Global rating agency Moody‘s, on Friday, revealed that the high inflation rate in Nigeria is creating spending pressure on the government and increasing the risk of social unrest.
Moody’s updated its outlook for Nigeria from stable to positive, citing the potential reversal of the deterioration in the country’s fiscal and external positions due to recent reform efforts.
However, the agency maintained Nigeria’s Caa1 rating, indicating weak fiscal and external positions.
Moody’s expressed concern about the impact of elevated inflation on the government’s interest and primary spending.
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In the challenging economic and social environment characterized by widespread poverty and social inequalities, the agency warned that social unrest caused by worsening inflation could potentially derail or reverse the reforms.
The unification of foreign exchange windows and devaluation of the naira were acknowledged as initial steps to address the country’s foreign exchange shortages and support external rebalancing.
Moody’s stated that the removal of the oil subsidy, along with these reforms, has the potential to improve Nigeria’s fiscal and external conditions, ultimately boosting its credit profile.
The agency highlighted that the combination of naira devaluation and higher petroleum prices, resulting from the subsidy removal, led to a 27% inflation rate in October.
Despite these challenges, Moody’s anticipates positive outcomes from the foreign exchange reform and fuel subsidy removal, expecting them to benefit the economy in the long run by satisfying foreign exchange demand, reducing distortions, and supporting the balance of payments.
The removal of the oil subsidy is also seen as a positive step to alleviate the government’s budget deficit.
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