Executive summary

Executive summary

Foreign Exchange (FX) risk remains a central but inefficiently allocated feature of the international development finance system. Across emerging markets and developing economies (EMDEs), investment is still often financed in hard currency (HCY) even where revenues are domestic, exposing borrowers to shocks they cannot control. This affects debt sustainability, project viability and the cost of capital and is detrimental to development outcomes.

The development system’s financing choices shape who ultimately carries currency risk. For example, when gender-focused programmes are funded in HCY, that risk can pass through to women-led businesses and end borrowers. Climate finance faces a related tenor problem: long-lived investments in distributed energy, adaptation and municipal infrastructure often depend on local currency (LCY) revenues, but HCY liabilities expose them to exchange-rate movements over many years. Maximising development impact, therefore requires a development finance system that is better equipped to overcome foreign exchange risk and provide easier access to LCY solutions.

Against this backdrop, Wilton Park convened a multi-stakeholder dialogue, in partnership with FCDO, TCX and Crown Agents Bank. This brought together Multilateral Development Banks (MDBs), Development Financial Institutions (DFIs), governments, central banks, investors, market infrastructure providers, international organisations and academia. Country experience were an important part of the discussions. Case studies were provided as background material, and officials from central banks and ministries of finance set out how currency risk has affected borrowing decisions, budgets and service delivery in their own economies.

Discussions examined the barriers limiting LCY finance, the effectiveness of existing FX-risk management solutions, the role of domestic financial market development and how MDBs and other actors can build a more resilient financial ecosystem. A particular focus was on the need to understand interdependencies across money markets, capital markets and the wider yield curve, including how stronger short-term market infrastructure, liquidity and risk-transfer mechanisms can support longer-maturity LCY financing.

There was broad agreement that LCY finance must not be treated as a marginal development finance issue. Participants repeatedly linked currency mismatch to its real-world effects across EMDEs, including on jobs, livelihoods, investment and the delivery of essential services. While a growing range of tools and institutions already exists to support LCY finance, the discussion highlighted that the greater challenge lies in deploying these solutions at scale, strengthening domestic financial markets and aligning incentives across shareholders, MDBs, DFIs, governments, regulators and private investors. LCY was therefore consistently framed not as a product, but as part of a wider financial ecosystem requiring coordinated action across multiple actors.

The discussion focused primarily on private capital mobilisation (PCM): how MDBs, DFIs and partners can channel investment and mobilise private capital into firms, projects and financial institutions without transferring unmanageable currency risk to local borrowers. But the agenda also has a sovereign dimension. The same market foundations needed to scale LCY finance for private investment — liquid money markets, credible short-term reference rates, repo and collateral frameworks, yield curves and derivatives markets — are also central to how governments manage domestic debt, liquidity and macro-financial risk.

The international development finance system now needs to move from recognition to implementation. LCY finance should increasingly be treated as a core component in MDB reform, private capital mobilisation and financial resilience, rather than a specialist treasury product. Shareholders, MDBs, DFIs and partners will need to forge a path that will allow LCY finance to scale while preserving financial sustainability and balance-sheet strength.

Seven priorities for collective action emerged:

• Use shareholder channels, including the G20, to raise ambition on LCY finance. Shareholders should use MDB boards, replenishments and G20 processes to send a clear, unified signal that scaled FX-risk mitigation and LCY finance are central to MDB reform, private capital mobilisation and the wider financial architecture. That signal should translate into clearer expectations for MDBs on risk appetite, treasury reform, LCY origination, offshore hedging capacity, onshore market development and risk-sharing tools.
• Move FX-risk assessment upstream in MDB/DFI transactions and explore how LCY can increasingly be made the default choice where borrower revenues are domestic. MDBs and DFIs should treat LCY as the starting assumption where borrower revenues are domestic, so that HCY is justified rather than assumed. Both options should be assessed at origination, borrower FX exposure stress-tested, and hedging or risk-sharing built into financing design before term sheets are finalised.
• Build LCY strategies around the market functions that enable intermediation, including money markets. MDBs, DFIs, central banks and technical partners should give greater weight to the liquidity, collateral, benchmark and risk-transfer conditions that determine whether LCY finance can be originated, priced and managed locally. This should include developing and applying diagnostics, policy dialogue and institutional tools, supported by stronger central-bank peer learning on local market development, to address constraints in liquidity circulation, repo, collateral, benchmarks, supervisory treatment and derivatives markets.
• Expand and differentiate risk-sharing and hedging solutions. Donors and shareholders should address both the scale and design constraints in LCY risk management, increasing risk-bearing capacity where offshore hedging extends what local markets can provide, while supporting new onshore and deliverable models where local market depth, regulation and liquidity conditions allow.
• Create a stronger LCY data and diagnostics architecture, integrated within wider efforts to improve EMDE and development finance data. MDBs, DFIs, the IMF, OECD and GEMs should each fill distinct gaps: standardised money-market diagnostics, stronger Article IV/FSAP guidance, clearer reporting of the currency denomination of ODA lending and mobilisation, more granular LCY credit-risk/performance data, and better evidence on borrower outcomes.
• Strengthen the MDB LCY Policy Forum as a key delivery and accountability mechanism. Shareholders should keep the recommendations of the 2024 Heads of MDBs Viewpoint Note clearly in view and hold MDBs to account for progress. MDBs should re-emphasise and strengthen the policy-level MDB LCY Forum as a key senior mechanism for tracking delivery, surfacing constraints, testing new areas of collaboration and maintaining momentum beyond individual initiatives.
• Build LCY mobilisation pathways for institutional capital. MDBs, DFIs, donors and shareholders should test how private-capital mobilisation approaches developed in hard-currency portfolios — including B-loans, securitisation and other aggregation and risk transfer structures — can be adapted to LCY exposures. By pooling diversified LCY assets and distributing risk through investable vehicles, these approaches could broaden investor participation, expand distribution channels and help establish LCY finance as a scalable asset class.

FCDO and other participants should explore how the report’s conclusions can be taken forward through more targeted workstreams reflecting the paper’s recommendations. Participants also saw value in reconvening the wider group within six months to review progress and further support momentum.