Unlocking local currency financing in emerging markets and developing economies: What role can donors, development finance institutions and multilateral development banks play?

Paul Horrocks, Catriona Marshall, Callum Thomas, Thomas Venon, Dave Portmann and Wuraola Okuwobi

No 117, OECD Development Co-operation Working Papers from OECD Publishing

Abstract: Scaling local currency financing solutions in emerging markets and developing economies (EMDEs) requires addressing critical foreign exchange (FX) risks that limit the mobilisation of resources towards sustainable development outcomes. Challenges include structural constraints in multilateral development bank (MDB) and development finance institution (DFI) business models, underdeveloped local financial markets, and a lack of incentives and scalable instruments to engage institutional investors. While current market solutions provided by donors – such as currency hedging tools, local currency bonds, and other blended finance approaches – offer potential, they also face a number of critical limitations. This paper proposes policy options for expanding local currency financing flows, deepening domestic capital markets and mobilising local actors, with aims of fostering long-term economic resilience and stability in EMDEs.

Keywords: blended finance; development finance institutions; emerging markets and developing economies; foreign exchange risks; local capital markets; local currency financing; multilateral development banks (search for similar items in EconPapers)
JEL-codes: F34 G15 O16 (search for similar items in EconPapers)
Date: 2025-02-04
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Persistent link: https://EconPapers.repec.org/RePEc:oec:dcdaaa:117-en

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