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

The authors analyze the exchange rate and balance of payment crisis risks 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 “domesticoriented” (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.

This Research Paper is published in the framework of the International Research Initiative on Public Development Banks working groups and released for the occasion of the 14th AFD International Research Conference on Development.

It is part of the pilot research program “Realizing the Potential of Public Development Banks for Achieving Sustainable Development Goals”. This program was launched, along with the International Research Initiative on Public Development Banks (PDBs), by the Institute of New Structural Economics (INSE) at Peking University, and sponsored by the Agence française de développement (AFD), Ford Foundation and International Development Finance Club (IDFC).

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