Why Fighting the Invisible Hand in Nigerian Foreign Exchange Rate Will Cause More Harm Than Good to the Economy.

Nigeria is facing a serious challenge of foreign exchange rate volatility, which affects its economic growth and stability. The naira, the national currency, has depreciated significantly against the US dollar and other major currencies in recent years, due to factors such as low oil prices, high inflation, and capital flight. This has resulted in a shortage of foreign exchange, high import costs, and reduced purchasing power for Nigerians.

The Central Bank of Nigeria (CBN) has tried to intervene in the foreign exchange market, by setting an official exchange rate and restricting access to foreign currency for certain transactions. However, this has created a distorted and inefficient market, where a parallel or black market rate emerges, which is much higher than the official rate. The CBN’s intervention has also led to a loss of foreign reserves, as it has to sell dollars to defend the naira.

The theory of the invisible hand and free markets suggests that the CBN’s intervention is counterproductive and harmful to the economy. The invisible hand is a concept coined by the economist Adam Smith, which states that the market forces of supply and demand will automatically allocate resources efficiently, without the need for government interference. According to this theory, the CBN should let the market determine the exchange rate, based on the demand and supply of foreign currency, and not try to manipulate or control it.

There are several benefits of letting the market set the exchange rate, such as:

• Improving the allocation of resources. A market-determined exchange rate will reflect the true value of the naira, based on its scarcity or abundance. This will signal to the producers and consumers the relative prices of domestic and foreign goods and services and encourage them to adjust their production and consumption patterns accordingly. For example, a depreciated naira will make imports more expensive and exports more competitive, which will incentivize domestic production and diversification, and reduce the dependence on oil.
• Attracting foreign investment. A market-determined exchange rate will enhance the confidence and credibility of the Nigerian economy, and attract more foreign investors, who will not have to worry about exchange rate risks or uncertainties. A flexible exchange rate will also act as a shock absorber, by adjusting to external shocks, such as changes in oil prices or global demand, and maintaining the balance of payments.
• Preserving foreign reserves. A market-determined exchange rate will reduce the pressure on the CBN to intervene in the foreign exchange market, and save its foreign reserves for more productive uses, such as financing infrastructure, health, and education. A higher level of foreign reserves will also strengthen the naira and the economy, by providing a buffer against external shocks and enhancing the country’s creditworthiness.

However, there are also some challenges and risks associated with letting the market set the exchange rate, such as:

• Increasing inflation and interest rates. A market-determined exchange rate may lead to a sharp depreciation of the naira, which will increase the cost of imports and fuel inflation. This will erode the purchasing power of Nigerians and reduce their living standards. The CBN may have to raise interest rates to curb inflation, which will increase the cost of borrowing and discourage investment and growth.
• Exposing the economy to speculation and volatility. A market-determined exchange rate may be subject to speculation and manipulation by market participants, who may buy or sell foreign currency to profit from exchange rate movements. This may create instability and uncertainty in the foreign exchange market, and affect the real economy. The CBN may have to monitor and regulate the market to prevent excessive speculation and volatility.
• Requiring structural and institutional reforms. A market-determined exchange rate may not be sufficient to solve the underlying problems of the Nigerian economy, such as low productivity, poor infrastructure, weak governance, and corruption. These problems may limit the ability of the economy to adjust to exchange rate changes, and undermine the benefits of a flexible exchange rate. The CBN may have to implement structural and institutional reforms, such as improving the business environment, enhancing fiscal discipline, and strengthening the financial sector, to support the market-determined exchange rate and the economy.

In conclusion, fighting the invisible hand in Nigerian foreign exchange rate will cause more harm than good to the economy, as it will create a distorted and inefficient market, and deplete the foreign reserves. The CBN should let the market set the exchange rate, as it will improve the allocation of resources, attract foreign investment, and preserve foreign reserves. However, the CBN should also be aware of the challenges and risks associated with a market-determined exchange rate, and take appropriate measures to mitigate them. The CBN should also complement the market-determined exchange rate with structural and institutional reforms, to enhance the resilience and competitiveness of the Nigerian economy.