There is a quiet assumption buried in many infrastructure financial models: that the exchange rate on the day of financial close is a reasonable guide to the exchange rate over the next fifteen years. Anyone who has watched the major African currencies over the past decade knows how dangerous that assumption is. When a project borrows in dollars or euros and earns in naira, cedi, kwacha or shillings, a sustained depreciation can turn a comfortable debt service cover into a default without a single operational problem.
Currency risk is not a reason to avoid the region. It is a risk like any other, and it can be allocated, reduced or priced. What it cannot be is ignored, and lenders will not let it be.
Moving the risk to the buyer
The most common answer in the power sector is to denominate or index the tariff to hard currency. The utility pays in local currency, but the amount is calculated by reference to the dollar, so the project’s revenue keeps its value in the currency of its debt. This does not remove the risk; it moves it to the offtaker, and ultimately to the state and the end customer. That is why hard-currency tariffs are closely tied to the offtaker question: a utility that already struggles to pay will struggle more after a devaluation, and lenders know it.
Indexing the tariff does not remove currency risk. It moves it to the buyer.
For projects that sell to a market rather than to a state buyer — logistics assets, agri-processing, commercial and industrial power — hard-currency revenue may be available directly, for example where customers are exporters earning in dollars. Where it is, it is one of the strongest credit features a project can have.
Borrowing in the currency you earn
The alternative is to match the debt to the revenue by borrowing in local currency. Domestic banks and pension funds are an increasingly important source of such capital in several markets, although tenors are often shorter than infrastructure needs and interest rates reflect local conditions. Development finance institutions have extended local-currency lending, and specialist providers such as TCX, a fund established by development finance institutions, offer long-dated hedges in frontier currencies that commercial markets do not cover.
Local-currency structures usually cost more on paper than hard-currency debt. The comparison that matters, though, is not the headline interest rate but the all-in cost once the risk of depreciation is priced in. A project that pays more for its debt but can never be pushed into default by an exchange-rate shock may well be the cheaper project over its life.
Convertibility and transfer
A separate but related risk is that local currency cannot be converted into hard currency, or cannot be sent abroad, when debt service falls due. This is a political rather than a market risk, and it is typically covered through political risk insurance, through offshore payment accounts, or through reserve accounts held in hard currency that give the project time to work through a temporary shortage.
What a well-prepared project shows
When we review a project, the currency question is one of the first we ask, because the answer shapes everything else: which lenders can participate, how much debt the project can carry, and what the equity return really is. A well-prepared sponsor can explain which currency each revenue and cost line is in, how the structure protects debt service from a large depreciation, and what the model shows under a severe but plausible currency scenario. That clarity will not make the risk disappear, but it tells investors that the sponsor has thought about the project the way they will.
