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…States still borrowing despite FAAC windfall
…Experts warn of cash strain ahead
By Chinwendu Obienyi
Nigeria’s debt situation is drawing fresh concern as the federal government adopts a new borrowing approach that experts say could create more problems down the line, even if it helps in the short term.
As of April 2026, Nigeria has massively increased its borrowing plans, with the National Assembly approving a $6 billion (approx. N8.4 trillion) foreign loan request to fund the 2026 budget. Additionally, the 2026 borrowing plan was hiked by N11.31 trillion to a total of N29.2 trillion due to a ballooning budget deficit, bringing total projected public debt to around N155 trillion.
The $6 billion is in external loans. The package includes a $5 billion Total Return Swap (TRS) deal with First Abu Dhabi Bank and a $1 billion facility from UK Export Finance.
The UK-backed loan will fund the upgrade of Lagos and Tin Can Island ports. But it is the $5 billion TRS deal that is attracting the most attention, as it signals a shift away from Nigeria’s usual Eurobond borrowing to more complex, privately arranged financing.
The government says the funds will support the 2026 budget, infrastructure projects, refinancing of existing debts and other urgent financial needs. However, analysts warn that this new structure could make Nigeria’s debt profile harder to manage.
In simple terms, the TRS deal means Nigeria will use local currency bonds as security to access dollars.
In return, it gives the lender the earnings from those bonds, including interest and any increase in value.
Although it is structured as a financial contract, experts say it works like a loan backed by collateral.
This exposes the country to risks, especially if the naira weakens or if local interest rates rise, potentially increasing repayment pressure on the government.
Under the TRS arrangement, Nigeria will issue naira-denominated bonds as collateral and transfer their returns, both interest and price movements, to the counterparty in exchange for dollar funding. Although structured as a derivative, the deal effectively functions as a collateralised foreign currency loan, exposing the government to exchange rate and domestic yield risks.
Commenting on the development, Cordros Research in an emailed note, said, with Nigeria embracing a new frontier in external borrowing, the facility could substitute for the government’s planned $2.56 billion Eurobond issuance, particularly as global market conditions remain tight.
Borrowing costs have risen amid geopolitical tensions, while investor appetite for emerging market debt has weakened.
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At an estimated cost of 7.60 per cent to 7.65 per cent, the TRS appears broadly in line with current Eurobond yields. However, a public issuance would likely attract a premium, pushing borrowing costs above 8.0 per cent, making the swap arrangement relatively competitive.
Despite this, the investment and research based firm said, concerns are mounting over the embedded risks.
According to the firm, because the facility is over-collateralised and marked-to-market, adverse movements in the exchange rate or domestic bond yields could trigger margin calls, requiring the government to post additional collateral at short notice.
“In such scenarios, liquidity pressures could intensify at a time when financial conditions are already tight. The implications for Nigeria’s debt trajectory are significant.
Although drawdowns are expected to be phased over one to three years, providing gradual support to external reserves, the country’s debt stock will rise incrementally as funds are accessed. Over time, cumulative obligations could weigh on already strained public finances.
The structure also introduces contingent liabilities that may not immediately reflect in official debt statistics but could influence investor perception.
To secure the facility, the FG is expected to pledge securities worth about N9.09 trillion, equivalent to 133.3 per cent of the loan value. While these instruments are issued off-market and may not directly affect bond supply in the near term, analysts warn that markets could begin to price in the associated risks.
Over the medium term, this could exert upward pressure on sovereign yields, particularly if concerns around transparency and debt sustainability deepen.
Data from SBM Intelligence show that Nigeria’s N68.3 trillion 2026 budget underscores persistent structural imbalances, with N15.8 trillion allocated to debt servicing. At the subnational level, states continue to rely on borrowing despite a 161 per cent surge in FAAC allocations, reflecting weak internally generated revenue.
Worse, the World Bank has revised Nigeria’s 2026 growth forecast downward to 4.1 per cent, citing structural constraints and global uncertainties.
Head, Research at FSL Securities, Chiazor Victor, noted that slower growth could limit revenue generation and heighten debt sustainability risks
“While the TRS structure offers an alternative funding source in a challenging global environment, its success will depend on exchange rate stability, contained domestic yields, and improved fiscal discipline.
Without these conditions, the strategy may provide short-term liquidity but leave Nigeria more exposed to financial shocks over the medium term”, Victor explained.
