Nigeria’s sovereign ratings improve as fiscal vulnerabilities remain

Nigeria’s ongoing economic reforms have received further recognition from international financial institutions, with recent developments pointing to improved external stability, stronger growth prospects and better conditions in the foreign exchange market.

However, the positive assessments have also highlighted a persistent weakness: Nigeria’s limited fiscal capacity. While stronger reserves, moderating inflation and improved market conditions are supporting the country’s economic outlook, weak government revenue and spending constraints remain significant barriers to stronger sovereign creditworthiness.

The latest developments came after Moody’s Ratings revised Nigeria’s sovereign outlook to positive from stable while global index provider FTSE Russell announced plans to return the country to its frontier market classification after nearly three years outside the index.

For the Federal Government, the decisions provide additional external validation of the economic reforms implemented under President Bola Tinubu.

However, Moody’s retained Nigeria’s long-term foreign and local currency issuer ratings at B3, indicating that the improved outlook does not yet amount to a full endorsement of the country’s credit position.

Moody’s sees stronger external position

Moody’s said its positive outlook reflected reforms that, if sustained, could improve Nigeria’s ability to absorb external shocks, strengthen economic resilience and gradually improve government revenue.

The ratings agency pointed to sizeable current account surpluses, rising foreign exchange reserves, improved functioning of the FX market and stronger, although still limited, monetary policy transmission as evidence of progress.

According to Moody’s, sustained current account surpluses and reserve accumulation could significantly reduce Nigeria’s exposure to external vulnerabilities.

The improvement in Nigeria’s external position has coincided with stronger economic growth. Real gross domestic product expanded by four per cent in 2025, prompting Moody’s to increase its medium-term growth forecast from approximately three per cent previously.

The agency expects economic growth to remain around four per cent in the coming years, supported by continued expansion in the non-oil sector and higher oil production.

Inflation has also moderated significantly. Headline inflation fell to 15.4 per cent in July 2026 from 25.3 per cent a year earlier.

Moody’s attributed the decline partly to the fading effects of major price adjustments following exchange-rate liberalisation and the removal of fuel subsidies, alongside the restrictive monetary policy stance of the Central Bank of Nigeria (CBN).

Nigeria’s external reserves have also recorded substantial growth.

Moody’s reported that gross reserves, excluding gold, Special Drawing Rights and Nigeria’s position at the International Monetary Fund, increased to approximately $44.4 billion in June 2026 from $31.2 billion a year earlier, equivalent to around six months of import cover.

The Federal Government, citing CBN data, put gross external reserves at $53.3 billion as of August 26.

Fiscal weakness remains a concern

Despite the improvements in external stability, Nigeria’s fiscal position remains one of the major concerns weighing on its sovereign credit profile.

Moody’s estimated general government revenue at about 10 per cent of GDP in 2025, placing Nigeria among countries with the lowest revenue levels globally.

The agency attributed the weak revenue position to factors including the size of the informal economy, extensive exemptions, weak compliance, leakages in oil revenue collection and remittances, as well as limitations in administrative capacity.

The low revenue base has broader implications for the government’s ability to fund public services, meet debt obligations and respond effectively to economic shocks.

This means that improvements in foreign exchange reserves and inflation, while significant, will not by themselves resolve the structural weaknesses in Nigeria’s fiscal system.

Responding to the Moody’s assessment on X, Finance Minister and Coordinating Minister of the Economy, Taiwo Oyedele, described the positive outlook as an important external validation of the administration’s reform programme.

He pointed to measures including fuel subsidy removal, exchange-rate reforms and tax reforms as part of the changes contributing to the improved outlook.

Oyedele said the government’s medium-term objective was to place Nigeria on a path towards investment-grade status, but acknowledged that achieving that goal would require sustained improvements in external reserves, domestic revenue mobilisation, spending efficiency and debt affordability.

“Our medium-term ambition is to place Nigeria firmly on the path to investment grade,” he said.

FTSE Russell restores Nigeria’s frontier market status

Nigeria also received a boost from FTSE Russell, which announced that the country would return to its frontier market classification from the opening of trading on September 21, 2026.

The country had been removed from the frontier market classification in September 2023 following persistent difficulties relating to foreign exchange execution and the repatriation of investment proceeds.

FTSE Russell’s latest decision followed improvements in foreign exchange liquidity, capital repatriation and market accessibility.

The Federal Ministry of Finance attributed the development to the government’s broader macroeconomic and structural reform programme.

Oyedele described the reclassification as another important validation of Nigeria’s reform trajectory and a foundation for further development of the country’s capital market.

He said the decision sent a positive signal to international investors about improvements in market openness and efficiency, while stressing that the return should be viewed as a milestone rather than the final objective.

However, the reclassification followed a period of uncertainty.

FTSE Russell had previously suspended the planned return because of concerns surrounding Nigeria’s transition from a T+2 to T+1 settlement cycle.

The index provider had warned that the shorter settlement period could effectively create a prefunding requirement for international institutional investors because of the time required to complete foreign exchange conversions, obtain investment approvals and transfer settlement funds.

Following additional engagement with Nigerian market authorities and feedback from its Equity Country Classification Advisory Committee, FTSE Russell said it had not identified material settlement, operational or funding problems since the introduction of T+1.

The eventual reclassification therefore represents an improvement in some of the market-access conditions that contributed to Nigeria’s earlier removal from the index. It does not, however, eliminate the broader structural challenges facing the market.

Reform gains now face a sustainability test

The latest assessments strengthen the Federal Government’s argument that its economic reforms are beginning to produce measurable results.

Stronger reserves, lower inflation, improved FX market conditions, higher economic growth and renewed access to international market classifications all point to an economy that is gradually adjusting to the effects of recent reforms.

However, the assessments also raise the bar for the next phase of the reform programme.

For Moody’s, the positive outlook is dependent on Nigeria sustaining the improvements already recorded. The continued B3 rating also shows that the country remains some distance from a stronger sovereign credit profile.

The fiscal challenge is particularly important. Without a significant and sustainable increase in government revenue, improvements in external buffers may not translate into stronger public finances or greater capacity to invest in infrastructure and public services.

The government has therefore committed to deepening domestic revenue mobilisation, improving spending efficiency, strengthening debt management and maintaining external buffers.

It also intends to work with financial regulators and market institutions to improve market liquidity, broaden investor participation and strengthen investor protection.

For Nigeria, the return to the frontier market index and Moody’s improved outlook are important steps in rebuilding investor confidence. But sustaining those gains will depend on whether the country can translate macroeconomic improvements into stronger fiscal fundamentals.

The immediate challenge is no longer simply demonstrating that reforms can improve economic indicators. It is ensuring that those gains are sustained long enough to strengthen Nigeria’s fiscal position, reduce vulnerabilities and ultimately improve the country’s sovereign creditworthiness.