In a recent revelation, credit rating agency Fitch highlighted the ongoing challenges faced by the Central Bank of Nigeria (CBN) in addressing the persistent forex backlog. The scarcity of foreign exchange, coupled with the country’s soaring debt service to revenue ratio, has raised concerns about Nigeria’s sovereign credit rating.
Gaimin Nonyane, Fitch’s Director of Middle East and Africa Sovereigns, emphasized the potential impact of the enduring forex shortages on the Nigerian naira. Currently, a significant 30% gap exists between the official and parallel exchange rates. Nonyane expressed apprehension, stating, “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.”
Both Nonyane and Toby Iles, Fitch’s Head of Middle East and Africa Sovereigns, cautioned that Nigeria’s interest payments to revenue ratio, exceeding 40%, poses a substantial risk to its credit rating, standing four times higher than the median for B-rated sovereigns. Iles pointed out the doubling of interest-to-revenue ratios across Africa since 2014, influenced by increased borrowing and rising costs due to global interest rate hikes.
Despite these challenges, the Central Bank of Nigeria (CBN) has initiated the clearance of a backlog of FX forwards for companies repatriating funds abroad. The CBN Governor estimates the total backlog at $7 billion, having cleared around $2 billion in the past three months to ensure liquidity in the forex market.
Fitch currently rates Nigeria at B- with a stable outlook, taking into account various macroeconomic challenges, including record-level inflation, a fluctuating naira, and sluggish crude oil production. Persistent concerns surround Nigeria’s debt levels, with the debt service to revenue ratio reaching 183% in the first quarter of 2023, and the total public debt standing at N87.9 trillion as of Q3, 2023.
In the 2024 budget proposal, the federal government plans to borrow N7.83 trillion to address a budget deficit of N9.18 trillion. Despite this borrowing plan, there is a concerted effort by the federal government to diminish reliance on debts and increase revenue through the Committee on fiscal policy and Tax Reforms. As Nigeria navigates these economic challenges, Fitch’s insights underscore the importance of addressing both forex and debt concerns for a sustainable and stable financial future.