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 global financial institutions over the increasing use of complex derivative financing by African sovereigns.
Bloomberg reported on Friday that the latest drawdown represents the first tranche of a $5bn Total Return Swap facility approved by the National Assembly on March 31, 2026, and is expected to support the 2026 budget, finance infrastructure projects, and refinance existing debt obligations.
The report quoted people familiar with the transaction, who asked not to be identified because they were not authorised to speak to the media.
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.
“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 at a time when Nigeria is facing higher borrowing costs in international capital markets, forcing the government to seek alternative financing arrangements to shore up its fiscal position and improve access to 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. This means that for the full $5bn facility, the government would have to post approximately $6.65bn worth of naira-denominated bonds as collateral.
In return, the Abu Dhabi-based lender provides dollar liquidity to the Nigerian government. The Federal Government will pay a floating interest rate benchmark plus about four percentage points, while the lender receives the returns generated by the underlying government securities.
The transaction effectively allows Nigeria to unlock immediate dollar funding without issuing new Eurobonds or taking on traditional external loans at prevailing market rates, which have become increasingly expensive for frontier economies.
The government has already indicated that the proceeds from the initial $1.5bn drawdown will be deployed to support budget implementation, fund critical infrastructure projects, and refinance costlier domestic and external debts.
However, the financing arrangement 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 ago, Fitch Ratings warned that Nigeria’s planned $5bn financing arrangement with First Abu Dhabi Bank could increase 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 cited 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 can mask the true scale of a country’s liabilities and trigger sudden hard-currency demands during periods of economic stress.
The warnings came amid growing concerns that several African countries are increasingly turning to structured finance products to bypass the high cost of conventional borrowing in international debt markets.
The Nigerian deal sends mixed signals to investors. On the one hand, the immediate injection of $1.5bn provides the government with much-needed foreign exchange liquidity and leaves room for an additional $3bn drawdown under the approved facility.
On the other hand, because total return swaps are not recorded in the same way as traditional Eurobonds or syndicated loans, they could make it more difficult for investors to accurately determine Nigeria’s total debt exposure and assess the country’s overall risk profile.
The arrangement also carries a significant collateral risk. Financial experts note that if the value of the naira-denominated bonds posted as collateral declines sharply because of currency depreciation or a sell-off in Federal Government securities, Nigeria could face margin calls requiring it to provide additional collateral.
Such a development could place further pressure on the country’s already stretched fiscal position. The deal nevertheless reflects the growing preference among African sovereigns for alternative financing structures as global interest rates remain elevated.
Countries such as Senegal and Angola have also explored similar arrangements to gain access to dollar liquidity without paying the premium demanded by investors in public bond markets.
Nigeria’s decision to activate the facility comes as the government continues to battle revenue constraints, rising debt-servicing costs, and persistent foreign exchange pressures.
According to official data, debt servicing continues to consume a significant portion of government revenues, leaving limited fiscal space for capital expenditure and infrastructure development.
The latest financing arrangement, therefore, offers short-term relief by providing immediate access to foreign currency funding, but economists warn that the long-term implications 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 rising dependence on unconventional borrowing mechanisms as authorities search for innovative ways to finance development needs without further increasing pressure on the country’s already elevated debt profile.
The President said the proposed borrowing would add to Nigeria’s public debt stock, which stood at $110.3bn (about N159.2tn) as of December 31, 2025.
