by Feyi Fawehinmi

I’ve not been lucky enough to meet Bola Onadele (“Koko”) yet but he’s one of those people you constantly hear about. For the best part of the last 30 years, he’s been at the heart of finance and trading in Nigeria and if you were to write a story about Nigeria’s long and tortuous journey to a proper forex trading market, he would have to feature prominently in it. These days he’s the CEO of FMDQ OTC which is the center of Nigeria’s debt capital and forex markets.

 

Yesterday I had a piece published in Quartz Africa on how all the hope we had in the liberalised forex markets in June has now vanished. Things are not just back to how they were before, they are now worse. All of the demons I warned about are now roaming free.

Purely by coincidence, an interview with Koko was published in Business Day yesterday about the same forex markets. You don’t need to read anything I write about forex in Nigeria but it is criminal not to read what Koko says about the fx markets.

Annoyingly, the interview is behind a paywall at Business Day. I asked them to please take off the paywall because the contents of the interview are too important to Nigeria’s economy. Thankfully, the guys at AbokiFX have published the interview on their website.

Hi @BusinessDayNg can you pls remove the paywall on just this piece so Nigerians can read it? Do it for your country https://t.co/DlOh98dnr6

— tyro (@DoubleEph) October 10, 2016

But there is one section of the interview I want to highlight. Here he is talking about how Nigeria now has 6 different fx markets effectively.

Q: The BDC/Parallel Market is at $/N480. Where is the inter-bank spot market? What are analysts and investors saying about the fair value of the naira? What are the main concerns of potential investors today? Are we now talking about naira adjustment or is the demand now as a result of better management of the FX market?
A: It is pathetic that the BDC/parallel market rate has become the reference rate in Nigeria. It is indeed sad. Even though this market is also important, as some genuine transactions are executed here, it is a much smaller market than the inter-bank market and it is amazing that this market has better price discovery than the inter-bank FX market. You asked about the spot FX market. I am disappointed to say that I do not know the current levels. I was a trader in 1991 and if you asked me then for the spot FX level or asked my co-traders (Rasheed Olaoluwa of GTBank or Nimi Akinkugbe of IBTC, as then known), we would have given you the spot FX rates, and even if not the same figure, the difference would be negligible. In Nigeria today, twenty-five (25) years after, we have a highly fragmented spot FX market — almost six markets with sub-market rates ranging from $/₦305 to $/₦370! How can you present such a fragmented market in an economy that should be working 24/7 to make its financial markets globally competitive? There is no single spot FX rate in Nigeria. Spot FX has six sub-markets, as I said.
The first sub-market is the CBN rate (which is ₦50 — ₦60 away from the actual market). At this level, the CBN sprinkles tiny flows to the market and probably less now, where the International Oil Companies (IOCs) are forced to sell to petrol importers. We need to talk more about this.
The second sub-market is the FMDQ Close, which does not reflect the right market sentiments due to the pressure on the banks. This rate is close to the CBN rate because the closing period is dominated by CBN transactions with the banks at discounted rates!
The third submarket is the FMDQ NIFEX, which is suffering as the Reference Banks are bashful in advising their views of the right spot FX level. This is where the OTC FX Futures settle.
The fourth sub-market is the real spot FX level which is at $/₦350–360. Most transactions settle here, with two (2) or more cheques flying around to support the transactions, thereby promoting unethical behaviour!
The fifth sub-market is the $/₦340 rate at which the International Money Transfer Organisations (IMTOs) buy the remittances from Nigerians in the diaspora, and the sixth sub-market is the rate at which exporters desire to sell their dollars — expect this to be nearer the BDC/parallel market. You cannot blame the exporters because the pricing of their export products is benchmarked nearer the more transparent parallel market. We cannot run a credible FX market with such fragmentation.
I highlighted the part about the 2nd sub-market because it speaks to how Nigeria’s economy is actively being sabotaged. There is no other word to describe what is going on other than sabotage.
The way the market works is that it does not take an average of rates during the day to get a closing price. To use a simplified example; imagine that someone sells dollars at N300 at 10am. Then at 12noon, someone else sells dollars at N330. Finally, just before the market closes at 2pm, someone sells dollars for N280. Now, this is a bit awkward. The rate during the day has moved between N280 and N330. If you were to take an average for the day, the exchange rate for the day will be N303 to $1.

 

But the market doesn’t work that way. The last rate at the end of the day is the closing rate for that day. So when you check the rates for the day, you will see that the day’s exchange rate is N280 to $1 even though someone sold for N330 to $1. In a normal market, this shouldn’t be a problem because the rate during the day won’t swing about so wildly. But Nigeria’s market is abnormal with all sorts of distortions and lack of liquidity.

I had heard of this particular ‘sub-market’ for a while and now Koko himself has confirmed it. What the CBN does it to wait till the market has almost closed and then throw in one useless transaction at a really low rate. The market then closes at that rate and we have an exchange rate that looks ‘low’. (Sauces even tell me that the CBN later reverses these useless transactions later which would be outrightly criminal. But don’t quote me).

Why is the CBN doing this? Well, it appears there is ‘political pressure’ for the exchange rate to be ‘low’ so rigging the market this way satisfies that pressure.

And this sums up neatly why Nigeria is where it is today, starved of forex. The CBN and its governor are acting in bad faith. The document establishing this new ‘floating’ forex market in June is about as good as any you’ll find anywhere in the world. Yet, the implementation is completely opposite of what is in the document. You cannot expect any favours when you behave in this way. You write down one thing and actively do the opposite. This forex fiasco of the last 18 months or so has cost Nigeria so much credibility that it is hard to say when we will ever be seen as credible again.

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One thing I’m absolutely convinced about is that Godwin Emefiele must go for Nigeria to even begin dreaming of solving this problem. He does not command the respect of anyone I know and he actively acts in bad faith. President Buhari’s government cannot be taken seriously at all as long as Emefiele remains CBN governor. President Buhari and Godwin Emefiele are clearly in agreement over this madness so the only conclusion is that both of them are working hand in hand to sabotage the economy.

The piece I wrote about the new fx policy in June is by far the most popular article I’ve ever written. It was read by tens of thousands of people. I got a lot of calls and emails and the general sense was one of relief that maybe Nigeria had turned a corner and was about to begin the long march out of forex purgatory. And here we are in October back to where we started from. All that hope dashed and Nigerians generally being taken for a ride.

I’m glad that someone of the stature of Koko has spoken up so passionately against the madness that is going on. The Nigerian economy is being damaged by a handful of people, willfully or ignorantly, by their inane actions. It is not a time for people to keep quiet. Buhari and Emefiele will one day leave the scene but the damage they are doing might remain with Nigeria for many years after they have left.

Read the whole interview. It is important. It’s your country, too.

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Op–ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija

 

This article was first written HERE