Nigeria faces major economic challenges ahead of elections due on 25 February and policy choices by the incoming administration could have a significant impact on the country’s credit profile, Fitch Ratings says.
 
 The Nigerian Supreme Court’s suspension of a 10 February deadline for exchanging old banknotes into new eases, at least temporarily, the risk of intensifying cash shortages. However, the demonetisation drive is still likely to be disruptive in the near term. Associated cash shortages may hit consumer spending and boost demand for foreign currency, aggravating foreign-exchange shortages. It is not yet clear whether there will be offsetting longer-term economic benefits, such as greater use of the formal banking system or enhanced use of digital payment systems.
 
The country faces numerous other challenges to its fiscal sustainability, external finances and economic outlook. We downgraded Nigeria’s rating to ‘B-’ from ‘B’ in November 2022, with a Stable Outlook, reflecting continued deterioration in debt servicing costs and external liquidity.
 
 Our base case assumes that the subsidy on petrol, a key drag on the public finances, will be reduced in 2023, but phased out more gradually than in the government’s latest budget. We consider the next administration is likely to face pressure to continue it and concessions on this front could make consolidating the public finances more difficult.

 
 
 
 Fitch expects some improvement in crude oil production to help offset lower oil prices in 2023. Output in 4Q22 was 15% higher than in 3Q22, and rose further in January to 1.26 million barrels a day (mb/d) but it was still well below Nigeria’s budgeted 1.69mb/d for 2023 and its OPEC quota of 1.8 mb/d. This partly reflects security issues that we believe will continue to hamper production.
 
 Nigeria’s fiscal profile will remain weak in the medium term. General government interest/revenue is extremely high (47% in 2022 by Fitch's estimate) and we expect it will remain so given constraints on revenue mobilisation, increasing debt and high interest rates. Structurally low non-oil revenue, spending pressures and weak economic growth imply substantial fiscal financing needs. The government faces external debt amortisations of USD2.5 billion in both 2023 and 2024, an increase on recent years, although the majority is bilateral and multilateral debt service. We stated in November that increased financing constraints or signs of difficulty in meeting debt servicing costs could lead to negative rating action.

The government last year confirmed that Nigeria did not intend to seek a debt restructuring. Fitch does not consider a restructuring or forced debt exchange likely in the near term, but there is a risk the next administration could take a different stance.
 
In November, Fitch said that significant intensification of Nigeria’s external liquidity pressures, illustrated by a rapid decline in international reserves, could lead to negative rating action. Our base case assumes that international reserves will edge down further and that foreign-exchange liquidity will remain constrained. We assume that the official exchange rate will be permitted to depreciate modestly over 2023-2024, but that it will remain overvalued, hampering economic activity.
 
 The prospects for exchange-rate reform will be influenced by the outcome of the presidential election, and could increase under a new central bank governor. The incumbent’s term ends in 2024, but an incoming administration could push for earlier change. A more flexible exchange-rate regime would likely be a long-term positive for Nigeria’s credit profile,