Onome Amuge
The African Development Bank Group (AfDB) has approved a $25 million equity investment in The Currency Exchange Fund (TCX), a specialist institution that offers local currency hedging in emerging and frontier markets, in a move designed to curb foreign-exchange exposure that has long undermined Africa’s debt sustainability.
The investment, announced recently, signals the AfDB’s determination to strengthen the continent’s financial resilience at a time when governments and businesses are still dealing with the fallout of external shocks, including volatile commodity prices, tightening global monetary conditions and exchange rate instability.
TCX, founded in 2007 and backed by a consortium of development finance institutions (DFIs), governments and impact investors, provides tailor-made instruments that allow borrowers to take loans in their domestic currency while shielding them from exchange-rate swings. Such tools are often absent in frontier economies where hedging markets are either shallow or non-existent.
For much of the past two decades, African economies have relied heavily on hard-currency borrowing mainly in US dollars and euros to finance infrastructure and development projects. While this offered access to global capital, it left borrowers exposed to sudden currency depreciations, especially in countries with narrow export bases and limited foreign reserves.
The mismatch between hard-currency debt and local-currency revenues has been a recurrent source of distress. According to the AfDB, more than half of low-income African countries are now at high risk of debt distress or already in distress. In fragile states, even modest exchange-rate movements can cause debt service costs to spiral out of control.
By strengthening TCX’s capital base, the AfDB hopes to expand the availability of local-currency hedging, reduce systemic vulnerabilities and help African borrowers avoid the costly cycle of debt restructuring. “This investment in TCX marks an important milestone in the Bank’s effort to deepen African capital markets and address the root causes of debt distress. It will unlock local currency financing for MSMEs, infrastructure, and many sectors across Africa,” said Ahmed Attout, Director of the AfDB’s financial sector development department.
Since inception, TCX has hedged more than $17 billion in notional amounts worldwide, including $4 billion across 31 African countries. Around 18 per cent of its global outstanding portfolio is focused on fragile and low-income markets, precisely those where access to financial risk management tools is most limited.
The AfDB’s equity injection is expected to strengthen TCX’s risk-bearing capacity and broaden its reach into illiquid African currencies, enabling it to cover frontier and fragile states that are often bypassed by commercial investors. Sectors expected to benefit include debt management offices, infrastructure and energy access projects, as well as micro, small and medium-sized enterprises (MSMEs).
Ruurd Brouwer, chief executive of TCX, said the AfDB’s entry into the fund’s capital base would expand its capacity to absorb risk. “We are thrilled to welcome AfDB to TCX’s capital base, joining fellow DFIs, impact investors, and governments that support our local currency hedging solution. This partnership will protect borrowers from currency risk and promote the development of African capital markets,” Brouwer said.
The AfDB’s intervention aligns with its Ten-Year Strategy (2024–2033), which prioritises financial sector development, resilience, and innovative financing. By catalysing local currency solutions, the Bank hopes to not only reduce debt vulnerabilities but also attract private-sector capital that is often deterred by FX risks.
In 2022 and 2023, a series of external shocks from the Covid-19 pandemic to the war in Ukraine, triggered sharp capital outflows from emerging markets and drove up the cost of borrowing. African currencies depreciated against the dollar, in some cases by double digits, leaving governments with unsustainable repayment burdens. By reducing FX exposure, AfDB officials argue, African economies can better weather such shocks in the future.
The initiative also supports broader market development. By expanding the use of hedging instruments, TCX indirectly encourages the growth of local capital markets, creating benchmarks, improving liquidity, and ultimately fostering conditions where private-sector hedging can take root.
For Africa’s private sector, especially MSMEs and infrastructure developers, the implications could be transformative. Borrowing in local currency remains rare, and where available, it is often offered at prohibitive rates. By making hedging solutions more accessible, TCX lowers the risks for both borrowers and lenders, potentially unlocking new volumes of credit that would otherwise be constrained.
This is particularly relevant for sectors such as energy and infrastructure, where revenues are typically denominated in local currency but financing comes in dollars. Without hedging, any devaluation can wipe out margins or bankrupt projects. The AfDB’s support for TCX is therefore considered not just a matter of financial engineering but a step toward de-risking investments critical to Africa’s long-term growth.
