The International Monetary Fund (IMF) has cautioned Nigeria over its plan to raise up to $5 billion through a derivatives-based financing arrangement with First Abu Dhabi Bank, warning that such transactions are often complex and lack transparency.

This was made known by Christian Ebeke, the IMF’s mission chief for Nigeria, according to Reuters.

The warning comes months after the Senate approved the proposed deal, which involves a Total Return Swap (TRS) structure aimed at refinancing expensive debt and funding critical infrastructure projects.

The transaction would place Nigeria among a growing number of African sovereigns, including Senegal and Angola, that have explored similar financing arrangements.

The IMF’s concerns were contained in comments by its Nigeria mission chief, Christian Ebeke, during a briefing on the Fund’s latest Article IV consultation, which otherwise praised the country’s recent economic reforms for improving macroeconomic stability and investor confidence.

What the IMF is saying
The IMF said derivative-based sovereign financing arrangements could expose countries to significant risks because their terms are often difficult to assess.

Ebeke said, “Our view is that transactions in these types of structures carry risks. Usually they are opaque, so the terms are not always very transparent when we review these instruments across countries.”

According to the Fund:
Nigeria plans to raise up to $5 billion through a Total Return Swap (TRS) agreement with First Abu Dhabi Bank.
The proceeds are expected to refinance expensive debt and finance infrastructure projects.
The IMF believes Nigeria could instead raise funding through:
Eurobond issuances;
Concessional financing; and
Other conventional borrowing mechanisms.

The Fund also noted that Nigeria’s improving macroeconomic fundamentals have strengthened its access to international capital markets.

Key highlights from the IMF’s latest assessment include:

Economic reforms since 2023 have improved policy credibility.

Foreign exchange reforms have helped restore investor confidence.

Nigeria has regained access to international capital markets.

Portfolio investment inflows have strengthened.
Risk premiums have declined.

Gross external reserves have risen to around $50 billion, their highest level in 17 years, according to the Central Bank of Nigeria.

However, the IMF warned that reliance on short-term foreign portfolio inflows exposes the economy to rollover and external financing risks.

Get up to speed
Nigeria has embarked on one of its most ambitious economic reform programmes in decades under President Bola Tinubu, including the removal of fuel subsidies, exchange rate liberalisation, and tighter monetary policy.

The IMF has consistently backed these reforms, arguing that they have helped restore macroeconomic stability, improve fiscal management, and rebuild external buffers.

At the same time, the government continues to face substantial financing needs for infrastructure development and debt management. The proposed derivatives transaction with First Abu Dhabi Bank is intended to reduce borrowing costs by replacing more expensive debt obligations while providing additional funding for capital projects.

The IMF’s warning reflects broader concerns about the growing use of structured sovereign financing arrangements across emerging and frontier markets. Unlike traditional sovereign bonds, derivative-based transactions can involve complex contractual terms, contingent liabilities, and repayment structures that may not be immediately visible to investors or policymakers.

The Fund also highlighted that while Nigeria’s reforms are yielding macroeconomic gains, many households are yet to experience the benefits.

According to the IMF:

Poverty levels remain around 63%.

Millions of Nigerians continue to face food insecurity.

Global shocks, including the ongoing Middle East conflict, could undermine reform gains by increasing inflationary pressures and fiscal risks.
The conflict has contributed to volatility in global energy markets and heightened uncertainty over commodity prices, creating both opportunities and risks for oil-exporting economies such as Nigeria.

What you should know
The IMF’s warning does not amount to opposition to Nigeria raising external financing, but rather a call for greater transparency and caution in the choice of borrowing instruments.

In December, the Federal Government secured about $1.2 billion in financing from the United Arab Emirates to advance construction of a key segment of the Lagos–Calabar Coastal Highway.

The Lagos–Calabar Coastal Highway has been positioned as a transformative transport corridor aimed at improving logistics, trade, tourism and regional integration.