Allianz: Nigeria's response to persistent fiscal pressures limited

Nigeria's economy is expected to grow by 3 per cent this year, according to Allianz Trade's Country Risk Atlas. However, the government's ability to respond to persistent fiscal pressures is limited due to institutional weaknesses, social challenges, and output constraints. Luca Moneta, Senior Economist for Africa and the Middle East at Allianz, recently joined CNBC Africa to discuss the findings of the report. Moneta highlighted several pressure points that Nigeria is facing and the challenges it encounters in addressing them. One significant concern is the impact of mounting pressures on the country's currency, exchange rate, and debt repayment. Moneta pointed out that Nigeria's debt service as a percentage of GDP is expected to be around 5 per cent this year, reflecting the substantial cost of servicing maturing debts. Despite efforts to trim the budget deficit and reduce borrowing levels, Nigeria continues to face significant borrowing needs and rising interest rates. The country has increased auction volumes for T-bills and bond auctions, but these measures have not fully addressed the underlying economic issues. Moneta expressed caution about relying solely on international markets for funding, citing high sovereign debt spreads and unsustainable yields observed in countries like Kenya. Instead, he suggested considering multilateral funding as a more viable alternative. Nigeria's Balancing Act between fiscal and monetary policies is crucial in navigating the current economic challenges. The upcoming Central Bank of Nigeria Monetary Policy Committee meeting will focus on inflation targeting and price stability. While the target inflation rate is set at 17%, concerns remain about the existing high inflation rate, currently around 30%. Moneta acknowledged the challenges posed by currency devaluation and structural issues on food prices but remained cautiously optimistic about potential improvements in the latter part of the year, especially with the commissioning of new refineries. The Dangote Refinery and other upcoming local refineries are expected to lessen the reliance on fuel imports and address trade imbalances. Looking beyond Nigeria, Moneta discussed broader West African geopolitical shifts and the implications for regional stability. He emphasized the importance of policy normalization and security challenges in influencing Nigeria's economic outlook and international ratings. Despite Nigeria's current rating of D3, indicating moderate long-term prospects with room for international market access, Moneta stressed the need for further reforms to enhance the country's economic outlook and stability. As Nigeria, along with Benin, Cote d'Ivoire, and Ghana, considers Eurobond issuances, the country's ability to attract foreign investment will depend on its commitment to implementing necessary reforms. In conclusion, Nigeria faces significant fiscal pressures with limited room to maneuver, requiring strategic policy responses and structural reforms to sustain economic growth and stability.