ABUJA, Nigeria (VOICE OF NAIJA)-The Federal Government has drawn down $1.5bn from a $5bn financing facility arranged with the United Arab Emirates’ largest lender, First Abu Dhabi Bank, despite growing concerns from international financial institutions over the increasing use of complex derivative financing by African governments.
According to a Bloomberg report on Friday, the latest drawdown represents the first tranche of a $5bn Total Return Swap facility approved by the National Assembly on March 31, 2026.
The funds are expected to support the 2026 budget, finance infrastructure projects, and refinance existing debt obligations.
The report cited people familiar with the transaction who requested anonymity because they were not authorised to speak publicly.
The report read, “Nigeria has accessed the first tranche of a $5bn derivatives deal with the United Arab Emirates’ largest lender, pressing ahead with a transaction that has been scrutinised for being opaque.
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“The West African nation drew about $1.5bn in the last couple of weeks from a total return swap transaction with First Abu Dhabi Bank PJSC, according to people familiar with the transaction, who asked not to be identified because they were not authorised to speak to the media.”
The transaction comes as Nigeria faces rising borrowing costs in international capital markets, prompting the government to seek alternative financing options to strengthen its fiscal position and improve foreign exchange liquidity.
Under the arrangement, Nigeria is required to pledge Federal Government securities worth about 133 per cent of any amount drawn under the facility. For the full $5bn facility, the government would need to provide about $6.65bn worth of naira-denominated bonds as collateral.
In exchange, the Abu Dhabi-based lender provides dollar liquidity to the Nigerian government.
The Federal Government will pay a floating benchmark interest rate plus about four percentage points, while the lender receives the returns generated by the pledged government securities.
The arrangement enables Nigeria to secure immediate dollar funding without issuing new Eurobonds or taking conventional external loans at current market rates, which have become increasingly expensive for frontier economies.
The government has indicated that proceeds from the initial $1.5bn drawdown will be used to support budget implementation, finance critical infrastructure projects, and refinance more expensive domestic and external debts.
However, the financing structure has attracted criticism from international financial institutions and market analysts over concerns about transparency and potential hidden liabilities.
In its June 2026 assessment of African sovereign debt markets, the International Monetary Fund warned that derivative financing structures such as total return swaps are often opaque and difficult for investors and creditors to monitor.
The IMF noted that such arrangements are “hard to track, hard to value in real time, and can obscure the true extent of a country’s financial obligations.”
Three days earlier, Fitch Ratings warned that Nigeria’s planned $5bn financing arrangement with First Abu Dhabi Bank could heighten sovereign debt risks and reduce transparency in public debt reporting.
In a report titled ‘Emerging Market Sovereigns’ Use of Total Return Swaps Raises Risks,’ published on June 19, Fitch said the growing use of TRS structures by emerging economies could create hidden liabilities and expose countries to significant financial risks during periods of economic stress.
The rating agency referenced Nigeria’s proposed $5bn transaction, under which the country plans to pledge about $6.67bn worth of naira-denominated bonds as collateral for hard-currency financing.
“Material gaps in transparency may also weigh on Fitch’s Issuer Default Rating assessment,” the agency said.
Fitch added that the opaque nature of such transactions could conceal the true scale of a country’s liabilities and trigger sudden hard-currency demands during periods of economic stress.
The warnings come amid increasing concerns that several African countries are turning to structured finance products to avoid the high cost of conventional borrowing in international debt markets.
Nigeria’s transaction presents mixed implications for investors.
While the immediate injection of $1.5bn provides much-needed foreign exchange liquidity and leaves room for an additional $3bn drawdown under the approved facility, total return swaps are not recorded in the same way as traditional Eurobonds or syndicated loans.
As a result, analysts say the arrangement could make it more difficult for investors to accurately assess Nigeria’s total debt exposure and overall risk profile.
The transaction also carries significant collateral risks. Financial experts noted that if the value of the naira-denominated bonds pledged as collateral declines sharply due to currency depreciation or a sell-off in Federal Government securities, Nigeria could face margin calls requiring additional collateral.
Such a scenario could place further pressure on the country’s already strained fiscal position.
Nevertheless, the deal reflects the growing preference among African governments for alternative financing structures as global interest rates remain elevated.
Countries such as Senegal and Angola have also explored similar arrangements to secure dollar liquidity without paying the higher premiums demanded by investors in public bond markets.
Nigeria’s decision to activate the facility comes as the government continues to grapple with revenue constraints, rising debt-servicing costs, and persistent foreign exchange pressures.
Official data shows that debt servicing continues to consume a significant share of government revenue, leaving limited fiscal space for capital projects and infrastructure development.
The latest financing arrangement therefore offers short-term relief by providing immediate access to foreign currency funding, but economists say the long-term impact of such complex derivative transactions will depend on the government’s ability to maintain transparency and effectively manage the risks associated with the collateral structure.
The development is also expected to reignite debate over Nigeria’s growing reliance on unconventional borrowing mechanisms as authorities seek innovative ways to finance development needs without adding further pressure to the country’s already elevated debt profile.
The President said the proposed borrowing would increase Nigeria’s public debt stock, which stood at $110.3bn (about N159.2tn) as of December 31, 2025.