BY CHINYERE OBIORA – Financial experts have warned that a booming economy means little if the state treasury remains dry, stressing that robust national growth must compliment and go hand in hand with aggressive revenue generation.
Additionally, they espoused that while Gross Domestic Product (GDP) paints an optimistic picture on paper, the harsh fiscal reality remains that economic output does not pay off creditors, but hard government revenue does.
This stark assessment by Professor Torsten Schmidt cuts to the heart of a dilemma confronting emerging economies chasing coveted investment-grade sovereign credit ratings as he also insisted that true economic potential is only as good as a government’s actual fiscal muscle to service and clear its mounting debt obligations.
These observations by Professor Schmidt, Head of Macroeconomics and Public Finance Research at RWI, and Professor Kai Gehring, Associate Professor of Economics at the University of St. Gallen, among other stakeholders laid bare a central challenge facing countries seeking investment-grade sovereign credit ratings, insisting that economic potential must translate into the fiscal capacity to meet debt obligations.
Highlighting the economic and institutional reforms required to strengthen sovereign creditworthiness at the 6th International Credit Rating Webinar last October, Professor Schmidt while arguing that economic growth must be accompanied by stronger revenue generation, said a growing economy can expand the resources available for taxation, the government’s ability to collect revenue remains central to its capacity to service public debt.
This distinction is particularly relevant to Nigeria, where Profesor Gehring estimated government revenue at approximately 10 per cent of GDP, while also noting that interest payments consume more than half of federal revenue, limiting the resources available for other government obligations.
He said Investment-grade countries generally record higher revenue-to-GDP ratios, underscoring the importance of broadening the tax base and improving revenue collection.
Also cautioning against relying solely on debt-to-GDP ratios to assess creditworthiness, the webinar panelists pointed to countries with high debt levels that retain the capacity to meet their obligations, explaining that institutional effectiveness and the broader economic environment also influence sovereign ratings.
For Professor Gehring, the time-frame for achieving investment-grade status is as important as the reforms themselves, describing the journey as “a marathon, not a sprint”.
According to him, research shows that only one of 35 sovereigns with ratings similar to Nigeria’s had reached investment grade within five years, an observation that further highlight the limits of expecting rapid rating improvements.
His position that countries must show reforms can deliver sustained results rather than temporary improvements that may be reversed over time gets back from Prof Schmidt, who emphasised the importance of productivity, capital formation and higher income per capita in supporting long-term credit quality.
He also identified government efficiency, the rule of law and the quality of the legal environment as important factors in sovereign rating assessments.
Beyond economic performance, Professor Gehring said the durability of reforms remains critical to investor confidence, noting that rating assessments consider whether policy improvements are likely to continue over the life of long-term government bonds, stressing that changes in Government that lead to policy reversals can therefore undermine progress towards stronger credit ratings.
Arguing that reforms are more likely to endure when their benefits are shared across political parties, regions and groups, creating broader domestic support, he said transparency and reliable public data are also important to enable investors assess economic conditions, public finances and security risks more effectively.
Professor Schmidt added that fiscal rules can help direct public borrowing towards productive investment rather than current consumption. For commodity-dependent economies, diversifying exports and reducing exposure to oil-price fluctuations can further strengthen resilience.
On a general note, though the experts agree that credible monetary policy, steady inflation, and a stable exchange rate will naturally draw private investors back to the table, yet they said reaching investment-grade status takes more than looking good on paper.
The understanding remains that to truly transform sovereign creditworthiness, stronger revenue mobilisation must be anchored by effective institutions and durable reforms—policies built not for a single news cycle, but to endure until they deliver undeniable results.
