CBN is still Short of the Amount Needed to Clear Forex Backlog – Fitch Ratings
Fitch, a renowned credit ratings agency, has brought attention to the persisting challenges faced by the Central Bank of Nigeria (CBN) in managing a shortage of foreign exchange to clear the existing forex backlog. Gaimin Nonyane, Fitch’s Director of Middle East and Africa Sovereigns, underscored the ongoing scarcity of foreign exchange in Nigeria, emphasizing that it continues to exert pressure on the naira. Notably, there exists a substantial 30% disparity between the official and parallel exchange rates, indicating the severity of the forex challenges.
Nonyane raised concerns about the central bank’s ability to effectively address the significant forex backlog, a crucial task considering the large external financing requirements of the private sector. This situation underscores the intricate balance that the CBN must strike to ensure stability in the foreign exchange market, as failure to do so may lead to further depreciation of the naira and potential economic repercussions.
The high debt service to revenue ratio in Nigeria further complicates the sovereign credit rating outlook. Nonyane highlighted that the country faces a challenging ratio exceeding 40%, a significant weakness when compared to other B-rated sovereigns. This elevated ratio suggests a strain on fiscal resources, potentially impacting the government’s ability to meet its debt obligations and invest in critical areas such as infrastructure and social services.
Toby Iles, Fitch’s Head of Middle East and Africa Sovereigns, provided additional insights into the broader trend of interest payments to revenue ratios across Africa. He pointed out that these ratios have more than doubled since 2014, attributing the surge to heightened borrowing and increased costs stemming from global interest rate hikes. The rising debt service costs present a common challenge for many African nations, highlighting the importance of prudent fiscal management to ensure debt sustainability.
To address the forex challenges, the Central Bank of Nigeria has taken steps to clear a backlog of FX forwards, particularly for companies looking to repatriate funds abroad. The estimated total backlog is substantial, hovering around $7 billion. Notably, the central bank has successfully cleared approximately $2 billion of this backlog in the past three months. The commitment of the CBN to ensuring liquidity in the forex market is crucial for stabilizing the exchange rate and instilling confidence among investors and businesses.
Despite the macroeconomic challenges faced by Nigeria, including record-level inflation, currency instability, and sluggish crude oil production, Fitch has maintained the country’s credit rating at B- with a stable outlook. This suggests that, despite the difficulties, there is a level of confidence in the country’s ability to navigate these challenges and implement measures to restore economic stability.
However, the significant debt levels in Nigeria remain a cause for concern. In the first quarter of 2023, the debt service to revenue ratio surged to 183%, signalling a strain on the country’s fiscal capacity. As of Q3, 2023, Nigeria’s total public debt reached N87.9 trillion, further emphasizing the need for a strategic and sustainable approach to debt management.
The 2024 budget proposal presented to the National Assembly indicates the federal government’s intention to borrow N7.83 trillion to address a budget deficit of N9.18 trillion. Despite this borrowing plan, there is a concerted effort by the government to diminish reliance on debts and increase revenue through the Committee on Fiscal Policy and Tax Reforms. This strategic shift underscores the government’s commitment to fiscal responsibility and sustainable economic management, recognizing the importance of balancing economic growth with debt sustainability in the long term.
