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Fitch, a leading global credit ratings agency, has upgraded Nigeria’s long-term credit default rating from stable to positive, citing reforms in various sectors such as the foreign exchange market, oil industry, and monetary policy over the past year.
The agency highlighted the efforts of the Federal Government in achieving macroeconomic stability and enhancing credibility as key drivers for the positive outlook.
Some of the reforms contributing to the revised outlook include adjustments in exchange rate and monetary policy frameworks, reduction in fuel subsidies, improved collaboration between fiscal and monetary authorities, and decreased Ways and Means borrowing.
In its statement, Fitch said, “The Positive Outlook partly reflects reforms over the last year to support the restoration of macroeconomic stability and enhance policy coherence and credibility.”
While acknowledging the positive strides, Fitch also pointed out short-term challenges such as high inflation levels and continued volatility in the foreign exchange market. It emphasized the need to test the durability of the commitment to reforms.
The report commended the Central Bank of Nigeria (CBN) for its role in addressing distortions in the foreign exchange market and tightening monetary policy, which attracted foreign inflows.
However, Fitch expressed concerns about persistent volatility in the forex market, elevated inflation rates, and transparency issues regarding the true size of Nigeria’s foreign reserves.
Additionally, it raised alarms about lagging oil production levels, the necessity to boost non-oil revenues, and the burden of high interest payments due to currency depreciation and increased borrowing rates.
Background:
Last year, Fitch affirmed Nigeria’s credit outlook as stable, but raised concerns over the proposed $10 billion loan to clear the forex backlog. Since then, the Federal Government and the CBN have implemented significant policy reforms, including clearing the forex backlog, raising the monetary policy rate (MPR), and enhancing capital requirements for banks.
However, despite high rates of return attracting increased foreign inflows, the forex market witnessed significant volatility. Moreover, crude oil production remained below the budget benchmark in the first quarter of 2024, despite favorable oil prices.
The Federal Government’s substantial fuel subsidy payments in 2022 also posed financial challenges.
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