Local currency lending in fragile states: Follow up on recent proposals and the way forward
Following last year's Development Finance Institution (DFI) Fragility Forum, this policy brief considers challenges and opportunities related to local currency (LCY) lending in fragile states.
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Ali et al. Policy Brief October 2024.pdf
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- The challenge of delivering finance in local currency remains a critical issue, particularly for borrowers in fragile and conflict-affected states, given these countries’ profound and complex social, political, and economic vulnerabilities.
- The Development Finance Institutions (DFI) Fragility Forum 2023 focused on local currency (LCY) lending to generate momentum around developing scalable and viable local currency solutions. The proposals discussed included an innovative approach to treasury risk management, technical assistance to central banks, cross-currency swaps with central banks, local currency credit guarantees, and an onshore treasury platform.
- With constrained public finances, mobilising private capital is the only viable solution for addressing challenges like the United Nations Sustainable Development Goals (SDGs) and climate change. Over time, as market development progresses, LCY finance could become more widely available across all sectors.
- To achieve further progress in bolstering LCY lending, DFIs should strengthen internal capacity, raise awareness, engage stakeholders, and enhance collaboration. Local policy priorities include improving governance, transparency, rule of law, macroeconomic policies, and financial stability.