By Misty Uba (IPM) & Meelan Gupta, Forbes Councils Member.
In Nigeria’s complex and evolving economic landscape, the dollarization of major projects—where financing, contracts, and, in many cases, revenues are denominated in U.S. Dollars rather than Nigerian Naira (₦)—has become a foundational strategy for mobilizing large-scale capital. For infrastructure, energy, and industrial developments, dollarization is not merely a preference but a risk-mitigation imperative demanded by international investors, lenders, project sponsors, and developers.
This financing architecture reflects both Nigeria’s macroeconomic realities and the risk-return requirements of global capital markets
Nigerian Policy Context Supporting Dollarized Project Finance
Nigeria’s policy framework, while often evolving, implicitly recognizes the necessity of dollarized project finance for strategic sectors:
• Central Bank of Nigeria (CBN):
• The CBN has historically permitted foreign currency-denominated loans for capital-intensive projects, subject to registration, repatriation approvals, and compliance with FX regulations. Instruments such as Certificates of Capital Importation (CCI), FX approvals, and ISPOs are central to lender comfort.
• National Development Plans:
• Nigeria’s Medium-Term National Development Plans and sector-specific master plans consistently emphasize private capital participation, PPPs, and foreign investment, implicitly relying on hard-currency funding.
• Public-Private Partnership (PPP) Frameworks:
• The Infrastructure Concession Regulatory Commission (ICRC) Act and PPP guidelines enable long-tenor, dollarized financing structures, particularly for transport, ports, airports, and power projects.
• Sector Regulators:
• Bodies such as NERC (power), NMDPRA and NUPRC (oil and gas), and the Nigerian Ports Authority increasingly accommodate USD-linked tariffs or cost-reflective pricing to support bankability.
Dollarization, therefore, is not contrary to Nigerian policy; rather, it is tacitly embedded in how Nigeria attracts long-term foreign capital into priority sectors.
Sector-Specific Rationale for Dollarized Financing
1. Refining and Downstream Oil & Gas
Nigeria’s refining projects, including modular and large-scale refineries, are inherently dollarized:
• Crude feedstock is globally priced in USD.
• Equipment, EPC contracts, and catalysts are imported and USD-denominated.
• Refined products increasingly reference international pricing benchmarks.
Dollarization aligns debt service with revenue streams and reduces exposure to Naira volatility, which would otherwise render refining margins unpredictable.
2. Power Generation and Transmission
In the power sector, dollarization is critical due to:
• Imported turbines, transformers, and control systems priced in USD.
• Long-tenor debt requirements (15–20 years).
• The need for predictable DSCRs under PPAs.
While end-user tariffs are largely Naira-based, many PPAs incorporate USD indexation or partial FX pass-through mechanisms to preserve bankability.
3. LNG and Gas Infrastructure
Nigeria’s LNG, gas processing, pipelines, and export terminals are structurally dollarized:
• LNG sales contracts are USD-denominated.
• Buyers are international utilities and traders.
• Financing is typically sourced from ECAs and DFIs requiring USD cash flows.
Dollarization is therefore a natural and unavoidable feature of LNG and gas export projects.
4. Renewable Energy: Solar and Wind
Solar and wind projects increasingly rely on foreign capital due to:
• Imported panels, turbines, inverters, and storage systems.
• EPC contracts priced in USD or EUR.
• Long-term climate finance and DFI participation.
Dollarized or USD-indexed tariffs are often essential for renewable projects to achieve financial close, particularly at utility scale.
5. Transport Infrastructure: Roads, Rail, Ports, and Airports
• Roads and Rail:
• Large PPP concessions require dollarized financing due to imported rolling stock, signaling systems, and civil works equipment.
• Ports:
Port terminals earn USD-linked revenues through international shipping, making dollarized debt a natural fit.
• Airports:
Aviation revenues (landing fees, passenger charges, cargo handling) are often USD-linked, supporting dollar-denominated financing structures.
6. Data Centres and Digital Infrastructure
Nigeria’s fast-growing digital economy has driven strong demand for data centres:
• Equipment (servers, cooling systems, power infrastructure) is imported and USD-priced.
• Anchor clients, including hyperscalers and multinationals, often pay in USD.
Dollarization is critical to aligning capital costs with revenue profiles in this sector.
7. Water, Waste, and Social Infrastructure
Water treatment plants, desalination, and waste-to-energy projects require:
• Imported membranes, pumps, and control systems.
• Long-tenor financing with stable cash flow assumptions.
Dollarized or indexed tariffs are often essential to attract private capital into these socially critical but capital-intensive sectors.
Policy Risks and the Need for Structural Solutions
Despite policy accommodation, risks remain:
• FX liquidity shortages can disrupt debt servicing.
• Inconsistent tariff enforcement undermines cash flows.
• Political sensitivity around USD pricing can lead to regulatory intervention.
Structured trade finance, FX-indexed instruments, blended finance, and risk-sharing mechanisms—such as those discussed by the Forbes Finance Council and The Global Treasurer—offer practical pathways to mitigate USD liquidity constraints while sustaining investment flows into Nigeria’s priority sectors.
Conclusion: A Policy-Backed Necessity, Not a Choice
Dollarization remains a double-edged sword for Nigeria. It is indispensable for mobilizing the scale of capital required across refining, power, LNG, renewables, transport, digital infrastructure, and water sectors. At the same time, it places pressure on FX reserves and heightens macroeconomic sensitivity.
Reducing long-term reliance on dollarization will require:
• Sustained macroeconomic stability
• Deep and liquid FX markets
• Export-led USD earnings growth
• Credible, enforceable sector regulation
Until these conditions are firmly established, dollarized project finance will remain an enduring, policy-aligned reality for Nigeria’s development ambitions.
References:
• Structured FX Solutions in Emerging Markets, The Global Treasurer (2025)
Meelan Gupta | Global finance & treasury pro w/ 25+ years’ experience in Africa, the Middle East, Europe & Asia.
Misty Uba | Teamlead GSR 360 & Omega Sysyem, Independent Project Manger Nigeria, West & East Africa.
