The International Monetary Fund (IMF) has cautioned Nigeria over its proposed $5 billion Total Return Swap arrangement with First Abu Dhabi Bank, warning that the structure could expose the country to hidden costs and financial risks, even as the government looks to alternative funding channels amid elevated global borrowing costs.
Christian Ebeke, the IMF’s resident representative in Nigeria, raised concerns about the structure of the transaction, noting that Nigeria still had access to conventional financing options that could prove more transparent and potentially less risky.
Fielding questions on Tuesday during a press briefing on Nigeria’s 2026 Article IV consultation, Ebeke warned against underestimating the risks embedded in derivative-based funding arrangements such as the proposed swap.
His words, “On the TRS, Nigeria has market access. It carries risks and it is important to consider that. There are options for Nigeria. Nigeria can issue Eurobonds and indeed borrow from multilaterals institutions on concessional terms. Nigeria can take advantage of those options for its deficit funding.”
The remarks come as the federal government moves to raise up to $5 billion through a Total Return Swap with First Abu Dhabi Bank, a structure that allows the government to receive upfront funding backed by naira-denominated securities while the lender takes exposure to the returns on the underlying assets.
According to government documents submitted to the National Assembly in March, the proceeds are expected to finance infrastructure projects and refinance higher-cost domestic and external obligations. The structure is designed to ease immediate fiscal pressure while providing flexibility in funding execution.
Nigeria is joining a growing number of African sovereigns, including Senegal and Angola, that have tapped similar derivative-linked financing arrangements over the past year as global borrowing costs remain elevated and access to Eurobond markets becomes more constrained.
Under the proposed arrangement, the TRS will be backed by naira-denominated government securities valued above the loan amount by as much as 33.3%. The facility will be disbursed in tranches, carries a six-year tenor with a three-year grace period, and is priced at SOFR plus 3.95% for the first tranche and 4% for subsequent drawings, according to reports.
The structure also includes margining provisions requiring the government to post additional U.S. dollar cash collateral if the value of the underlying securities falls due to market or exchange-rate movements. Any excess collateral value, however, would be returned to Nigeria.
Analysts have noted that while such instruments can provide liquidity in tight markets, they also introduce complexity around valuation, contingent liabilities and foreign exchange exposure.
Ebeke also pointed to alternative financing avenues available to Nigeria, including concessional borrowing from multilateral institutions and renewed access to international bond markets, suggesting these options should remain central to the country’s funding strategy.
The IMF, in its broader assessment, also recommended that Nigeria consider medium-term fiscal adjustments, including potential increases in tax rates, as part of efforts to strengthen public finances and reduce reliance on external borrowing.
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