate everything. Because at the end of the day, we are wasting money we can use to develop the country to defend the Naira. And obviously, no amount of economic manipulation would make the Naira rise. We don’t just have the resources.

One thing is, with currency or with money, you can’t manipulate the market. It will cost you a lot of money to manipulate it. And when the reason your currency is crumbling is because you don’t have money, then using your money to do it will result into more problems.

There is a speculative attack and the reason we are having this problem is because there’s no liquidity; there’s no money. Nigeria is not producing; we are not exporting. Unless you fix the fundamental issue, just trying to use the policy to boost the Naira or to manipulate the Naira will not solve any problem. It’s just a waste of time.

I think Nigeria needs to follow the path of Chile, where the central bank does not interfere in exchange rate. They removed the restrictions. Here, P2P also removed the same restrictions. The CBN should remove every restriction and focus on inflation, on interest rates, on ensuring that the Naira has value locally and forget about dollar rate and trying to manipulate everything. Because at the end of the day, we are wasting money we can use to develop the country to defend the Naira. And obviously, no amount of economic manipulation would make the Naira rise. We don’t just have the resources.

The implications bring us to the question of legality. What they are currently doing to the Naira, is it legal?

I really can’t answer if it is legal or not, but what Emefiele did with the printing of money, to me, is not legal. The printing of N23 trillion was against the CBN Act.

But for the other stuff which still happens, it might not be illegal because they will always find a way to do something which is wrong in a legal way.

So, do they have the power to do it? Yes. But is it ethical or is it helpful? No.

So, what they are doing might be legal, but it’s obviously not helpful. Everyone can see it. The Naira is crumbling daily, and no one needs a prophet to know that the free fall won’t stop. It’s visible.

We have seen it happen from three years ago. This shows that what they are doing is obviously not working, and it has to change. It’s not just a policy problem. It’s also a total collapse of the country, like the total collapse of the government.

You said you had businesses before you left Nigeria and that the profit from some of these businesses couldn’t even pay rents. Did Naira fluctuations affect your businesses in any way?

On a general scale, when you are building a startup, you are trying to raise funds globally, compete globally, try to grow fast, take over the world, scale across different countries. And when you don’t have investors at that point, and you are bootstrapping, you will need to be competitive enough, have good numbers that will attract the big investors. At the end of the day, the investors are in Silicon Valley in the United States of America. So, the problem I kept having was, no matter how much I grew, my numbers were not attractive enough, or my traction was not attracting anyone globally. So, even if I was making more money on a yearly basis, against the dollar, I was losing money.

Now, for my cash flow business, which was like my money exchange business, the problems kept mounting because the platforms you use to actually move the money, the people you are partnering with, are going out of business. You are finding it increasingly hard to even source FX. You have customers who want to send money abroad, who want to import something, but you wake up and see that CBN has blocked this means of sending money.

They have blocked this, they have blocked this, they have blocked that. You keep losing customers. You are not being competitive. You have to start travelling to Benin Republic, travelling to Sierra Leone. I was constantly travelling across Africa, trying to get dollars, travelling to Cameroon to buy dollars, because it was very hard at that point to even get dollars to send anywhere. You couldn’t even get the Chinese Yuan.

The dollar was now being hoarded. People were hoarding it and were not willing to sell it. And if they sell, by the time you add your commission, you wouldn’t be competitive enough for the importer to use you. They would have to use someone cheaper, maybe someone with a BDC license..

Every Friday, one would have high BP because you didn’t know what new CBN policy would crumble you. And then, they woke up and suddenly stopped giving licenses to BDCs.

How was I ever going to scale up my business when I couldn’t get a license? So, that means I would remain illegal, like, not illegal, but I would remain like, an unlicensed BDC for the rest of my life. So, I had to shut it down and find my way out of the country to a country that was serious.

Those were the problems I faced. Every Friday, there was just a new CBN policy waiting to crush your business. With each devaluation, your revenue kept shrinking. You couldn’t compete globally. You didn’t see yourself making a million dollars in revenue, because today, a million dollars is N500 million Naira, tomorrow it is N1 billion.

The Nigerian paying you, his money doesn’t change. It’s still the same money. But now, globally, you are useless. Another of the problems we also had then that made me say ‘You know what, I’m leaving for good’ was, you would buy dollars today and sell. When trying to restock the dollars, the money you had in Naira would not be enough to buy the dollars. So today, you are trading like one million dollars a month, tomorrow, Naira falls, and you’re now trading N800,000, and your money keeps reducing, which also affects your treasury, and then you keep doing constant mathematics. That was a really bad place to be in and it wasn’t favorable anymore.

The moment they cut off the licenses, it became useless building in Nigeria, and I just had to leave. I was not the only one who left; a lot of other people also left for different countries. A lot of businesses, not just money businesses left. Even people with fintech ideas, those who had crypto startups, those who had put so much into building something and the Naira failed them.

Are there guarantees that this measure being implemented by the CBN to strengthen the Naira will make any long-term difference

It is not just about the CBN borrowing money and trying to create policy upon policy. They know, and everybody too knows that it’s not going to work, because the CBN is trying to solve a problem by tackling the symptoms. It’s like someone has HIV and the fellow is taking Paracetamol for their headache. You will need to solve the root problem and not just the symptoms.

To be honest, I don’t think the CBN on its own can solve the problem of the Naira. It’s not just the CBN’s function. The economy is not productive. A currency is just the reflection of an economy. Let me use crypto as an example. BNB is a reflection of Binance. If Binance is strong, their token will be strong. Or even for companies, Flutterwave’s stock is a reflection of Flutterwave. If Flutterwave is doing well, their stock will do well. If Zenith Bank’s stock is doing well, Zenith Bank is doing well.

So, if Nigerians are getting poorer every day, big companies and multinationals are leaving the country, everybody’s running from the country due to insecurity and inflation, there is no way the Naira can grow.

It is not just about the CBN borrowing money and trying to create policy upon policy. They know, and everybody too knows that it’s not going to work, because the CBN is trying to solve a problem by tackling the symptoms. It’s like someone has HIV and the fellow is taking Paracetamol for their headache. You will need to solve the root problem and not just the symptoms.

So, speculation, arbitrage, whatever you are seeing today, is just the symptom of a deeper problem. The problem is not the speculator; it is not the arbitrage, not even the crypto traders. They are there because Nigeria as a country is not being productive. If we were exporting, if we created incentives for people to produce, mass export, we wouldn’t have this problem. For instance, people who are doing bureau de change would be able to buy dollars from exporters and sell to importers. But when there are almost no exporters or exporters don’t even have dollars, then how would they get dollars to give to importers?

The demand for the dollar is still there for imports. So, you need to solve the basic problem of production and that problem includes electricity, good roads. Actually, it is a very wide network of things. It’s like a cascading effect. You can’t just solve one and leave the rest. You have to solve the Nigerian problem as a whole. Then the Naira will gain strength.

But if you just try to miraculously make the Naira rise by prayer or by policy, it will be a waste of time. It is very easy to bet. It’s like when a financial institution is making massive losses, you don’t need a seer to tell you their stocks will also crumble. It is a simple tactic.

With all of this, should Nigerians still be happy about the Naira’s appreciation?

The Naira didn’t appreciate, because today it is back to what it was before Friday’s market appreciation.

The first time we spoke, you said that as a Nigerian, there is a limit to how much foreign investors will put into your business, especially if you’re still within the country. Could you explain this?

Yes, there’s a limit to the choices you have in Nigeria. For tech startups in Nigeria, there is like a ceiling of what you can actually achieve, especially for certain kinds of startups.

For some businesses who deal in food or basic commodities, maybe Nigeria might be a good market. But for a certain kind of technology-inclined business, like a subscription-based business, there’s a limit to what you can achieve by selling solely to Nigerians. You would have to sell abroad and raise money there because there’s also a limit to what you can raise in Nigeria.

There are very few investors for the number of startups we have. A lot of people could not even raise or even get feedback from investors. Most of the people who provide funding for some startups in the country are in Silicon Valley. So, there’s a limit to even what you can raise. If not, even from the banks, you can’t access cash from there.

How many Nigerian startups can walk into a bank today and get credit facility for their business? And when you can’t get credit, you can’t get investments, you can’t get funding, there’s just a limit to all you can do.

That is why you would mostly see Nigerian founders traveling abroad to raise funds, open Delaware entities because foreign investors don’t want to invest in a Nigeria-registered entity. They want to invest in Delaware or Cayman Island or Abu Dhabi or even some countries that you wouldn’t expect but they have good laws or they have the rule of law. They can pull out their money. Again, if you invest in Nigeria and the money is in Nigeria, you won’t know that there’s a problem until you want to take your money out, until you want to pay dividends. There are so many airlines who have money trapped in Nigeria. This is a business investment, but they can’t take it out because there’s no FX. All of these problems put together just make it difficult for Nigerian founders to compete.

It then becomes a question of, what is the peak of what you can achieve in Nigeria? Whatever the peak is, you will still need to travel abroad to raise the funds. But compare yourself with the founder in Brazil. The Brazilian founder can raise all the funds he needs to start up in Brazil. He can go to his bank and raise the funds. The guys in Chile, Costa Rica, Mexico and all can all do the same. But in Nigeria, you will still need the people. Even if you raise it in Nigeria, the real money is coming from people outside the country. That’s just the reality.

Considering everything that is happening, what should Nigerians expect as regards the Naira?

The Naira is only a symptom of a terrible economy. When the economy is sorted, then we can talk about the Naira and decide if we want to restore the Naira or we want to follow the Chinese and have a weak currency, which works for exportation.

The same thing they have expected for the last few years. The Naira will keep going down until something changes. That’s the brutal truth.

I think Nigerians would have to get used to seeing the Naira depreciate. It might not be daily, but they have to get used to it. Every year, I speculate about a 10 – 20 percent depreciation of the Naira because that is the reality. There is no single sign that supports the Naira going up.

Until you see the Nigerian economy growing, jobs being created, steady electricity, good internet, the Naira cannot truly appreciate. Yes, we have internet penetration but there is no good internet.

I was once in the middle of a pitch in Nigeria, and during the session, MTN started misbehaving. Sometimes, Glo would just cut off. So, it was normal to have like five different networks back then. One person would have as many as six or seven SIM cards back then just because you didn’t know which one was going to work at which point. So, internet is also a problem in Nigeria, and you can’t even talk about developing technology when there’s internet problem.

Most times you hire developers in Nigeria and they are telling you they have not seen light in one week and their generator is bad. In fact, currently, the first criteria for hiring someone in Nigeria is ‘Do you have internet? Do you have solar?’ These are things that shouldn’t even be part of the question but they are now necessary.

So, until the economy is working, until the country is growing, you cannot expect the Naira to grow or to appreciate or to increase in value against the dollar. Nigerians are already used to it, but they should get used to seeing it happen faster. And there’s no amount of patriotism that can solve the problem if the fundamental issues are not addressed. I am a very patriotic Nigerian. I love Nigeria. Even my food is Nigerian. I still have my Nigerian accents. But at the end of the day, patriotism won’t solve the problem.

The country, the government, not just the CBN, as a whole, the country needs to get it right. When the economy is sorted, if by that time it’s even logical to have a strong Naira, then the government, the CBN, can pursue a strong Naira policy. But at this point, I’m not even sure we need a strong Naira. I think if Nigeria is serious about the production right now, the Naira should be the policy.

Right now, you can’t say you want a strong Naira solely because you are importing. Importation is not even the problem, but the fact that you are not exporting and lack productivity. We should focus on chasing a more production-based economy. Encourage people to produce.

All these people that are selling recharge cards on the roadside, they are not being productive. All these people hawking on the roadside, that is not production. All these petty WhatsApp CEO businesses, that is not production. Nigeria will not become a world power when many of its population are doing comedy skits and trying to gloat. That’s not how a productive country grows. Those are things that happen when the country is already productive. But when the only way somebody can make money in Nigeria is by doing comedy skits, or the only way you can buy a car or build a house or make money in Nigeria is by, you know, doing illegal stuff, then we have a problem.

People have to work, there have to be factories, and we need to get involved in manufacturing, export, logistics, etc. There are just a lot of problems that need to be solved before we talk about the Naira.

The Naira is only a symptom of a terrible economy. When the economy is sorted, then we can talk about the Naira and decide if we want to restore the Naira or we want to follow the Chinese and have a weak currency, which works for exportation.