Fitch: Nigeria’s exchange rate, FX market remain volatile

Fitch Ratings has recently affirmed Nigeria's B with a positive outlook, highlighting the progress made in implementing reforms that enhance policy coherence, credibility, and reduce economic distortions. The rating agency acknowledges Nigeria's ongoing challenges in stabilizing its foreign exchange market, emphasizing the need to test the sustainability of the current reform process. Gaimin Nonyane, Director for Middle East and Africa Sovereigns at Fitch Ratings, discussed these key points in a recent interview with CNBC Africa. Nigeria's positive outlook reflects the government's commitment to reforms aimed at restoring macroeconomic stability and policy credibility. Years of unorthodox policies and financial repression have eroded consumer and investor confidence, making the recent focus on reform crucial. Short-term challenges persist, and the resilience of the reform process remains to be seen. Inflation, driven by high fiscal spending, poses a significant risk to Nigeria's credit rating. Efforts to tighten monetary policy and restore fiscal discipline have been offset by supply shocks and food shortages, delaying the disinflationary path. The volatility of the exchange rate adds to the uncertainty. Fitch views the phasing out of subsidies positively, despite the immediate inflationary impact. This move eases spending pressures and aligns with the push for fiscal responsibility. However, rising debt levels and budget deficits continue to raise concerns, prompting the need for stronger revenue mobilization through tax reforms. Nigeria's fiscal policy progress in revenue collection has been partially influenced by exchange rate effects on foreign exchange-denominated revenues. While efforts to close revenue loopholes have shown some success, more robust tax reforms are necessary to enhance public finance prospects. The ongoing volatility in Nigeria's foreign exchange market underscores the need for greater stability. Fitch suggests reducing externalities and formalizing the market to build confidence in foreign exchange stability, essential for potential credit rating upgrades. Gaimin Nonyane emphasized the importance of foreign exchange stability in Nigeria's path towards economic improvement, citing the need for greater confidence in the market. Inflation concerns persist as challenges, impacting credit rating prospects. As Nigeria navigates these issues, monitoring the sustainability of reforms and exchange rate stability will be crucial for future developments.