25 October 2022

Local currency denominated loans in the global development finance architecture

Local currency

The Institute of New Structural Economics (INSE) at Peking University and le Conseil National de la recherche scientifique et technique (CONICET) joined forces to further explore how multilateral development banks (MDBs) can lend in local currency to investment projects that are “domestic-oriented” (DOIPs), i.e., which do not generate hard currency, without incurring in currency mismatches between their assets and liabilities, which would downgrade their credit ratings. The main policy recommendation is that MDBs be recapitalized by their owners and use the hard currency proceeds to buy local currency to be used for local currency denominated lending.

The objective of this research project is to study the prospects of local currency denominated loans in the global development finance architecture. One of the main impediments for Multilateral Development Banks (MDBs) to lend in local currency is that they, in turn, fund themselves issuing hard currency denominated bonds in the international market. Thus, a currency mismatch between assets and liabilities increases the risks of MDBs, and may reduce their credit ratings, which increases their funding costs. Therefore, the report will try to identify funding strategies that MDBs can follow in order to maximize their financing of investment projects in host countries with local currency denominated loans instead of USD denominated loans.