Fitch Backs Nigeria’s Reform-driven Rebound

FITCH Ratings has upgraded Nigeria’s credit outlook from Negative to Stable, citing ‘clear signs of increased commitment to market-based reforms’ under President Bola Tinubu. While Nigeria’s long-term foreign currency issuer default rating remains at ‘B’, the revision reflects growing confidence in the government’s macroeconomic direction.

In its April 2025 release, Fitch praised wide-ranging fiscal and monetary reforms enacted since mid-2023, stating: ‘The authorities have taken steps to address Nigeria’s macroeconomic imbalances. These include exchange rate reforms, tighter monetary policy, the removal of fuel subsidies, and a halt to direct central bank financing of the deficit.’

These reforms, Fitch explained, have ‘enhanced macroeconomic credibility, reduced market distortions, and strengthened the country’s resilience to external shocks.’

FX reforms drive liquidity, narrow rate gap

A major policy shift was the Central Bank of Nigeria’s (CBN) overhaul of the foreign exchange market. In 2024, it introduced a new FX matching platform and code to improve price discovery and transparency.

Following a steep 40 percent depreciation of the naira in 2023, these reforms helped reduce the spread between official and parallel market rates. As a result, FX inflows through formal channels surged by 89 percent in Q4 2024 compared to an 8 percent rise the previous year.

Fitch noted: ‘The improvement in FX liquidity and convergence of rates has contributed to greater investor confidence, although short-term volatility remains a risk.’

However, external headwinds could undermine progress. A newly announced 14 percent US tariff on Nigerian exports is expected to dent foreign exchange earnings, while falling oil prices present another challenge.

Inflation dips but remains stubbornly high

Inflation cooled to 23.2 percent in February 2025, aided by a rebased consumer price index and tighter monetary policy. Still, this is well above the ‘B’ rating peer median of 4.3 percent.

Fitch highlighted the central bank’s decisive action, noting that it ‘has raised its policy rate by 875 basis points since February 2024, reaching 27.5 percent, in an effort to rein in inflation and stabilise the naira.’

The agency forecasts inflation will average 22 percent this year and decline slightly to 20 percent in 2026, adding: ‘We expect the CBN to maintain its tight policy stance until inflation shows a sustained downward trend.’

External reserves improve, but buffers remain thin

Nigeria’s gross reserves climbed to $41bn by end-2024 before slipping to $38bn due to debt servicing obligations, including a $1.1bn Eurobond repayment due in November.

Fitch observed: ‘Net external reserves are estimated at about $23bn. The CBN has reduced reliance on FX swaps, with such liabilities now at 14 percent of gross reserves—down from 25 percent in November 2024.’

Current account dynamics are also improving, with a $6.8bn surplus (6.6 percent of GDP) recorded in 2024, driven by higher formal FX inflows and lower import costs.

Dangote refinery and oil recovery offer hope

The Dangote Refinery is poised to ramp up capacity from 550,000 barrels per day to 650,000 by mid-2025. This is expected to significantly cut fuel imports, which currently account for around 30 percent of Nigeria’s total goods imports.

Oil production (excluding condensates) is forecast to rise to 1.43 million barrels per day in 2025, up from 1.34 million, though still below pre-2019 levels due to ongoing underinvestment.

Fitch commented: ‘The operationalisation of the Dangote Refinery and gradual recovery in oil production should support the current account and reduce external vulnerabilities over time.’

Fiscal risks linger, banking pressure grows

Despite modest revenue gains, Nigeria’s fiscal deficit is projected to average 4.2 percent of GDP in 2025–2026, reflecting increased wage costs, debt servicing, and pre-election expenditure.

Fitch warned: ‘General government revenue remains structurally low. The interest-to-revenue ratio stands at 30 percent, and close to 50 percent at the federal level, underscoring debt sustainability concerns.’

The banking sector is also under strain. Non-performing loans stood at 4.9 percent in November 2024, and Fitch expects this to rise due to high inflation and rising rates. Smaller banks may face capital adequacy issues, prompting a wave of mergers and acquisitions.

Governance remains a long-term constraint

Fitch Ratings flagged governance and institutional weaknesses as major credit constraints. Nigeria ranks in the 19th percentile of the World Bank’s Governance Indicators, reflecting challenges in regulatory enforcement, corruption, and judicial independence.

‘Governance weaknesses continue to weigh on Nigeria’s credit profile,’ Fitch concluded. ‘Sustained improvements in transparency and institutional capacity would be necessary to support a ratings upgrade in the future.’