Why a 5% Dollar Loan Can Cost Nigerian Projects More Than 25% in Naira

A dollar loan may look cheap at 5%, but that is not its true cost for a Nigerian project that earns its revenue in naira. Once the cost of hedging foreign-exchange risk is added, the effective annual cost can rise into the mid-twenties. I argue that this currency mismatch is a major weakness in infrastructure finance. A project can have a clear payer and a cost-reflective tariff, yet still struggle when its debt is in dollars while customers pay in naira. If the naira depreciates, debt repayments rise sharply even when the project itself has not changed. Nigeria’s power sector shows the problem clearly. Equipment, gas contracts and some loans are priced in foreign currency, while revenue is collected in naira and often falls short. Tariff reviews may recognise exchange-rate changes, but a review does not automatically provide the cash needed to cover the gap. Hedging can reduce the risk, but it is expensive and limited. More local-currency lending, transparent tariff adjustment rules and deeper naira capital markets are needed. Sponsors should assess the fully hedged cost of any foreign-currency loan, not just the headline interest rate.

Use The App To Win ₦1m

Stories are shared by community members. This article does not represent the official view of NaijaWorld — the author is solely responsible for its content.