Moody’s Ratings has projected a significant increase in Nigeria’s interest spending, estimating a rise of 1% of the Gross Domestic Product (GDP) in 2024.
This forecast comes as tighter monetary conditions elevate government interest rates for local currency borrowing, which remains the primary funding source due to a constrained external funding environment.
According to Moody’s latest outlook for Nigeria, this surge in interest rates, from an average of 12.8% in 2023 to 19.7% in the first five months of 2024, will drive interest spending to consume 36% of government revenue.
It stated: “Tighter monetary conditions are pushing government interest rates for local currency borrowing to higher levels, from an average of 12.8% in 2023 to 19.7% between January and May 2024.
“As the government is predominantly borrowing in domestic markets, this will have a significant impact on interest spending, which we expect will increase by 1 percentage of GDP in 2024 and consume 36% of government revenue.”
The credit rating agency highlighted several risks to Nigeria’s fiscal consolidation plans, including the higher cost of oil subsidies and the potential introduction of supplementary measures to support those most affected by the inflation shock.
These factors pose a threat to the country’s economic stability, leading to ever-increasing interest expenses.
Fiscal deficit to hit 7% of GDP
Moody’s further expects Nigeria’s fiscal deficit to widen significantly to around 7% of GDP in 2024 due to multiple obstacles to fiscal consolidation.
It noted that institutional weaknesses and heightened social risks, exacerbated by inflation affecting a population with high poverty rates and limited access to basic services, are critical credit constraints.
While the new administration is attempting to improve tax compliance to increase revenue, Moody’s suggests that these efforts will unlikely offset the ongoing spending pressures.
The ratings agency noted: “We expect that the fiscal deficit will widen significantly in 2024 to around 7% of GDP amid multiple obstacles to the government’s fiscal consolidation plans. Moreover, institutional weaknesses and heightened social risks as inflation affects the population with high poverty rates and restrained access to basic services are key credit constraints. While the new administration is working at raising the very low levels of tax compliance, higher revenue intake is unlikely to fully offset the ongoing spending pressure.”
Additionally, the reintroduction of substantial fuel subsidies, driven by the devaluation of the naira without a corresponding increase in pump prices, and a proposed supplementary budget of N6.7 trillion (2% of GDP) to address high inflation’s impact on health, social welfare, agriculture, and energy sectors, are expected to further strain fiscal resources.
Uncertain Fiscal Outlook
Moody’s further paints an uncertain fiscal outlook for Nigeria. While the devaluation of the naira might boost the value of oil production in government accounts, future oil production remains encumbered by payments on various oil-backed loans contracted by the state-owned NNPC, limiting potential revenue gains.
- Fuel subsidy spending is likely to remain substantial, albeit gradually decreasing.
- The agency predicts a slight improvement in the fiscal deficit by 0.5% of GDP in 2025 due to expected reforms in revenue collection boosting non-oil revenue.
- However, with persistent inflation, there remains a risk that higher government borrowing costs and additional social spending pressures could impair market confidence and liquidity, leading to spiralling interest rates.
- Moody’s concluded that Nigeria’s ratings could be upgraded if the risks from higher inflation and fiscal headwinds from increased government borrowing costs and lower oil revenue are effectively contained and if fiscal consolidation supports monetary tightening efforts to control inflation.
- Conversely, a downgrade could occur if inflation worsens and government access to funding remains highly constrained, leading to a liquidity crisis characterized by spiking interest rates and payments.
