Fitch Ratings, a global credit ratings agency, has warned that the cash crunch occasioned by the redesigning of the N200, N500 and N1000 banknotes by the Central Bank of Nigeria (CBN) may boost demand for foreign currency and aggravate foreign exchange (forex) shortages in the country.
In its latest report titled, ‘Nigeria’s Economic Challenges Highlight Importance of Post-Election Policies’, Fitch said it was not yet clear whether there would be long-term economic benefits of the naira redesign policy.
The report stated: “The Supreme Court’s suspension of a 10th February deadline for exchanging old banknotes into new eases, at least temporarily, the risk of intensifying cash shortages.
“However, the demonetization 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,” the agency stated.
Fitch noted that it downgraded Nigeria’s rating to ‘B-’ from ‘B’ in November 2022, with a Stable Outlook, due to the country’s continued deterioration in debt servicing costs and external liquidity.
According to Fitch, Nigeria’s fiscal profile would remain weak in the medium term.
“General government interest/revenue is extremely high (47 percent 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 amortizations of $2.5 billion in both 2023 and 2024, an increase on recent years, although the majority is bilateral and multilateral debt service.”