Nigeria must stay through with its N13 trillion budget deficit as larger deficits may further depreciate the naira, stoke inflation and result in a prolonged tightening cycle, according to Fitch Ratings.

The international credit rating agency in an assessment of the country stated that while the nation’s credit profile has increased due to the various reforms introduced by the government last year, challenges persist, especially from the fiscal authorities.

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It noted that though the government’s recent 2025-2027 Medium-Term Expenditure Framework (MTEF) set out plans to narrow the budget deficit more sharply than “we had expected”, assumptions of oil prices and production were “more optimistic than Fitch’s”.

The credit agency had projected oil prices at $70 per barrel and a production capacity of 1.77 million barrels per day (mbpd) but Africa’s biggest oil producer pegged its budget at $75 with an output of 2.06 mbpd – an assumption that may be hampered by a drop in global oil prices or a legacy low production output which may widen deficit in the long run.

“Reducing the deficit in line with the MTEF would provide further credibility for the government’s reform agenda, but if the deficit target is missed, it may increase the pressure for further naira depreciation, as well as putting upward pressure on prices and interest rates,” Fitch Ratings said.

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The naira fell for the most of the year, shedding about 45 percent of its value year to date as low dollar liquidity as a result of lack of enough inflows worsened its volatility.

Consumer prices also was up all through the year except for July and August when it slowed. Inflationary pressures have depleted consumer spending as prices quickened to a more than 28-year high in November to 34.6 percent.

With inflation climbing up, benchmark interest rates are rising in an attempt to control prices that have escalated a worst cost-of-living crisis in a generation in Africa’s most populous nation.

Meanwhile, Nigeria is proposing a N13.1 trillion deficit for the next fiscal year – higher than N9.2 trillion earmarked in the 2024 budget.

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Afrinvest Research in its latest report and outlook for 2025 noted that “actual deficit would exceed the budgeted N9.2 trillion by 72.8 percent in the minimum should the total expenditure plan of N35.1 trillion be fully accommodated.”

The investment cum research firm also forecast a baseline fiscal deficit of N15.8 trillion for 2025 on the premise of a huge debt servicing cost estimated at over 45 percent of revenue and a possible shortfall in oil and non oil revenue.

“Exchange-rate policy remains hampered by a lack of transparency”

Fitch Ratings said that various changes that the central bank has introduced, including the simplification of the exchange-rate regime and tightening of monetary policy through higher interest rates, have reduced distortions in the economy and improved policy credibility.

It added that these policies have seen gross official reserves rise to $40.2 billion in November, equivalent to around six months of current external payments, from $32.2 billion in April and well above the median for sovereigns rated in the ‘B’ category of 3.7 months.

“Nonetheless, exchange-rate policy remains hampered by a lack of transparency in several areas, including the level of net reserves.

“A divergence between the official and parallel market rates has re-emerged in recent months, pointing to slower-than-expected progress on reforms and lingering FX strains,” it said.