Nigeria has accessed the first tranche of its $5 billion derivatives-based financing arrangement with the United Arab Emirates’ largest lender, First Abu Dhabi Bank (FAB), as the Federal Government seeks to refinance expensive debt and bridge its budget financing gap.
According to a Bloomberg report published on Friday, the Federal Government drew approximately $1.5 billion over the past two weeks through a Total Return Swap (TRS) transaction with First Abu Dhabi Bank.
The drawdown forms part of the broader $5 billion financing facility approved earlier this year.
Under the arrangement, Nigeria will provide naira-denominated securities worth 133.3 per cent of the loan value as collateral for the transaction.
The financing structure has attracted scrutiny from international financial institutions over the potential risks associated with derivative-based borrowing.
The International Monetary Fund (IMF) warned that aspects of the transaction “could give rise to political constraints on monetary or exchange rate policy.”
Fitch Ratings also cautioned that dollar-denominated margin calls backed by naira collateral could increase pressure on Nigeria’s foreign exchange market if domestic interest rates rise or the naira weakens.
Moody’s Ratings said the swap arrangement introduces credit risks that are not associated with conventional commercial borrowing.
According to the Bloomberg report, officials from Nigeria’s Ministry of Finance and the Debt Management Office did not respond to requests for comment, while First Abu Dhabi Bank declined to discuss client transactions.
The Federal Government is expected to use the financing to refinance high-cost debt while supporting its fiscal deficit financing programme.
The first tranche of the facility is priced at 395 basis points above the Secured Overnight Financing Rate (SOFR), increasing to SOFR plus 400 basis points for subsequent drawdowns.
Nigerian lawmakers had earlier described the pricing as competitive when approving the transaction in April.
The latest agreement further strengthens Nigeria’s financial relationship with First Abu Dhabi Bank, which previously provided about $1.2 billion to support the construction of a section of the Lagos-Calabar Coastal Highway.
Similar Total Return Swap arrangements have been used by countries such as Angola and Senegal to secure external financing as access to international capital markets became more challenging.
The transaction gives Nigeria access to substantial external funding without issuing conventional Eurobonds. However, analysts say it also introduces additional financial, credit and foreign exchange risks.
Earlier this year, the IMF cautioned Nigeria over its plan to raise up to $5 billion through the derivatives-based financing arrangement, noting that such structures are often complex and less transparent than traditional borrowing.
The Senate approved the Total Return Swap facility to refinance costly debt and fund critical infrastructure projects across the country.
The latest drawdown represents the first disbursement under the $5 billion programme and highlights the Federal Government’s growing reliance on alternative financing instruments to meet its fiscal and infrastructure funding needs amid elevated global borrowing costs.
