Local currency loans in the global development finance architecture

ALFREDO SCHCLAREK; JIAJUN XU

Cartagena de Indias

Conferencia; Finance in Common Summit 2023; 2023

BID, CAF, ALIDE, Bancoldex, EIB

Our theoretical study delves into three alternative financing strategies for Multilateral Development Banks (MDBs) to offer local currency loans to local investment projects. We compare them through analyzing the different payment mechanisms that arise, and the consequences on currency mismatch and FX risks. In terms of choosing the best financing strategy for MDBs, there is no perfect solution and each strategy carries pros and cons, which advocates for a nuanced, case-by-case approach, informed by the macroeconomic situation of each host developing country.