The International Monetary Fund (IMF) has signaled it will treat the collateral backing Nigeria’s $5 billion financing arrangement with First Abu Dhabi Bank as part of the country’s public debt, a move that could influence how similar transactions are assessed in emerging markets.
The financing facility, structured as a total return swap, has attracted attention from the IMF, investors and credit rating agencies, who say such arrangements can complicate the assessment of sovereign debt obligations and associated risks.
Under the agreement, Nigeria pledged about $6.7 billion in naira-denominated government bonds as collateral for the credit line. While such collateral has often been excluded from headline public debt figures, an IMF spokesperson confirmed that the Fund includes the full collateral amount in Nigeria’s debt stock.
The transaction comes as Africa’s largest oil producer seeks to diversify its financing sources while improving debt management.
In May, Nigerian Finance Minister Taiwo Oyedele said that the government was working with international counterparties on financing solutions aimed at lowering borrowing costs, optimizing the sovereign balance sheet and enhancing fiscal flexibility.
According to the Financial Times, people familiar with the matter said Nigeria plans to use the facility to refinance older, more expensive crude-backed loans rather than increase overall borrowing.
The deal has also renewed debate over the growing use of derivative-based financing by sovereign borrowers. Analysts say total return swaps can provide governments with an alternative source of funding, particularly during periods of tighter financing conditions, but may also introduce additional risks, including collateral requirements linked to market movements.
Also, the Financial Times reported that increased use of such financing structures could prompt investors to adapt their assessment of sovereign credit risk.
The renewed focus on these instruments comes as governments in several emerging markets explore alternatives to international bond issuance, which has become more expensive following the sharp rise in global interest rates over the past few years.
