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Fitch Ratings has cautioned that Nigeria’s economic stability efforts may falter if the government fails to achieve its fiscal deficit reduction targets. The global credit rating agency warned that an expanded budget deficit in 2025 could exacerbate naira depreciation, drive inflation higher, and increase borrowing costs, jeopardizing ongoing economic reforms.
Concerns Over Fiscal Projections
In its analysis, Fitch reviewed Nigeria’s 2025–2027 Medium-Term Expenditure Framework (MTEF), which aims to significantly narrow the budget deficit. However, Fitch raised concerns about the framework’s optimistic assumptions, such as oil prices at $75 per barrel and production levels of 2.06 million barrels per day (mbpd), including condensates.
By comparison, Fitch’s estimates are more conservative, projecting oil prices at $70 per barrel and production at 1.77 mbpd.
“Reducing the deficit in line with the MTEF would enhance the credibility of the government’s reform agenda. However, missing the target could intensify pressure for further naira depreciation, fuel inflation, and elevate interest rates,” Fitch noted.
The agency added that a deficit significantly exceeding its November 1 projections—when it affirmed Nigeria’s credit rating at ‘B-’ with a Positive Outlook—could undermine macroeconomic stability and damage policy credibility.
Revenue Challenges and Political Risks
While the government has increased efforts to boost non-oil revenues, including plans to raise Value Added Tax (VAT) from 7.5% to 10% by 2025, Fitch noted that such measures could face political resistance.
Nigeria’s revenue-to-GDP ratio, one of the lowest globally, is projected to average 10.3% in 2024–2025, far below the 19% median for sovereigns in the ‘B’ category. Fitch emphasized that improving fiscal revenues, especially from stable non-oil sources, is essential to strengthening Nigeria’s credit profile and achieving economic stability.
Exchange Rate Pressure and FX Reforms
Fitch highlighted the risks of missing fiscal targets, noting that it could exacerbate exchange rate pressures. Despite reforms to simplify Nigeria’s exchange rate regime and tighten monetary policy, the naira has faced renewed depreciation pressures, with a widening gap between official and parallel market rates reflecting persistent foreign exchange challenges.
The recent introduction of an electronic FX matching platform on December 2, 2024, is a positive step toward greater transparency. However, progress in resolving broader FX issues has been slower than expected.
Boost to External Reserves
Recent economic reforms have bolstered Nigeria’s external buffers, with gross official reserves rising to $40.2 billion in November 2024, up from $32.2 billion in April. This provides about six months of external payment coverage, significantly above the 3.7-month median for sovereigns in the ‘B’ category.
Key inflows supporting the reserves include:
- A $917 million foreign currency bond issued in August.
- A $750 million disbursement from the World Bank in November.
- A $2.2 billion Eurobond issuance in December, comprising a $700 million 6.5-year note and a $1.5 billion 10-year note.
Transparency and Investor Confidence
Despite these gains, Fitch flagged concerns over the transparency of Nigeria’s exchange rate policy, particularly regarding the level of net reserves. A lack of clarity in critical areas continues to undermine investor confidence, limiting the effectiveness of reforms designed to stabilize the economy.
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