The International Monetary Fund (IMF) has warned Nigeria to tread carefully in pursuing a proposed $5bn Total Return Swap financing arrangement with First Abu Dhabi Bank, describing such structures as opaque and potentially risky, despite the country’s improved access to international capital markets.
The IMF Resident Representative for Nigeria, Christian Ebeke, who gave the warning, said that to the Fund, such transaction and types of structures carry risks.
IMF’s warning is come weeks after the Senate approved the Federal Government’s request to raise up to $5bn through a Total Return Swap arrangement with a Middle Eastern bank, widely reported to be First Abu Dhabi Bank.
Ebeke noted that beyond concerns over transparency, such financing arrangements could expose countries to additional financial risks if underlying assets lose value or exchange rates move adversely. “They also carry risk, as we flag in the report, the margin calls in the case that the value of the asset drops or the currency depreciates,” he said.
According to him, Nigeria currently has alternative funding options that may be less complicated and more transparent. “We think that Nigeria has market access. Nigeria can issue Eurobonds to finance the deficit. And we also think that there are other avenues for Nigeria to raise funds, including on concessional terms,” Ebeke added.
While noting that the Fund did not yet have detailed information on the proposed swap structure, he urged the Nigerian authorities to closely monitor the transaction’s potential risks.
“At this point, we don’t have any further information on the TRS. But our view is that it carries risk, and it’s important to monitor those risks very, very carefully,” he said.