Nigeria Grappling With Forex Shortage to Clear Backlog - Fitch

Fitch announced Thursday that the Central Bank of Nigeria (CBN) is still grappling with a foreign exchange shortage needed to clear the forex backlog.

The nation’s high ratio of debt service to revenue is also adding to the difficulty of maintaining a favorable sovereign credit rating.

Gaimin Nonyane, Fitch’s Director of Middle East and Africa Sovereigns, stated that the persistent foreign exchange shortages in Nigeria are putting pressure on the naira. At present, there is a 30% difference between the official and parallel exchange rates.

“In our view, the central bank is still significantly short of the resources required to clear the foreign exchange backlog and also cater to the substantial external financing needs of the private sectors,” said Nonyane.

Increasing debt service cost across Africa

Nonyane and Toby Iles, Fitch’s Head of Middle East and Africa Sovereigns, warned that Nigeria’s ratio of interest payments to revenue, which exceeds 40%, is a major vulnerability for its credit rating – four times higher than the median for B-rated sovereigns.

Since 2014, interest-to-revenue ratios across Africa have more than doubled in Nigeria, fueled by increased borrowing and rising costs due to global interest rate hikes.

CBN has started clearing a backlog of FX forwards for companies aiming to repatriate their cash overseas. The Governor of the apex bank estimates the total backlog to be around $7 billion.

The apex bank recently announced that it has cleared approximately $2 billion of the backlog in the past three months and will ensure liquidity in the forex market.

Despite a plethora of macroeconomic challenges – record inflation, fluctuating naira, and sluggish crude oil production, Fitch rated Nigeria at B- with a stable outlook.

Nigeria’s debt levels have recently been a source of worry for many. In the first quarter of 2023, the debt service to revenue ratio rose to 183%. As of Q3, 2023, Nigeria’s total public debt stands at $98.7 billion.

In the 2024 budget proposal submitted to the National Assembly, the federal government plans to borrow $8.7 billion to cover a budget deficit of $10.2 billion.