PREVIEW
Ahead of the election, Abuja will come under pressure to show how the incoming funds will be used
President Bola Tinubu’s government has drawn the first tranche of US$1.5 billion from a controversial $5bn derivatives deal with United Arab Emirates’ largest lender, the First Abu Dhabi Bank. Opposition parties suggest some of the cash might go towards a pre-election spending splurge.
Details on how the total return swap works are scarce, but economic analysts have suggested the transactions are based on a sustained period of high oil prices, triggered by the United States-Iran war (AC Vol 67 No 12,IMF critiques Abuja’s opaque lending). In the limited details released so far, Abuja is to pledge naira-denominated securities at 133.3% of the loan value as collateral, priced at the US Secured Overnight Financing Rate (SOFR) plus 395–400 basis points (3.9-4%). State officials say this adds up to an all-in cost of approximately 8.1% at current rates, broadly in line with Nigeria's Eurobond yields, which have risen sharply since the US-Iran war began in February. The National Assembly in Abuja approved the deal on 31 March, a week after President Tinubu submitted the request.
Angola and Senegal have also brokered similar derivatives deals with First Abu Dhabi Bank to cut their borrowing costs, these deals have prompted warnings from the IMF (AC Vol 67 No 8,Finance chief Diba seeks debt compromise at IMF’s Washington summit).
'Our view is that the transaction in these types of structures carry risks. Usually, they are opaque so the terms are not always very transparent when we reviewed these instruments across countries,’ Christian Ebeke, the IMF’s resident representative in Nigeria told journalists this month. The Fund has urged Nigeria and others to instead tap the Eurobond market.
The agreement with First Abu Dhabi Bank fits with plans for closer economic ties between Nigeria and the UAE. President Tinubu has pitched the deals as a means to rebuild investor confidence in Nigeria’s economy.
In January, they signed a trade pact offering duty-free access to the UAE market for over 7,000 Nigerian products, while removing tariffs on UAE-imported machinery and industrial inputs to Nigeria. And Nigeria has co-hosted Investopia, the UAE-backed global investment platform, in Lagos since February.
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