Enhancing MDB capacity through local currency lending

Overview and Goals of Proposed Program:
This project aims to investigate the scope for increasing local currency lending by multilateral development banks (MDBs) to low lower middle income countries (LMIC). The key analytical premise of the project is that the risk of local currency lending is currently overestimated - by MDBs, their shareholders, and Credit Rating Agencies - which limits the lending capacity of MDBs. Local currency lending could scale up and increase the effectiveness of MDB lending by: (a) increasing the absorption capacity of recipient economies through a reduction in foreign exchange constraints and risks; and (b) reaching a more extended set of economic actors in LMICs, such as SMEs, that are crucial to reducing poverty, promoting inclusive economic development, and tackling the climate crisis, but are unable to carry the foreign exchange risk inherent in foreign lending.