The government of Nigeria is facing a wide range of fiscal pressures and a lack of capacity to respond due to long-standing institutional weaknesses and social challenges. The risk of a negative feedback loop has intensified as the government's need for borrowing has increased while interest rates have also risen.
This has resulted in a policy trade-off between servicing debt and financing other crucial spending items. The 2023 budget plans for an even larger fiscal deficit than in 2022, while the government's funding options remain limited and reliant on central bank financing.
Moody's has also downgraded Nigeria's foreign currency senior unsecured MTN program rating to (P)Caa1 from (P)B3. The outlook is stable, but the implementation of reforms may be lengthy, given the country's marked social and institutional constraints. The government's aim of increasing non-oil revenue and phasing out the costly oil subsidy requires reforms that are socially, institutionally, and politically challenging. Meanwhile, funding conditions will likely remain tight as the local currency (LC) and foreign currency (FC) country ceilings have also been lowered to B2 and Caa1, respectively, from B1 and B3.
According to the report, the reason for the downgrade to Caa1 is the review of Nigeria's fiscal and external position and the government's capacity to address the ongoing deterioration, which has been deteriorating. The fiscal pressure from falling oil production, the increasingly costly oil subsidy, and rising interest rates will likely persist over the next couple of years. The oil production outlook and the securitization of past advances from the Central Bank of Nigeria (CBN) remain uncertain. In order to achieve fiscal consolidation, the government needs to increase non-oil revenue, but the institutional capacity to design and implement a fiscal consolidation strategy remains very weak.
The government's funding options are limited, meaning it will have to borrow at higher interest rates, relying heavily on domestic debt, including continued borrowing from the CBN. The financial sector remains underdeveloped compared to many of Moody's rated sovereigns globally, with the banking sector representing the largest segment and already carrying large amounts of non-performing loans. The government's lack of access to external funding sources will add to the external pressure from depressed oil production and capital outflows, further eroding Nigeria's external profile over time.
The report highlighted that while a new administration may reinvigorate the reform impetus in Nigeria after the general elections scheduled for 25 February 2023, the implementation of reforms is likely to remain lengthy due to the country's marked social and institutional constraints. It added that the Nigerian government's weak institutional capacity and vested interests suggest that the implementation of reforms will be a lengthy process.
Nigeria's indicators measuring governance and social outcomes are particularly weak, lacking data and assessment on key policy issues. To address this, the report recommends that the Nigerian government increase non-oil revenue and phase out the costly oil subsidy. However, the institutional capacity to design and implement a fiscal consolidation strategy remains very weak, and the government will have to rely heavily on domestic debt, including continued borrowing from the Central Bank of Nigeria, as its funding options are limited.
