Credit ratings agency Fitch has sounded the alarm over Nigeria’s economic challenges, highlighting persistent foreign exchange shortages and a soaring debt service-to-revenue ratio as factors contributing to a precarious sovereign credit rating.
Gaimin Nonyane, Fitch’s Director of Middle East and Africa Sovereigns, voiced concerns regarding the Central Bank of Nigeria’s (CBN) struggles to amass sufficient foreign exchange reserves, leaving them ill-equipped to clear the forex backlog and meet the substantial external financing needs of the private sector.
Nonyane drew attention to the current 30% disparity between the official and parallel exchange rates, emphasizing the resultant pressure on the Nigerian naira.
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“We think that the central bank is still very well short of the amount it needs to be able to clear the foreign exchange backlog and also meet the extremely large external financing by the private sectors,” she stated.
Toby Iles, Fitch’s Head of Middle East and Africa Sovereigns, echoed Nonyane’s concerns about Nigeria’s economic vulnerability, particularly with interest payments to revenue ratio exceeding 40%. This ratio, four times higher than the median for B-rated sovereigns, poses a significant weakness for the country’s credit rating.
Iles noted that interest-to-revenue ratios across Africa have more than doubled since 2014, driven by heightened borrowing and increased costs due to global interest rate hikes.
The Central Bank of Nigeria has initiated efforts to clear a substantial backlog of foreign exchange forwards, estimated to be around $7 billion, facilitating cash repatriation by companies.
The Minister of Finance, Wale Edun, had last year, acknowledged the impact of the overdue forward payments in the foreign exchange market on the depreciation of the naira. Edun stressed the importance of addressing this issue for the stabilization of the local currency.
To tackle the forex backlog, the CBN announced the government’s move to raise about $10 billion with the assistance of banks.
Earlier this week, the apex bank announced it has successfully cleared approximately $2 billion of the backlog in the past three months and pledged to ensure liquidity in the forex market.
Despite the macroeconomic malaise, including record-level inflation, a weakening naira, and sluggish crude oil production, Fitch currently rates Nigeria at B- with a stable outlook.
However, concerns over Nigeria’s escalating debt levels persist, with the debt service to revenue ratio skyrocketing to 183% in the first quarter of 2023.
The country’s total public debt stands at N87.9 trillion as of Q3, 2023. In the 2024 budget proposal presented to the National Assembly, the federal government intends to borrow N7.83 trillion to address a budget deficit of N9.18 trillion. Despite this borrowing plan, the federal government said it is making concerted efforts to diminish reliance on debts and increase revenue through the Committee on Fiscal Policy and Tax Reforms.
The outcome of these concerted efforts and the ability of the Nigerian government to navigate these economic challenges will play a pivotal role in shaping the country’s economic stability in the coming months.
As Fitch’s warnings denote, addressing forex shortages and managing the debt burden are imperative for Nigeria’s financial resilience and creditworthiness on the global stage.