Fitch Warns of Economic Risks as Nigeria Faces Fiscal Challenges

Nigeria’s economic stability could face significant hurdles if the government fails to meet its fiscal deficit reduction targets, according to a recent warning from Fitch Ratings. The global credit rating agency emphasized that missing these targets could lead to further naira depreciation, higher inflation, and increased borrowing costs, undermining the government’s reform agenda.

Fiscal Deficit Concerns

Fitch’s analysis centered on Nigeria’s 2025–2027 Medium-Term Expenditure Framework (MTEF), which outlines ambitious plans to narrow the budget deficit. The framework assumes an oil price of $75 per barrel and production levels of 2.06 million barrels per day, including condensates. However, Fitch considers these projections overly optimistic, estimating oil prices at $70 per barrel and production at 1.77 million barrels per day.

The agency noted that achieving the deficit reduction goals outlined in the MTEF would enhance the credibility of the government’s reforms. However, a larger-than-expected deficit could complicate efforts to stabilize the economy, leading to increased pressure on the naira, rising prices, and higher interest rates.

Revenue Challenges and VAT Hike Resistance

Nigeria’s revenue-to-GDP ratio, one of the lowest globally, remains a key concern. Fitch projects this ratio to average 10.3% in 2024–2025, significantly below the 19% median for sovereigns in the ‘B’ rating category. The government has made strides in boosting non-oil revenues, including plans to increase the Value Added Tax (VAT) rate from 7.5% to 10% by 2025. However, this proposal is expected to face political resistance, potentially hindering revenue generation efforts.

Fitch stressed that improving fiscal revenues, particularly from non-oil sources, is crucial for enhancing Nigeria’s credit profile and achieving macroeconomic stability.

Exchange Rate and FX Market Reforms

The naira continues to face depreciation pressures despite reforms to simplify the exchange-rate regime and tighten monetary policy. A divergence between the official and parallel market exchange rates has re-emerged, highlighting ongoing foreign exchange challenges. Fitch acknowledged the introduction of an electronic FX matching platform in December 2024 as a positive step towards transparency, but noted that progress in addressing FX issues has been slower than anticipated.

External Buffers Show Improvement

Nigeria’s external reserves have benefitted from recent economic reforms, rising to $40.2 billion in November 2024 from $32.2 billion in April. These reserves provide cover for around six months of external payments, exceeding the median of 3.7 months for sovereigns in the ‘B’ category. Key inflows, including a $917 million foreign currency bond, a $750 million World Bank disbursement, and $2.2 billion in Eurobonds issued in December, contributed to this improvement.

Transparency Concerns and Investor Confidence

Despite these gains, Fitch highlighted concerns about the transparency of Nigeria’s exchange-rate policy, particularly regarding net reserves. The lack of clarity in certain areas continues to undermine investor confidence and weakens the impact of reforms aimed at stabilizing the economy.

Conclusion

Fitch’s warning underscores the critical importance of fiscal discipline and transparent economic policies in achieving Nigeria’s reform objectives. Addressing these challenges head-on will be essential for fostering investor confidence, stabilizing the naira, and ensuring long-term economic growth.