Introduction
Africa possesses an extraordinary concentration of global resources, including 60 percent of the world’s solar potential and 76 percent of its platinum, alongside a young and growing workforce. However, the continent currently receives only 3 percent of global energy investment. A primary driver of this disparity is the structural issue of currency mismatch in project finance.
When clean energy projects in emerging markets generate revenues in local currency but service debt in US dollars, exchange rate volatility directly impacts financial performance independent of operational efficiency. In Ghana, for example, significant foreign-currency borrowing coupled with a rapid depreciation of the cedi in 2022 sharply increased local-currency debt-service burdens. Similarly, in Nigeria, a 47.6 percent devaluation of the naira between June 2023 and June 2024 increased the naira-denominated value of external debt by 89.7 percent, rising from ₦33.25 trillion to ₦63.07 trillion, even as the debt's US dollar value remained virtually unchanged.
Currently, over 80 percent of lending by multilateral development banks and development finance institutions to low and lower-middle-income countries is denominated in hard currencies. This structural exposure to foreign exchange risk significantly inflates capital costs. Financing costs account for roughly 50 percent of the levelized cost of electricity for solar PV in emerging markets, compared to 25 to 30 percent in advanced economies and China. Reforming this financing framework to better manage currency risk remains central to unlocking the continent's energy potential.
More than 80 per cent of MDB and DFI lending to low and lower-middle income countries is in hard currency. The revenues that repay it are in local currency. That mismatch is the wall.
Original Sin, Enduring Consequence
In 1999, Barry Eichengreen and Ricardo Hausmann named the condition "original sin": the inability of developing countries to borrow internationally in their own currencies. More than two decades of financial deepening, institutional reform, and market development have addressed the problem for a narrow band of large emerging economies. For low-income countries and frontier markets, it endures. Since 2015, the US dollar and euro have accounted for over 98 per cent of foreign currency debt issued by emerging and developing economies. Progress at the aggregate level where the local currency share of external sovereign debt rose from 20 per cent to 60 per cent between 2003 and 2017 masks extreme divergence. That progress is concentrated in Brazil, India, China, and a handful of others. The countries that need local currency financing most urgently remain trapped in hard currency dependency.
The consequences accumulate relentlessly. Currency depreciation raised public debt across sub-Saharan Africa by up to 10 percentage points of GDP between 2020 and 2022 alone. In Ethiopia, the birr's 30 per cent slide against the dollar by mid-2024 raised the effective debt burden by an estimated 35 per cent over the preceding two years a near-ten-billion-dollar increase in real debt-service obligations on a country already classified as in debt distress. In Malawi, a 26 per cent kwacha devaluation fed directly into inflation while simultaneously raising the local-currency cost of every outstanding dollar obligation, compressing fiscal space for health and education in a single depreciation event.
Zambia's experience is the most instructive. The kwacha fell 64 per cent against the dollar in 2020 alone from ZMW12.9 to ZMW21.1 per dollar pushing public debt to 104 per cent of GDP and draining foreign reserves to below two months of import cover. Zambia missed its November 2020 Eurobond coupon, becoming the first African sovereign to default during the pandemic. The restructuring process that followed took three and a half years, required two separate creditor committees, an IMF programme, and protracted negotiations with private bondholders before a deal was reached in June 2024. The technical cause of the default was insufficient foreign exchange. The structural cause was borrowing in a currency the country could not produce.
These crises are not isolated. UNCTAD documents that 3.3 billion people now live in countries spending more on interest payments than on health or education. The count of countries at high debt risk rose from 22 in 2011 to 59 in 2022. External public debt relative to exports climbed from 71 per cent in 2010 to 112 per cent by 2021. African sovereigns currently pay average yields of 9.1 per cent on dollar-denominated bonds, compared with 6.5 per cent in Latin America and 4.7 per cent in emerging Asia. A 2023 UNDP analysis estimated that subjective sovereign ratings have cost African economies approximately $75 billion, comprising $28 billion in excess interest payments and nearly $46 billion in financing withheld. Only 4 of the continent's 55 countries hold investment-grade ratings from any of the three dominant agencies, despite an African infrastructure default rate of 2.6 per cent among the lowest globally.
The count of countries at high debt risk rose from 22 to 59 between 2011 and 2022. African sovereigns pay 9.1% on dollar bonds, nearly double the rate of emerging Asia. The premium is not explained by fundamentals.
The Cost the Hedging Market Cannot Absorb
Financial markets offer instruments to manage currency exposure: forwards, cross-currency swaps, guarantees. The fundamental problem is that for most frontier-market currencies, these tools are either unavailable at the tenors development finance requires, or priced beyond viability. Hedging premiums in volatile frontier markets can reach 10 to 15 per cent annually. A solar project that needs an 8 per cent return to attract private capital in the EU requires 22 per cent in an emerging market economy once currency risk is priced into the financing structure. That is not a governance problem or a pipeline problem. It is a pricing problem built into the architecture of how money moves across currency boundaries.
Forward markets the most basic hedging instrument, rarely extend beyond six to twelve months in frontier markets. Options markets are highly illiquid. For a renewable energy project with a 20-year asset life, rolling annual hedges introduces re-pricing risk at every renewal, defeating the purpose of long-term financing. The BCG State of Play analysis tracks specific hedging costs by market: Brazil at 4.0 per cent annually, Mexico at 5.6 per cent, Turkey at 37.5 per cent, with an EM aggregate of 2.0 per cent, but the aggregate conceals the frontier-market tail where most low-income countries sit, and where costs are highest precisely because depth is lowest.
The Currency Exchange Fund (TCX), the principal non-profit hedging facility for development transactions, hedged USD 2.84 billion across 54 currencies in 59 countries in 2025, its highest annual volume. Sub-Saharan Africa reached a regional record of USD 426 million. Yet the scale of demand against which that figure must be measured renders it small: estimated annual hedging demand in low and lower-middle income countries runs to USD 50 to 100 billion. Unhedged FX exposure in developing economies currently stands at approximately USD 2 trillion.
TCX's EFSD+ pricing facility, launched in the fourth quarter of 2025, received USD 1.5 billion in hedging requests within weeks of opening. Its BMUKN blended finance facility was 7.6 times oversubscribed — USD 316 million in applications against USD 16.9 million in executed hedges. These figures do not represent market failure. They represent a facility doing precisely what it was designed to do, at a fraction of the scale required. The problem is not the instrument. It is the absence of political commitment to capitalise the instrument at the level the market demonstrably demands.
The private market will not fill this gap on commercial terms. TCX carries currency exposure that commercial banks price at a substantial premium or decline entirely. Its 15-year annualised return of 1.6 per cent achieved by holding a diversified portfolio of developing-country currency risks and allowing natural correlation to reduce aggregate volatility demonstrates that the risk is manageable at portfolio level. It cannot be managed at the transaction level at a cost that makes projects viable. That gap between portfolio-level manageability and transaction-level prohibitive cost is where public intervention is not just justified but definitionally required.
The Capital Sitting Unused Inside the Continent
There is a dimension of this problem that receives insufficient attention in the international debate: the capital that already exists within developing economies but cannot be deployed into productive, long-term investment because the domestic financial infrastructure to channel it does not exist at scale. At the AfDB Annual Meetings in 2025, African pension funds, insurers, and sovereign wealth funds were identified as holding $2.1 trillion in assets under management. Over 80 per cent of that capital is locked into government treasuries. In West Africa alone, pension funds in Ghana and Nigeria hold close to $40 billion nearly all of it parked in short-dated government securities yielding 18 to 20 per cent, which drives the cost of sovereign borrowing upward while simultaneously starving infrastructure of patient capital.
The paradox is precise: the same macroeconomic instability that drives domestic interest rates above 20 per cent makes government securities the only rational investment for pension fund managers bound by fiduciary duty. Infrastructure bonds which would provide the long-tenor, local-currency financing that renewable energy, transport, and urban development require cannot compete with risk-free government paper at those yields. The high interest rate environment that is itself partly caused by currency instability and external debt pressure thus prevents the domestic capital market from developing the depth it needs to break the cycle.
The 2025 OECD Africa Capital Markets Report frames this as one of the continent's central financing challenges. Local currency bond markets outside South Africa remain thin: Sub-Saharan African securities exchanges average market capitalisation below 20 per cent of GDP, compared with approximately 50 per cent in other developing economies. Only Egypt and South Africa feature in the MSCI Emerging Markets Index. For most African markets, the institutional investor base capable of buying long-dated local-currency infrastructure bonds pension funds, insurance companies, development-oriented sovereigns exists on paper but cannot act, because the market infrastructure, the regulatory framework, and the asset class itself have not been developed to the point of viability. Nigeria issued Africa's first sovereign green bond in 2017, NGN 10.69 billion, followed by NGN 15 billion in 2019. These were proof-of-concept transactions. They demonstrated demand and issued a benchmark yield curve. They have not yet been replicated at the scale needed to constitute a functioning local capital market.
Unlocking domestic capital for infrastructure finance requires coordinated action on three fronts simultaneously: regulatory reform that allows pension funds to hold longer-duration, development-rated assets within acceptable risk parameters; market infrastructure investment to create the settlement, custody, and pricing systems that institutional investors require; and an anchor investor function played by MDBs or national development banks that can provide the first tranche of a transaction, establish a reference price, and demonstrate that the risk profile is manageable. Each of these is achievable. None of them happens by exhortation.
What MDBs Are, and Are Not, Doing
Development institutions have made incremental moves that deserve acknowledgement. The IFC committed over USD 30 billion in local currency senior debt across 67 currencies between FY2015 and FY2024. In May 2025, IFC and Standard Chartered launched a facility structured around a 9 billion Kenyan shilling (approximately USD 70 million) inaugural transaction to fund digital infrastructure in Kenya a mechanism through which the commercial bank provides local currency to IFC, which on-lends it to private-sector borrowers at reduced exchange rate risk. The IDA Private Sector Window includes a local currency facility. TCX's agreements with the Finance in Common secretariat make up to USD 500 million available for concessional hedging, with potential to support up to USD 2 billion in local currency investment. A EUR 150 million EU guarantee is expected to mobilise up to EUR 2 billion in local currency financing across several regions. Sierra Leone completed its first synthetic local currency bond in leone, in a transaction structured by FMO and TCX. Bhutan Power Corporation completed an IFC-backed ngultrum-linked loan at a 14.8-year tenor, the first offshore hedge ever executed in that currency.
Each of these transactions is real. None of them, individually or collectively, represents a solution at the scale the problem requires. The IDA Private Sector Window was allocated approximately USD 1.2 billion in 2023; actual guarantee payouts totalled one million dollars. The instrument exists. It is not being used. Ghana's pre-default external debt held by IDA, the World Bank's concessional arm, was approximately USD 6 billion, almost entirely in hard currency, held by an institution whose mandate is explicitly to serve the world's poorest countries. The mismatch between mandate and practice is not a technical oversight. It reflects institutional incentives that have not been recalibrated.
MDBs protect their triple-A credit ratings by avoiding currency risk on their own balance sheets. That constraint is real and has legitimate fiduciary roots: a downgraded MDB loses the cheap funding that makes concessional lending possible, which ultimately harms borrowers. The question is not whether MDBs should abandon prudent risk management. The question is whether the current incentive structure, which transfers 100 per cent of currency risk to borrowers who are the least equipped to bear it, in order to protect balance sheets held by institutions that are the most equipped to manage it represents sound development policy or institutional convenience dressed as prudence.
The Seville Commitment, concluded at the Fourth International Conference on Financing for Development in June 2025, called for tripling MDB lending by 2035. It named two new instruments, FX EDGE, an MDB toolbox for currency risk management, and Delta, a DFI local-currency liquidity platform, without timelines, capitalisation targets, or governance structures. The post-Seville analysis from CSIS describes the outlook as "murky." Private finance mobilised was approximately $70 billion in 2023, against an SDG financing gap of $4 trillion per year. ODA is projected to fall 9 to 17 per cent in 2025. The Seville Commitment is non-binding. Good instruments without capital are proposals, and the development community has decades of experience watching proposals substitute for action.
Tripling MDB lending by 2035 means nothing if 80 per cent of that lending remains in US dollars. The Seville Commitment named new instruments. It provided no capital, no timelines, and no binding targets on currency denomination.
What Actually Needs to Happen
The academic and policy literature on this challenge is substantial. The BCG State of Play report, the UN GISD Alliance working paper, the OECD local currency finance framework, the AfricaTalyst analysis of MDB mandates, the Bretton Woods Project assessment of local currency as a core development tool, and the IEA-IRENA-OECD clean energy financing study for Africa converge on a set of directions that are credible, technically sound, and politically achievable within existing institutional mandates. What they share is not novelty but absence of implementation. The following is not a list of recommendations. It is a list of decisions that must be made.
MDBs and DFIs must commit to capital-allocation targets for local currency lending, with board-level accountability and annual public reporting. The IFC's trajectory, USD 30 billion in local currency commitments across a decade demonstrates that the balance-sheet constraint is manageable when institutional will exists. The challenge is converting that trajectory from an IFC-specific achievement into the system-wide standard. The Bretton Woods Project and AfricaTalyst are correct that IDA, as the concessional window serving the world's lowest-income countries, must take the lead. IDA's rates roughly 0.5 to 0.75 per cent for concessional dollar loans make local currency loans cheaper than hard currency the moment a currency depreciates more than 20 to 25 per cent annually, which many frontier-market currencies do. The financial logic for local currency lending in IDA contexts is not ambiguous. What is missing is the institutional decision.
The capitalisation of hedging facilities must be treated as development finance infrastructure, not as a boutique instrument for specialised transactions. TCX's architecture a diversified portfolio of developing-country currency risks, with natural correlation reducing aggregate volatility below any individual-currency position achieves a 15-year annualised return of 1.6 per cent while providing hedges that the private market prices prohibitively or declines to offer at all. The EFSD+ guarantee facility of EUR 150 million is designed to support EUR 2 billion in local currency financing. That 13:1 leverage ratio is a compelling public investment. It needs to be replicated at ten times the current scale, with donor governments treating it as a core multilateral finance commitment rather than a supplementary programme line.
The portfolio approach to currency risk management treating a diversified basket of developing-country currencies as a risk pool, rather than hedging each transaction individually is the most technically credible path to reducing hedging costs at scale. The BCG analysis documents that EMDE currency volatility in aggregate is substantially lower than any individual currency's volatility, and that correlation patterns create natural internal offsets. A publicly capitalised, pooled global FX risk facility proposed by the GISD Alliance and modelled on TCX but sized for the market deserves explicit placement in the 2026–2027 negotiations on MDB capitalisation and the broader SDG financing architecture. The IMF's 2024 authorisation of SDRs for MDB hybrid capital instruments is an opening. The follow-through has, as the Bretton Woods Project documents, been weak. It must be strengthened.
Developing-country governments must build the institutional infrastructure that makes domestic capital markets viable not as a precondition for receiving international support, but as the primary investment target of that support. Debt management offices in over half of low-income countries have no foreign currency risk management strategy. Fewer than one in three have the systems, personnel, and analytical capacity to manage a currency-risk portfolio. The technical assistance required to change that is not expensive relative to the stakes. FCDO, AFD, KfW, the US DFC, and MDB technical windows should fund this at programme scale, not as a workshop in a broader digitalisation grant.
Georgia's legislative de-dollarisation programme which attracted MDB local-currency bond issuance by creating the regulatory and market conditions for it is the model. The lesson is not that countries should mandate away hard currency but that deliberate, sequenced policy reform, matched with technical and financial support, can shift the equilibrium. The Africa Credit Rating Agency, now progressing toward establishment under the African Union, represents a structural intervention that could reduce the perception premium embedded in African sovereign ratings the premium that the UNDP estimates has cost the continent $75 billion. AfCRA's primary value, as the evidence suggests, will be as a data institution that forces fiscal transparency and establishes local-currency benchmarks, not as a political vehicle for grade inflation.
Recommendation and Conclusion
Africa holds 60 per cent of the world's best solar potential. It attracts 3 per cent of global energy investment. That ratio will not shift through exhortation, conference declarations, or the announcement of instruments without capital behind them. It shifts when the development finance system is restructured so that borrowers who earn in naira, birr, cedi, kwacha, and shilling are not compelled to service debt in dollars.
The currency mismatch is not a market imperfection awaiting a technical correction. It is an institutional arrangement that systematically transfers risk to the least risk-bearing end of the transaction, concentrates the costs of that arrangement in the economies least equipped to absorb them, and then attributes the resulting investment shortfall to inadequate governance or insufficient project preparation in those same countries. The diagnostic convenience of that attribution is not accidental. It places the burden of adjustment on borrowers rather than on the architecture of lending.
The instruments to address this are operational. TCX, FX EDGE, Delta, the IDA Private Sector Window Local Currency Facility, the African Local Currency Bond Fund, the IFC–Standard Chartered local currency facility, the outline of a solution exists. What is absent is capitalisation at scale, binding portfolio targets, and the institutional decision that currency risk belongs on MDB and DFI balance sheets, managed, priced, and pooled across a diversified portfolio rather than passed in full to sovereign borrowers and private-sector projects that generate revenues in local currency.
The Seville Commitment calls for tripling MDB lending by 2035. If that lending remains 80 per cent in US dollars, it will triple the FX exposure of borrowers, not triple the development utility of MDB finance. The denomination of that lending is not a technical footnote to a political commitment. It is the substance of the commitment. Whether development finance in the next decade genuinely serves the countries it is designed to support will be determined less by its volume than by the currency in which it is denominated, and by whether the institutions channelling it are willing to absorb the risk they currently pass on.
The currency wall was built. It can be taken down. The decision to take it down belongs to shareholders of MDBs, to bilateral donors making capital commitments to hedging facilities, and to the governments of developing economies building the domestic market infrastructure that makes local currency finance self-sustaining. The window for doing this before the architecture of the next financial cycle consolidates around the same hard-currency defaults is not indefinite. The time to act is now.
