Fitch Ratings has warned that Nigeria’s efforts to stabilise its economy could face significant challenges if it fails to meet its fiscal deficit reduction targets.
The global credit rating agency noted that a larger-than-expected budget deficit in 2025 could lead to further naira depreciation, higher inflation, and increased borrowing costs, ultimately threatening the government’s reform agenda.
In its recent assessment, Fitch highlighted the Nigerian government’s 2025–2027 Medium-Term Expenditure Framework, which projects a sharp narrowing of the budget deficit.
However, Fitch questioned the framework’s assumptions, including oil prices at $75 per barrel and production of 2.06 million barrels per day, including condensates.
These figures are more optimistic than Fitch’s estimates of $70 per barrel and 1.77mbpd.
It said, “Reducing the deficit in line with the MTEF would provide further credibility for the government’s reform agenda, but if the deficit target is missed, it may increase the pressure for further naira depreciation, as well as putting upward pressure on prices and interest rates.
“A deficit significantly larger than what we projected in our November 1 assessment, when we affirmed Nigeria’s rating at ‘B-’ with a Positive Outlook, could complicate the task of establishing macroeconomic stability and potentially damage policy credibility.”
While the government has ramped up efforts to boost non-oil revenues, the proposed increase in Value Added Tax from 7.5 per cent to 10 per cent in 2025 could face significant political resistance.
Nigeria’s revenue-to-GDP ratio, one of the lowest globally, is expected to average 10.3 per cent in 2024–2025, according to Fitch, far below the 19 per cent median for sovereigns in the ‘B’ category.
Fitch emphasised that raising fiscal revenues, particularly from less volatile non-oil sources, remains a critical priority for improving Nigeria’s credit profile and achieving macroeconomic stability.
The agency also warned that missing the fiscal deficit target could heighten pressure on the exchange rate.
Despite reforms to simplify the exchange-rate regime and tighten monetary policy, the naira has faced renewed depreciation pressure.
A divergence between the official and parallel market exchange rates has re-emerged in recent months, highlighting lingering foreign exchange strains.
Fitch noted that while the introduction of an electronic FX matching platform on December 2, 2024, is a step towards greater transparency, progress in addressing FX challenges has been slower than anticipated.
Nigeria’s external buffers have, however, benefitted from recent economic reforms.
Gross official reserves rose to $40.2bn in November 2024, up from $32.2bn in April, providing cover for around six months of current external payments.
This is well above the median of 3.7 months for sovereigns in the ‘B’ category.
The reserves were supported by several key inflows, including a $917m foreign currency-denominated bond issued in August, a $750m disbursement from the World Bank in November, and the successful issuance of $2.2bn in Eurobonds earlier this month. The Eurobond issuance, completed on December 3, comprised a $700m 6.5-year note and a $1.5bn 10-year note.
Despite these improvements, Fitch highlighted ongoing concerns about the transparency of Nigeria’s exchange-rate policy, particularly in relation to the level of net reserves.
The agency noted that a lack of clarity in certain areas continues to undermine investor confidence and hampers the effectiveness of reforms aimed at stabilising the economy.
