Local Currency Loans in the Global Development Finance Architecture

ALFREDO SCHCLAREK; JIAJUN XU

Mendoza

Conferencia; LVIII Reunion Anual AAEP; 2023

Facultad de Ciencias Económicas, Universidad Nacional de Cuyo

We analyze 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. Further, we compare two funding strategies for MDBs; one that involves buying local currency and one that involves issuing local currency bonds. The main policy conclusion is that there are tradeoffs between these two funding strategies and MDBs should consider the particular exchange rate risks and balance of payments crisis risks for the real investment projects that are financed and the host countries.