By Ken Afor
Nigeria’s economic policies have been gaining recognition amidst the nation’s financial challenges, following the recent upgrade of the county’s economic outlook from stable to positive by the renowned global credit rating agency, Fitch.
This upgrade in credit rating signifies an improvement in Nigeria’s creditworthiness, a crucial factor for securing loans from international financial institutions.
The positive outlook for Nigeria, Africa’s largest economy with a GDP of $477.38 billion in 2023 is attributed to three significant reforms undertaken by the government. Firstly, the liberalization of the foreign exchange market in June 2023, secondly, the removal of fuel subsidies in May 29, 2023, and thirdly, the recent hike in electricity tariffs.
In a statement released by the rating agency on Friday, May 3, it highlighted a positive outlook, attributing it in part to recent reforms focused on reinstating macroeconomic stability and bolstering policy coherence and credibility.
“Exchange rate and monetary policy frameworks have been adjusted, fuel subsidies reduced, coordination between the ministry of finance and the Central Bank of Nigeria (CBN) improved, central bank financing of the government scaled back and administrative efficiency measures are being taken to raise the currently low government revenue, as well as oil production,” Fitch said.
Fitch noted that these reforms have mitigated distortions arising from past “unconventional monetary and exchange rate policies,” resulting in significant inflows returning to the official foreign exchange (FX) market.
“Nevertheless, we see significant short-term challenges, notably, inflation is high and the FX market has yet to stabilise, and the durability of the commitment to reform is to be tested.
“The CBN has stepped up efforts to reform the monetary and exchange rate framework following last year’s unification of the multiple exchange rate windows, and the large differential between the official and parallel market rates has collapsed.
“Average daily FX turnover at the official FX window has risen sharply from 2H23, and there has been clearance of USD4.5 billion of the backlog of unpaid FX forwards (the validity of the outstanding USD2.2 billion is being assessed by CBN), and weekly sales of FC to bureaux de changes (BDCs) have resumed (having been suspended since 2021),” the credit agency said.
Fitch highlighted that the increased formalization of FX activity and tightening of monetary policy have led to a significant increase in foreign portfolio investment inflows and a rapid appreciation of the Naira at the official FX window. This trend follows a 71 percent depreciation post-liberalization between June 2023 and mid-March 2024, as reported by the company.
Yet, the credit rating agency emphasized that despite improvements, the exchange rate remains volatile. It highlighted the ongoing challenge posed by the lack of clarity regarding the size of net FX reserves, which acts as a constraint on Nigeria’s sovereign credit profile.
‘Further monetary policy tightening anticipated’
In March, the Central Bank of Nigeria (CBN) raised the monetary policy rate (MPR), which benchmarks interest rates, from 22.75 percent to 24.75 percent.
Fitch said it expects further increases in the CBN monetary policy rate in the second half of 2024 and “strengthening of monetary policy transmission, after the recent resumption of open market operations at rates closely aligned to the MPR”.
“We project inflation, which rose to 33.2% yoy in March due partly to exchange rate pass-through and rising food prices, to average 26.3% in 2024 and 18.2% in 2025, still well above our projected ‘B’ median of 4.5%,” Fitch said.
Fitch’s rating also corresponds with Moody’s, a US-based rating agency’s, outlook for Nigeria from stable to positive in December 2023.
