The hidden cost of borrowing abroad to build in Nigeria

Foreign capital raised to build in Nigeria, whether a power project or a road, arrives carrying a cost that often defeats the point: hedging it into naira can cost more than the loan saves. Not hedging is worse, as anyone who carried dollar debt through 2023 knows. Countries that borrow in currencies they do not print pay this cost too. Last month India’s central bank opened a swap window, running until January 2027, letting state enterprises hedge their foreign borrowing at a concessional rate: currency stabilisation was the aim, but a deliberately priced absorption of hedging costs was the mechanism. It is a familiar move, public institutions acting on hedging costs rather than leaving them to the market, whether to defend a currency or fund development. What is new in Nigeria is that the same can now be done by design, rather than case by case.

Abroad, that change is already funded. TCX, a development-finance fund set up to take on emerging and frontier currency risk, does the hedging; donors pay to make it cheaper. In 2025 the European Union signed a €150 million guarantee with TCX to lower hedge prices for the companies that ultimately borrow. That support already reaches Nigeria. But TCX’s capacity is global and finite, not built around Nigeria’s pipeline.

A Nigerian power project raises dollars at 5 per cent for five years, a fraction of what naira debt costs. At today’s rates, the swap that turns those dollars into naira adds roughly twenty percent a year, and the fully hedged cost lands in the mid-twenties, roughly where naira debt would have started. Three years of reform has changed a great deal in the markets, but not this number.

The hedging cost is not one problem but three, each with a different owner, and reform has reached them unevenly.

The first is the liquidity premium: the extra cost of dealing in a shallow market where few banks quote and there is no reliable curve to price from. Plumbing fixes it: the benchmarks and dealing infrastructure are market prices off. That layer is moving. The Central Bank of Nigeria launched the Nigerian Overnight Financing Rate this June, a benchmark built from real trades rather than estimates and one of several recent changes to the market’s infrastructure. Dealers charge for uncertainty about where rates really are; a benchmark like this leaves less to charge for. But an overnight rate is only a starting point: a credible naira swap curve beyond the short end, which this market has never produced, still has to be built on top of it.

The second layer is the credit premium, charged for the risk that either side of the hedge cannot pay. The market fix is collateral and central clearing, so no one has to price who is on the other side, and FMDQ Clear already stands as a central counterparty. Building that into standard market practice takes years. Until it spreads, development finance institutions carry the exposure on stronger balance sheets, deal by deal.

The third layer is the differential itself: the gap between naira and dollar interest rates that any hedge must price, the twenty percent in the swap calculation above. It closes only as inflation and fundamentals converge, the slow work of monetary orthodoxy, measured in years, not months. For most transactions it is simply the cost of the currency. But for power, infrastructure and agriculture, projects that cannot wait years for that convergence, there is a case for bridging it with concessional capital. There is a limit to what that can do. Some of the gap reflects a naira that markets expect to weaken, and no facility can make that expectation disappear. It can absorb the risk for a time, not remove it. Bridging the differential means someone carrying that risk, not wishing it away. This is the layer no Nigerian institution owns by design.

The honest objection is a moral hazard: subsidise the hedge and you dull the pressure to fix fundamentals. Nigeria has lived that; the OTC FX futures market it ran from 2016, with the central bank as sole seller, showed what an unpriced, unlimited absorber of currency risk looks like and what it costs when the currency moves.

Two of the three layers are moving: the benchmarks are being rebuilt, and the credit premium is a carried deal by deal while the collateral and clearing infrastructure that would replace it takes shape. The third, the differential, is the one no institution has been given to carry. India’s swap window and the EU’s guarantee show the risk can be priced and held elsewhere. Whether Nigeria should hold its own, and who would pay for it, is a question the reforms have finally made it possible to ask.

Eyitope Owolabi is a Treasury Client Solutions Specialist at Africa Finance Corporation, where he structures hedging solutions for African sovereigns, financial institutions and corporates. He writes in a personal capacity.