Fitch: Nigeria faces significant challenges managing its debt
Fitch Ratings, says Nigeria faces significant challenges in managing its debt as pressure on interest-to-revenue ratios remains very high at 38 per cent, driven by higher interest rates and structurally low revenue-to-GDP ratios.
Director, Middle-East and Africa sovereigns at Fitch Ratings, Gaimin Nonyane, made this known during a post-sovereign rating webinar focused on Nigeria and Egypt.
Nigeria spent a sum of N7.8 trillion to service its debt obligations in 2023, a 121 per cent increase compared to N3.52 trillion incurred in the previous year, according to analysis of data released by the Debt Management Office (DMO).
The breakdown of the data shows that domestic debt service cost stood at N5.23 trillion, representing a 104 per cent increase from the previous year’s N2.56 trillion, while external debt service surged by 167 per cent to N2.57 trillion, compared to N962.5 billion recorded in 2022.
Data from the Debt Management Office indicates Nigeria has a total external debt portfolio of $42.29 billion up from $41.69 billion in 2022.
Starting at $464.1 million in 2017, these costs have steadily escalated. By 2018, the figure had more than tripled, peaking at $1.472 billion. After a slight decrease in 2019 to $1.334 billion, the costs climbed annually, culminating in 2023’s record high of $3.503 billion.
This substantial increase in debt servicing demands a large portion of Nigeria’s annual budget, restricting government spending in critical sectors such as health and education.
To mitigate rising debt costs, Nigeria has implemented measures, such as securitization of Central Bank overdraft, reduction in Central Bank financing, as well as revenue mobilization and tax reforms.
Fitch projects that these efforts will lead to a decline in the interest-to-revenue ratio, averaging 34 per cent in 2024-2025. However, this ratio will remain one of the highest among ‘B’ rated sovereigns, indicating persistent fiscal challenges.
Also, Fitch highlights that the country’s gross foreign reserves are expected to recover modestly. The success of Nigeria’s economic reforms will largely depend on the sustainable recovery of foreign reserves, easing domestic foreign currency supply constraints, and maintaining current account surpluses.
Nigeria has faced substantial inflationary pressures, which Fitch attributes to past exchange rate policies and structural economic issues.
Despite recent policy rate hikes, Nigeria’s real interest rates remain negative. The tight monetary policy aims to curb inflation, which Fitch forecasts will moderate but stay elevated.
Fitch also commended Nigeria’s commitment to a more flexible exchange rate regime but cautions that the pace of reforms will be crucial in stabilizing the foreign exchange market and supporting investor confidence.
On May 3, 2024, Fitch affirmed Nigeria’s ‘B-‘ rating while revising the outlook from stable to positive. This positive shift reflects Nigeria’s significant strides in addressing macroeconomic instability through several key reforms.
These reforms include adjustments in exchange rate and monetary policy frameworks, reduction of fuel subsidies, improved revenue mobilization, better policy coordination, and scaling back central bank financing of the government.
“Nigeria’s ‘B-‘ rating is supported by its large economy, developed and liquid domestic debt market, and substantial oil and gas reserves,” the rating agency noted.
