Nigeria Draws First $1.5bn From $5bn UAE Swap Deal Amid Transparency Concerns

Nigeria has drawn the first tranche of about $1.5 billion from a planned $5 billion total return swap agreement with the United Arab Emirates’ largest lender, First Abu Dhabi Bank (FAB), marking a major step in the Federal Government’s strategy to refinance debt and fund its budget deficit.

According to a Bloomberg report, the funds were accessed within the past two weeks under a derivatives financing arrangement that has attracted scrutiny from international financial institutions over concerns about transparency and potential fiscal risks.

People familiar with the transaction said the Federal Government pledged naira-denominated securities valued at 133.3 per cent of the loan amount as collateral for the deal.

The International Monetary Fund (IMF), alongside global credit rating agencies Fitch Ratings and Moody’s Ratings, has cautioned that such financing arrangements could expose Nigeria to significant financial and exchange rate risks.

In its latest economic assessment, the IMF warned that aspects of the transaction could constrain future monetary and exchange rate policy decisions.

Fitch also noted that the structure of the swap could increase pressure on Nigeria’s foreign exchange reserves if the naira weakens or domestic interest rates rise, as any margin calls would have to be settled in US dollars despite the collateral being denominated in naira.

Similarly, Moody’s said total return swaps introduce credit risks that are generally absent in conventional commercial borrowing.

Neither Nigeria’s Minister of Finance nor the Director-General of the Debt Management Office responded to Bloomberg’s requests for comment. First Abu Dhabi Bank also declined to discuss the transaction, citing its policy of not commenting on client relationships.

The Federal Government is expected to deploy the proceeds to refinance high-cost debt and bridge the country’s budget deficit as President Bola Tinubu prepares for the January general election, where he is expected to seek a second four-year term.

As of December 31, Nigeria’s external debt stood at $51.9 billion, according to data from the Debt Management Office.

The first tranche of the facility carries an interest rate of 395 basis points above the Secured Overnight Financing Rate (SOFR), rising to SOFR plus 400 basis points for subsequent drawdowns. Nigerian lawmakers had described the pricing as competitive when they approved the transaction in April.

The latest agreement further deepens Nigeria’s financial relationship with First Abu Dhabi Bank, which had previously extended about $1.2 billion in financing for the construction of a major highway being built by a company linked to an ally of President Tinubu.

Total return swaps gained global attention following the collapse of Archegos Capital Management in 2021, which exposed the risks associated with such derivative instruments.

Several African countries have also turned to similar financing structures. Senegal raised approximately 721 billion CFA francs ($1.3 billion) through total return swaps last year after losing access to international capital markets, while Angola had raised $1 billion through similar arrangements by 2025, according to the IMF.

The Bloomberg report was authored by Nduka Orjinmo.