Former World Bank chief warns Nigeria’s opaque debt deals risk future crisis

Former World Bank President David Malpass has warned that Nigeria’s growing use of collateral-backed borrowing is creating opaque debt structures that could complicate future debt restructuring and scare off investors. In a new World Bank Policy Research Working Paper, Malpass cited Nigeria alongside Angola and Senegal as countries where such deals are becoming less transparent.

Malpass sounds alarm on collateralised borrowing

Malpass made the remarks in the paper titled Public Debt and Central Banks, published on the World Bank’s website and based on the Stanley Fischer Memorial Lecture delivered at the World Bank Group’s Annual Bank Conference on Development Economics. He argued that collateralised sovereign borrowing has become less transparent across several developing economies, creating what he called “a new race toward seniority in the capital structure.”

“Sophisticated new collateralized transactions – I saw ones in Angola, Nigeria, and Senegal – are creating a new race toward seniority in the capital structure,” Malpass wrote. He warned that such financing structures would make future debt restructurings more complex. He also said the growing use of multilateral development bank guarantee products had not been tested during sovereign debt crises.

“This will add further complexity to restructurings as will the expansion of MDB guarantee products. Their sturdiness and value have not been tested in a restructuring context, and I am sceptical they are adding true value,” he stated.

Global debt framework falling short

Beyond Nigeria’s collateral-backed borrowing, Malpass criticised the broader global debt restructuring framework. He said current mechanisms had failed to deliver meaningful relief for heavily indebted countries. Debt reconciliation remained hampered by limited transparency, with experts still “working in the dark” on many sovereign debt contracts, particularly those involving Chinese lending programmes.

He added that some commercial debt transactions now contain non-disclosure clauses, making it hard to determine whether they genuinely serve the interests of borrowing countries.

Currency reform could transform Nigeria

Malpass also focused on Nigeria’s exchange rate regime, arguing that stable currencies are essential for sustained economic growth and rising household incomes. He grouped Nigeria with Ethiopia and Egypt among countries where floating exchange rate regimes and multiple exchange rate systems had transferred wealth from low-income wage earners to privileged groups while worsening poverty.

According to the report, Nigeria’s per capita income stands at roughly $1,500, or about $4 per day, while median income is even lower because income and wealth remain concentrated among a small proportion of the population. “The upside from currency reform would be massive,” Malpass wrote, noting that Nigerians working abroad routinely earn “10 or 20 times as much” as those at home.

He disclosed that during his tenure as World Bank president, he held several meetings with Nigeria’s previous president, cabinet members, and the World Bank’s Nigeria team to identify reforms. Those discussions identified currency stabilisation and exchange rate unification, oil sector reforms, tax reforms, and agricultural liberalisation, particularly in rice production, as key ingredients for faster growth. “These could transform Nigeria’s economy as much as China’s 1993 reforms launched its sustained 10% real growth rate,” he said.

Nigeria pushes ahead with $5 billion derivative deal

The warning comes amid mounting concerns over Nigeria’s $5 billion Total Return Swap (TRS) with First Abu Dhabi Bank. The International Monetary Fund recently cautioned Nigeria over the plan, warning that such transactions are often complex and lack transparency. Fitch Ratings also warned that the deal could obscure sovereign debt risks and complicate any future debt restructuring.

Despite the warnings, Nigeria accessed the first tranche of the arrangement, drawing about $1.5 billion over the past two weeks through the TRS transaction. The Federal Government aims to refinance expensive debt and bridge its budget financing gap.

For Nigerian consumers and businesses, Malpass’s warning signals that rising opaque borrowing could erode investor confidence and push up borrowing costs over time. If debt restructuring becomes more complex, the naira and the broader economy could face additional pressure, making it harder for businesses to plan and for households to see real income gains.