Nigeria’s Economic Stability Hinges on Fiscal Discipline, Fitch Ratings Warns
Nigeria’s ambitious economic reform agenda faces a critical test in its ability to rein in its fiscal deficit, according to a recent assessment by Fitch Ratings. The global credit rating agency cautioned that missing the government’s deficit reduction targets could trigger a cascade of negative consequences, including further naira depreciation, escalating inflation, and a surge in borrowing costs, jeopardizing the overall reform efforts.
Fitch’s analysis centers on Nigeria’s 2025-2027 Medium-Term Expenditure Framework (MTEF), which outlines a significant narrowing of the budget deficit. However, Fitch expressed reservations about the underlying assumptions of the MTEF, particularly regarding oil prices and production levels. The government’s projections of $75 per barrel and 2.06 million barrels per day (including condensates) appear overly optimistic compared to Fitch’s more conservative estimates of $70 per barrel and 1.77 million barrels per day. This discrepancy raises concerns about the feasibility of achieving the projected deficit reduction.
A failure to meet the deficit target could undermine the credibility of the government’s reform program, potentially triggering further naira depreciation, inflationary pressures, and rising interest rates. Fitch emphasized that a significantly larger deficit than anticipated could complicate the task of establishing macroeconomic stability and damage policy credibility. This would represent a setback for Nigeria’s efforts to attract foreign investment and stimulate economic growth.
Revenue Mobilization: A Key Challenge for Nigeria’s Fiscal Health
A core issue underlying Nigeria’s fiscal challenges is its persistently low revenue-to-GDP ratio, one of the lowest globally. Fitch projects that Nigeria’s revenue-to-GDP ratio will average 10.3% in 2024-2025, significantly below the 19% median for ‘B’ category sovereigns. This highlights the urgent need for Nigeria to bolster its revenue generation, particularly from non-oil sources, to enhance its fiscal resilience and improve its credit profile. While the government has initiated efforts to increase non-oil revenues, including a proposed VAT increase from 7.5% to 10% in 2025, such measures may face political resistance. Successfully navigating these political hurdles and implementing effective revenue mobilization strategies will be crucial for achieving sustainable fiscal consolidation.
Exchange Rate Volatility and External Buffers
Despite reforms aimed at simplifying the exchange rate regime and tightening monetary policy, the naira has come under renewed depreciation pressure. A widening gap between the official and parallel market exchange rates has re-emerged, signaling persistent foreign exchange strains. While the recent introduction of an electronic FX matching platform represents a positive step towards greater transparency, Fitch notes that progress in addressing FX challenges has been slower than expected. The lack of clarity surrounding Nigeria’s exchange rate policy, particularly concerning the level of net reserves, continues to undermine investor confidence and hampers the effectiveness of reforms.
Despite these exchange rate challenges, Nigeria’s external buffers have strengthened due to recent economic reforms and inflows. Gross official reserves rose to $40.2 billion in November 2024, up from $32.2 billion in April, providing approximately six months of import cover, exceeding the median for ‘B’ category sovereigns. This improvement is attributed to several factors, including a foreign currency-denominated bond issuance, a World Bank disbursement, and successful Eurobond issuances. However, Fitch cautions that ongoing concerns about the transparency of exchange rate policy and net reserves continue to pose risks.
The Path Forward for Nigeria’s Economic Stability
Nigeria’s economic outlook hinges on its ability to effectively implement its fiscal consolidation plans and address the underlying challenges hindering revenue mobilization. Achieving the deficit reduction targets outlined in the MTEF is crucial for building credibility and restoring investor confidence. This requires a combination of realistic revenue projections, prudent expenditure management, and structural reforms to enhance the business environment and attract investment. Furthermore, addressing the persistent foreign exchange strains and ensuring greater transparency in exchange rate policy are essential for fostering macroeconomic stability and promoting sustainable economic growth.
The government’s efforts to boost non-oil revenues will be a key determinant of its success in achieving fiscal consolidation. Overcoming political resistance to revenue-enhancing measures, such as the proposed VAT increase, will be crucial. Exploring alternative revenue streams and strengthening tax administration will be essential for diversifying government income and reducing reliance on volatile oil revenues. Simultaneously, managing public expenditure effectively and prioritizing investments in critical infrastructure and human capital will be crucial for maximizing the impact of public spending on economic development.
Finally, transparent and consistent communication regarding exchange rate policy and reserve management is essential for building trust with investors and stabilizing the foreign exchange market. A clear and credible policy framework can help to reduce uncertainty and encourage foreign investment, contributing to stronger external buffers and greater resilience to external shocks. Nigeria’s success in navigating these challenges will determine whether it can achieve its ambitious economic reform agenda and unlock its full growth potential.
