Many constraints to LCY finance stem from missing institutional capabilities rather than a lack of instruments. In several markets, the challenge is not the availability of hedging or lending solutions, but the ability of domestic institutions to operate them. Sharing expertise on financial supervision and macroprudential policy can therefore have large effects in the short and medium term.
A recurring theme was the need to move beyond conventional technical assistance (TA) towards the development of specific market functions. This includes the capacity to support repo markets, liquidity management, collateral frameworks, benchmark construction and local derivatives activity. In many markets these functions remain underdeveloped, limiting the ability of financial institutions to intermediate local currency or manage risk effectively.
Capacity building should therefore be tied to live reform agendas and transaction pathways. It should help institutions implement specific market functions, rather than only increasing general awareness of LCY finance.
Central banks and regulators were identified as particularly important counterparts. Alongside their monetary and financial-stability responsibilities, they help shape the legal, regulatory and operational foundations of local markets. Actions discussed included support for supervisory capacity, market infrastructure, collateral and netting arrangements, and domestic money-market frameworks. Technical assistance (TA) should be linked directly to implementation and market operations, rather than delivered as a standalone activity.
Regulatory barriers also need to be addressed in concrete terms. These may include the capital treatment of LCY and hedged exposures, restrictions on derivatives use, collateral eligibility rules, netting and insolvency frameworks, FX prudential limits, withholding tax on local issuance, and investment regulations affecting pension funds and insurers. Addressing these constraints requires regulators and market participants to work through practical obstacles together rather than treating regulation as a generic enabling condition.
There was also support for strengthening institutional capability within MDBs, DFIs and local financial institutions. This includes improving treasury, risk and credit functions, building expertise in balance-sheet management and local market operations, and developing the capacity to originate and manage LCY assets. Shared capability platforms can help reduce duplication, consolidate expertise and accelerate the diffusion of good practice across markets.
Capacity constraints extend beyond regulators to market participants themselves, particularly local banks. Expanding LCY finance will require stronger capabilities in liquidity management, origination, risk transfer and the use of swaps and other structured products, reducing reliance on a small number of specialised intermediaries.
A further gap sits on the borrowing side. Ministries of finance, debt management offices, state-owned enterprises and firms make currency decisions, the consequences of which persist for the life of an instrument. Yet these decisions must often be made without the analytical tools to compare options on a like-for-like basis. Facilities dedicated to this function are beginning to emerge.
The TCX Local Currency Academy, funded through the EU’s EFSD+ framework and KfW, provides practical frameworks, analytical tools and direct technical support on foreign exchange risk management to public and private sector borrowers across at least twenty low-income and lower-middle-income countries.
Specific propositions that attracted support included:
- Link technical assistance to live market functions. Donors, MDBs and technical partners should direct support towards repo, collateral, benchmarks, swaps documentation, supervisory treatment and treasury operations, rather than generic training.
- Enable local institutions to reach SMEs in LCY. MDBs and DFIs should use guarantees, capital relief and risk-sharing structures to work through banks, NBFIs and other originators that can reach SMEs, while regulators clarify treatment of those assets so liquidity is not simply recycled into sovereign securities.
- Support central banks and regulators as market enablers, including through a Governor-led EMDE central-bank forum on local market development. Such a forum should focus on peer-to-peer implementation of the practical reforms that underpin LCY market functioning, including repo, collateral, netting, benchmarks, swaps and supervisory treatment. It would sit alongside BIS governor-level discussions as a practical market-development track, focused less on macro-financial surveillance and more on the institutional plumbing needed for LCY markets to function.
- Strengthen borrower capacity to compare and choose currency options. Ministries of finance, debt management offices and state-owned enterprises determine the currency composition of their liabilities, often without the means to compare offers on a like-for-like basis: a hard currency headline rate set against a local currency alternative whose higher nominal cost largely reflects the interest rate differential rather than a risk premium. MDBs, DFIs and technical partners should support the analytical capacity to evaluate that trade-off over the life of an instrument and to reflect currency exposure explicitly in debt management strategies. Lenders should present both options at origination wherever a local currency alternative exists.