Fitch Ratings says Nigeria’s response to the global slump in oil prices has fiscal and growth risks.
The agency said it had yet to see how policy measures announced by the Federal Government would contain economic pressures occasioned by the oil shock.
Fitch in a statement in London said, “The Nigerian authorities’ recent economic policy announcements show the response to the oil price shock is coalescing around state-led development to boost economic growth and import substitution to blunt the effects of declining oil receipts.
“It is yet to be seen whether the associated measures will promote growth while containing fiscal pressures, but we believe there are a number of downside risks.”
According to the rating agency, the emerging economic policy under President Muhammadu Buhari includes an increase in public spending and state-directed investment, revenue-side reforms and accommodative monetary policy.
The Federal Government’s expansionary 2016 budget envisages spending of N6tn ($30bn), up from N4.6tn in the 2015 budget, including a 30 per cent increase in capital spending.
The government aims to finance additional spending through revenue-side reforms, including improved tax collection and public finance management and by increasing external financing.
The fall in oil prices below the $38 per barrel level assumed in the 2016 budget has increased the need for external financing. And the government announced recently that it was looking to the World Bank and African Development Bank for additional lending and exploring a Eurobond issuance in the first quarter.
The Central Bank of Nigeria had taken a large role in implementing economic policy during last year’s six-month wait for cabinet appointments.
It introduced foreign exchange controls and restrictions and resisted pressure for further naira devaluation.
The CBN cut the benchmark rates by 200 basis points in November and reduced the Cash Reserve Ratio for commercial banks.
The central bank has also continued to restrict access to forex in 2016, limiting dollar sales to the Bureau de Change operators.
It has maintained its support for the naira rather than risk the inflationary impact of devaluation.
Fitch noted that “Overall, these policies present downside risks to Nigeria’s sovereign credit profile, although there are various mitigating factors: increased borrowing and higher interest payments will add to pressure on the fiscal position.
“But public debt is low, and the government is unlikely to fully execute its spending plans. Capital expenditure, for example, has constituted only about 20 per cent of the total Federal Government spending in recent years and is estimated to have dropped to about 13 per cent for 2015.”
According to the global rating agency, under-spending by the country will reduce the negative impact on the public finances and boost growth.
The Federal Government has indicated that it will use low oil prices to begin phasing out fuel subsidy in 2016, which will partly contain the deterioration in the public finances.