Exchange rate and balance of payment crisis risks in the global development finance architecture

ALFREDO SCHCLAREK; JIAJUN XU

Tilburg

Conferencia; 13th Critical Finance Studies Conference Building Back Better? Financing a Resilient, Sustainable and Inclusive Global Recovery; 2021

University of Leeds, Tilburg University and the University of York

We analyze the exchange rate and balance of payment crisis constraints when MDBs lend, in hard currency, to NDBs, for NDBs to onlend to investment projects. Investment projects maybe ?export-enhancing? (EXIPs), which generate hard currency (for example, building a port or developing export agriculture), or ?domestic-oriented? (DOIPs), which don?t generate hard currency (for example, a solar farm or a sewage system). If MDBs want to increase the proportion of onlending to DOIPs, they need to increase their refinancing to NDBs, and allow more time to pay back the loans. Further, MDBs need to reduce the interest rate charged on NDBs. In addition, high return EXIPs need to be financed to increase the supply of hard currency. Finally, more locally-produced supplies, in contrast to imported supplies, allow lending a larger proportion to DOIPs.