Abiola Olatoye
Africa is the second largest continent and is rich in natural resources such as oil, gas, and minerals. These resources continue to serve as an important source of income for many African countries. All of these continue to attract foreign investment and have the potential for sustained economic expansion, industrial diversification and capital market development.
After years of dependence on extractive industries, a shift towards digital infrastructure, manufacturing, renewable energy and social infrastructure is reshaping Africa’s investment profile. This shift towards value-added production and technology-driven sectors opens new avenues for investors to participate in long-term equity projects.
As African economies continue to diversify and integrate, stock markets are evolving beyond frontier status to become strategic platforms for mobilizing long-term investment and driving inclusive economic growth.
Nevertheless, maximizing this opportunity requires a nuanced understanding of the opportunities and challenges shaping these markets. Key challenges include limited market liquidity, currency volatility, currency mismatch, and regulatory fragmentation, which often impede the involvement of large institutional investors.
Additionally, political instability, an inconsistent policy environment, weak corporate governance practices, and low financial literacy continue to constrain investor confidence and market depth. Infrastructure deficiencies, particularly in trading technology and payment systems, further limit cross-border participation and efficiency.
Addressing these constraints through stronger regulation, greater transparency and regional market integration is critical to unlocking the full potential of Africa’s capital markets and positioning them as reliable engines of sustainable growth.
Of all the challenges facing African financial markets, currency mismatch stands out as one of the most significant. Despite improving market fundamentals, many companies and governments continue to borrow in foreign currencies (usually US dollars or euros) while generating revenue in local currencies. This gap makes the balance sheet vulnerable when exchange rates fluctuate. As global investors seek to increase their exposure to African markets, addressing this structural mismatch is critical to achieving sustainable risk-adjusted returns.
According to the African Development Bank (AfDB), the infrastructure funding gap is between US$130 billion and US$170 billion annually, and it is essential to close this gap. This is essential for productivity, job creation and economic resilience across the continent. It will also accelerate the continent’s progress towards achieving the Sustainable Development Goals (SDGs).
Currency mismatches inflate the cost of capital, distort service prices, and impede long-term investment across key sectors such as energy, transportation, and healthcare. While this challenge is not unique to Africa, its impact is further amplified by the continent’s macroeconomic instability, shallow local currency capital markets, and limited available hedging instruments.
According to research by the Climate Policy Initiative (2024) and the International Finance Corporation (2024), many sustainable infrastructure projects in emerging markets face additional borrowing costs of 200 to 600 basis points due to currency risks due to volatility and uncertainty, making otherwise viable investments economically unsupportable.
This effect is most pronounced in long-lived sectors such as energy and healthcare, where project returns are realized over decades and are highly sensitive to exchange rate fluctuations. As a result, infrastructure projects in Africa often remain underfunded because their financing structures expose them to unsustainable currency risks, even as global investors seek yield and hold record liquidity.
Collectively, this structural imbalance raises serious macroeconomic concerns, as foreign currency loans account for an estimated 70-85% of total debt in low-income countries, increasing their vulnerability to external shocks and debt service pressures. Infrastructure projects such as renewable energy plants, toll roads, and hospitals typically generate revenue in local currency through user fees or payments from governments.
However, that debt is often paid in foreign currencies. If the exchange rate depreciates, the cost of debt in local currency terms will rise sharply, threatening the profitability and long-term viability of the project. Therefore, it is common for project investors to incorporate a systemic risk premium and demand higher returns to compensate for foreign exchange risk. In the long run, this increases the weighted average cost of capital (WACC) and ultimately increases the cost of providing services.
Several initiatives have provided development finance institutions (DFIs) with local currency hedging solutions to mitigate currency mismatches, including the Currency Exchange Fund (TCX), IFC’s Local Currency Facility, and AfDB’s African Domestic Bond Fund. Additionally, the African Unit of Accounts (AUA) and the Pan-African Payments and Settlement System (PAPSS) propose promoting regional payments and reducing dollar dependence.
Despite all these efforts, currency disparities persist as most hedging instruments are expensive, illiquid and short-term. Furthermore, limited access to a small number of currencies in the market means that they are only partially covered in most cases, creating lingering constraints on sustainable infrastructure investment for many African governments and private sponsors.
Although the extent of mismatch and its impact on the cost of capital has been widely studied, there has been relatively little work on integrated and viable solutions that combine financial innovation, policy reform, and institutional adjustment. However, African economies need to shift from viewing currency risk as an unavoidable feature to seeing it as a design flaw that can be mitigated through structured financial and policy interventions.
It would be beneficial to integrate a coordinated ecosystem approach using blended finance, local currency debt issuance, and risk-sharing partnerships between DFIs and retail investors.
A combination of local currency financing mechanisms, long-term hedging products, foreign exchange-linked return frameworks, and supportive policy reforms will significantly reduce the WACC of infrastructure projects. Reducing funding costs also reduces tolls, tolls, and fees, with corresponding implications for affordability and access.
To illustrate this argument, for example, reducing financing costs by 300 to 500 basis points can improve a project’s internal rate of return by up to 20 percent, reduce required user fees by a similar margin, and expand access to services without additional subsidies.
Therefore, shifting the paradigm from identifying risks to designing solutions will ensure that monetary mismatch mitigation becomes a development imperative rather than just a financial optimization effort. Reducing foreign exchange exposure and lowering the cost of capital are central to unlocking the private investment needed to achieve Africa’s infrastructure and sustainability goals.
>>>The author is a project finance and investment expert with experience spanning venture capital, financial advisory, private equity, and investment management. He has held key positions across the Nigerian financial services industry, including financial advisory firms, private equity firms, and the Nigerian Government Investment Authority, where he contributed to strategic investment initiatives across multiple sectors. Abiola is currently based in the United States and works in venture capital, focusing on early stage investments that foster innovation and economic growth. He is currently pursuing an MBA at the University of Michigan’s Ross School of Business. He holds a master’s degree in finance and a bachelor’s degree in economics. He can be reached via (email protected)
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