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The global credit rating agency Moody’s Ratings has warned that the Central Bank of Nigeria’s ability to maintain a stable naira without draining reserves may be impacted by declining oil prices and stubborn inflation.

This was disclosed in the rating action update shared on its website on Friday, where it upgraded Nigeria’s long-term foreign currency and local currency issuer ratings to B3 from Caa1 and changed the outlook to stable from positive.

At the centre of Nigeria’s credit upgrade was the CBN’s overhaul of the country’s foreign exchange regime, which scrapped multiple exchange rates in favour of a unified market-driven system. According to Moody’s, this has enhanced transparency, improved forex liquidity, and significantly narrowed the gap between official and parallel market rates. The move has also boosted investor confidence and improved external debt repayment capacity.

Despite the positive rating action, Moody’s has warned that Nigeria’s economic outlook remains vulnerable to external shocks, particularly a decline in global oil prices and the persistence of inflationary pressures. These, the agency noted, could test the resilience of the current monetary framework and derail some of the recent macroeconomic gains.

The rating agency stated, “The upgrade reflects significant improvements in Nigeria’s external and fiscal positions. A more flexible exchange rate has greatly bolstered external reserves. Concurrently, the removal of oil subsidies has alleviated budgetary spending pressures. Initially, these policy shifts posed inflationary risks, with, as a result, a potential for policy reversal. These risks have now diminished, with inflation and domestic borrowing costs showing nascent signs of easing, giving us confidence that the policy changes are becoming more entrenched. Moreover, tax reforms have started yielding results. Although vulnerabilities related to oil prices and the exchange rate remain, Nigeria’s more robust buffers support a B3 rating.

“The stable outlook means we expect Nigeria’s recent progress on external and fiscal fronts to continue, though at a slower pace if oil prices fall. We assume current policies—like the flexible exchange rate—will stay in place, supported by a healthy balance of payments. Over the next few years, we expect debt to level off at 50 per cent of GDP, with interest payments taking up about 35 per cent of government revenue. Risks are balanced, with the Central Bank of Nigeria potentially facing difficulties in upholding a flexible exchange rate if oil prices decline further, weakening the naira and increasing the government debt burden. Persistent high inflation could impede interest rate normalisation. Conversely, a track record of flexible exchange rate policy and successful revenue reforms could improve business sentiment, lower interest rates, and drive economic growth beyond our baseline expectations.”

Moody’s warning came amid a projection that oil prices may drop by 16 per cent in 2025. As Nigeria remains heavily reliant on crude oil exports for forex earnings, any significant price decline could undermine the CBN’s ability to maintain a stable naira without draining reserves. There is a risk that lower oil revenues could pressure the CBN to re-intervene more heavily in the forex market or abandon its current flexible approach. This could trigger a renewed widening of exchange rate spreads and reduce investor confidence,” Moody’s warned.

At about $63 per barrel as of Sunday, June 1, 2025, the price of crude in the global market was already lower than the benchmark of $75 per barrel on which the 2025 budget is hinged.

Analysts at Afrinvest in their monthly report for May sided with Moody’s and called for complementary efforts from the fiscal authorities.

“Given that crude oil revenue is projected to deliver 47.7 per cent of the N40.9 tn budgeted revenue for 2025, we estimate deficits could exceed N17.0tn in 2025, pushing total debt stock to N180.0 tn (c. 60.0 per cent of GDP). Taking a cue from 2024, where Nigeria spent N11.0tn (52.9 per cent of total revenue in the period) on debt servicing, there is an urgent need to replace historic fiscal expansionism with a more prudent framework that prioritises sustainable budget growth and is capex intensive. We consider this necessary to effectively complement CBN’s effort at fostering real growth while maintaining price stability,” Afrinvest stated.

In addition to oil-related risks, inflation remains a key concern.

Nigeria’s inflation rate, which peaked at 34.8 per cent in December 2024, moderated to 24.5 per cent in January 2025 following a rebasing of the Consumer Price Index methodology. Food inflation, in particular, has shown a consistent downward trend, dropping to 21.3 per cent by April. However, the credit agency said inflation remains stubbornly high and could reverse if global commodity prices rise or if the naira weakens further.

 To combat inflation, the CBN has adopted a tighter monetary stance, raising the benchmark interest rate by 875 basis points in 2024 to 27.5 per cent, the highest level in decades, and increasing the cash reserve requirement for banks. It has also halted the practice of Ways and Means financing of the Federal Government, which previously stoked monetary expansion.

The report also flagged Nigeria’s weak interest-to-revenue ratio, projected to remain at 35 per cent by 2027, as a structural constraint that limits the government’s fiscal flexibility. Still, Moody’s maintained a stable outlook on Nigeria, expressing confidence that recent reforms have laid the groundwork for improved economic governance and debt sustainability. The agency noted that the continuation of current policies, especially efforts to improve tax collection and reduce dependence on oil, could support further upgrades in the future.