Fitch flags macro-stability risks on Nigeria’s deficit monetisation

Fitch Ratings has raised concerns over Nigeria's macroeconomic stability, citing the sustained use of direct monetary financing from the Nigerian government's Ways and Means Facility with the Central Bank of Nigeria. Jan Friederich, Senior Director at Fitch Ratings, highlighted weaknesses in Nigeria's public finance management during an interview with CNBC Africa. Friederich emphasized the risks associated with the central bank financing the government directly, which could indicate a close relationship between the two entities and potentially lead to challenges in tightening monetary policy when needed for the country's economic well-being. The use of direct monetary financing by the government from the central bank is considered relatively unorthodox and raises questions about the central bank's independence and its ability to make decisions based on the country's best interests rather than the government's. Friederich pointed out that Nigeria had been using this method even before 2020, which could signal a lack of commitment to macroeconomic stability and the willingness to tighten when necessary to control inflation. In addition to the concerns around direct monetary financing, Friederich discussed Nigeria's debt accumulation and the impact on the country's debt ratios. He noted that while Nigeria's debt-to-GDP ratio remains lower than many other African countries, the country's extremely low revenue-to-GDP ratio poses challenges for servicing the debt. With revenues accounting for only 7% of GDP, the sustainability of Nigeria's debt levels comes into question. Looking ahead to Nigeria's budget projections for 2021, Friederich acknowledged the government's conservative estimate of an oil price of $40 per barrel. While this projection provides a safety margin, the impact of the COVID-19 pandemic on oil markets and Nigeria's revenue challenges remain significant factors to monitor. Discussing the inflation rates in Nigeria, particularly the December figures of 15.8% overall inflation and nearly 20% food inflation, Friederich attributed the high inflation levels to a combination of external factors and macroeconomic policy choices. He highlighted challenges in accessing foreign exchange, which affects imports and contributes to inflationary pressures. Additionally, the central bank's focus on maintaining the exchange rate tightness further complicates the inflation dynamics in Nigeria. As Nigeria prepares for the next MPC meeting, Friederich underlined the importance of monitoring the central bank's decisions on inflation policies. The complex interplay of factors in Nigeria's economy, including unorthodox monetary financing, debt accumulation, low revenue-to-GDP ratio, and high inflation rates, underscore the need for prudent macroeconomic management and policy interventions to ensure long-term economic stability.