Fitch Ratings, a leading global credit rating agency, has stressed the critical importance of ongoing foreign exchange (FX) reforms in Nigeria to stimulate foreign direct investment (FDI) and foreign portfolio investment (FPI).
This assertion came to light during a recent presentation, where the director of sovereigns at Fitch, Gaimin Nonyane, highlighted the significance of these reforms.
Nonyane emphasised that while Nigeria’s current account (CA) could see enhancements through increased oil refining capacity, the sustenance and attraction of foreign investments heavily rely on FX reforms. He said this underscores the necessity for the Nigerian government to prioritise and expedite these reforms to bolster investor confidence and foster economic growth.
Acknowledging Nigeria’s efforts in fiscal and monetary reforms aimed at stabilising the macroeconomic landscape, Fitch also addressed the nation’s challenges in managing its debt. With interest-to-revenue ratios remaining alarmingly high at 38 per cent, Nigeria faces substantial pressure in this regard.
Despite these challenges, Fitch projected a decline in Nigeria’s debt costs, albeit they are expected to remain significantly high. The agency highlighted various measures implemented by Nigeria, such as securitisation of Central Bank overdraft, reduction in Central Bank financing, and revenue mobilisation and tax reforms, aimed at alleviating the burden of debt service costs.
Fitch underscored that the success of Nigeria’s economic reforms hinges on several factors, including the sustainable recovery of FX reserves, alleviation of domestic foreign currency supply constraints, and maintenance of current account surpluses. However, the agency also noted persistent inflationary pressures attributed to past exchange rate policies and structural economic issues.
While Nigeria has made strides in exchange rate reforms, narrowing the gap between official and parallel market exchange rates, Fitch cautioned that the pace and effectiveness of these reforms are paramount for stabilising the foreign exchange market and bolstering investor confidence.
Fitch’s affirmation of Nigeria’s ‘B-‘ rating on May 3, 2024, with a revised outlook from stable to positive, reflects the country’s commendable efforts in addressing macroeconomic instability through significant reforms. Despite this positive shift, Nigeria’s rating remains constrained by several factors, including weak governance indicators, high dependency on hydrocarbons, limited crude oil production capacity, low net foreign exchange reserves, high inflation, ongoing security challenges, and structurally low non-oil revenue.
Moreover, Nigeria’s expenditure on debt service costs has seen a staggering increase, reaching N7.8 trillion in 2023, marking a substantial rise compared to the previous year. These costs, fueled by both domestic and external debt service obligations, underscore the urgency for Nigeria to address its fiscal challenges and prioritise sustainable debt management strategies.
