Leading provider of credit ratings, Fitch Ratings, has said that rising fuel subsidy will prevent Nigeria from fully benefitting from surging oil prices. The agency, which stated this in its latest report that saw it affirming Nigeria’s Long-Term Foreign- Currency Issuer Default Rating (LTFC IDR) at “B” with a stable outlook, said that while higher prices will boost the country’s external reserves and support near-term economic growth, “high hydrocarbon dependence leaves Nigeria vulnerable to negative oil price shocks and structurally low domestic revenue mobilisation.”
Fitch noted that Nigeria, in January this year, reversed a plan to phase out the implicit fuel subsidies that support price controls on petroleum, which necessitated the Federal Government adjusting its budget for 2022 to project a deficit target that is 0.6 per cent of GDP wider than the original target, due to the subsidies. According to the agency, “higher oil prices will also boost the subsidy cost, denting the benefit of higher global oil prices to the budget. We forecast the 2022 general government fiscal deficit to remain broadly unchanged from 4.1per cent of GDP in 2021.
However, we estimate that a $10 per barrel increase would narrow the fiscal deficit by 0.5per cent of GDP.” On the impact of the higher oil prices on the country’s external reserves, Fitch stated: “Nig
eria’s gross international reserves have been bolstered by higher oil export receipts, which will continue in 2022. We forecast reserves to increase to $43 billion in 2022, up from $40.5 billion at end-2021.
“We estimate that the combination of oil exports and remittance inflows helped to bring the Current Account (CA) into balance in 2021 after a deficit of 4.2per cent of GDP in 2020. Our baseline assumption is for the CA balance to remain broadly unchanged in 2022, but sustained higher oil prices at their present level of $112 per barrel could widen the 2022 current account surplus to 4percent of GDP, with upside to Nigeria’s international reserves.” It further stated that “we forecast general government debt, including the Federal Government of Nigeria’s overdraft with the Central Bank of Nigeria (CBN), to increase to 32per cent of GDP by end-2022, well below the current ‘B’ median forecast of 79.1per cent. “Debt affordability metrics related to revenue are helped by an increase in non-oil revenue to an estimated 5.6per cent of GDP in 2021, from an average of 3.9per cent in the previous five years.”