On the currency front, the dollar will most likely continue its bearish trend which started at the tail end of 2020, as global recovery proceeds with the continuous production and approval of vaccines and quantitative easing by major economies, the dollar will likely gain strength between Q2 and Q3 2021. There will be a positive appetite for risky currencies especially currencies of Emerging markets, which will likely trend upwards if the current momentum of recovery is sustained, however, a lockdown because of the further spread in the new strain of the coronavirus will reverse the outlook.
For the domestic economy, in 2020 the CBN adjusted/devalued the Naira on three occasions to ease the pressure on the domestic currency and to reduce the gap between official rates and parallel rates as this was one of the conditions needed to be met to receive the World Bank. However, lower FX earnings widened the gap between the two markets. The decline in FX inflows also put pressure on the foreign reserves, as of 30 December 2020 foreign reserves had declined by -8.25% YTD. Data released by the CBN showed that as of Q3 2020, the CBN had injected $4.37bn into the foreign exchange market as part of its efforts to ensure the stability of the Naira, this is expected to continue in 2021.
Although the inflow of foreign loans and a slight uptick in oil prices managed to ensure some level of stability of the foreign reserves, this approach is not sustainable in the long-term. A longer-term solution could be to improve the development and growth of non-oil exports, the boosting of non-oil exports would help to diversify FX earnings (see table 66 below).
Table 66: Monthly Average Exchange Rate
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