Persistent FX exposure reflects structural, market and behavioural constraints rather than a single binding factor. International capital is predominantly raised in HCY and MDB/DFI balance sheets are largely configured to intermediate that capital. The market infrastructure needed to manage FX risk remains uneven: in many low-income countries, hedging markets are absent, while in middle-income markets they are often shallow, short-dated or costly. FX risk management is therefore frequently unavailable, difficult to access at scale, or prohibitively expensive.
The scale of this exposure is material. Unhedged FX risk across developing economies is estimated at over $2 trillion, with currency volatility accounting for a significant share of risk premia in international lending. In practical terms, this affects both sovereign balance sheets and private investment decisions, shaping where capital flows and on what terms.
Demand-side dynamics reinforce these constraints. Borrowers often select HCY financing where it appears cheaper ex ante, despite the risks this creates over time, reflecting incentives and information gaps around FX volatility. Observed demand for HCY finance should therefore not be read as evidence that the current allocation of FX risk is efficient; it may reflect the products, incentives and administrative pathways the system has made easiest to use. For borrowers with LCY revenues or smaller financing needs, the absence of LCY solutions can constrain investment directly. Expanding LCY finance is therefore a central part of the solution. Properly deployed, it improves resilience by aligning liabilities with revenue streams, reducing exposure to exchange-rate shocks and associated risk premia, and enabling investment that would otherwise not take place. This is critical for development. For example, expanded LCY solutions can help deliver stronger gender and climate outcomes, by removing the burden of FX risks on SMEs, women-owned businesses or long-dated infrastructure projects that are least able to absorb currency volatility. Two example country cases trace how this plays out.
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Case study 1: Zambia
Zambia issued USD 3 billion in Eurobonds between 2012 and 2015 alongside other non-concessional borrowing. When drought, the pandemic and a reversal in portfolio flows arrived together in 2020, most of the debt stock was denominated in hard currency while revenues were domestic, so depreciation revalued the liability itself: external public debt rose from 62% to 96% of GDP in a single year, driven substantially by revaluation rather than by new borrowing. Zambia defaulted in November 2020. The adjustment fell first on capital spending, which more than halved as a share of GDP by 2022, compressing the budgets that fund clinics, classrooms and rural roads. Recovery has been led domestically, with a primary surplus of 3.1% of GDP in 2025 and nearly 40,000 teachers recruited between 2021 and 2024. Currency composition determined how much of the shock reached the budget, and therefore how much reached the services the budget pays for.
Source: TCX and OGResearch country case study developed for Wilton Park event, 2026.
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Case study 2: Ghana
Ghana entered 2021 with persistent fiscal vulnerabilities, including a tax-to-GDP ratio of 12.4% and deficits averaging 6.7% of GDP. As external debt-service pressures intensified and access to international markets closed, foreign debt service was already absorbing close to 30% of budget revenues, and the government turned to central bank financing worth 7.2% of GDP in that year alone.. Inflation reached 54.1% by December 2022, the cedi lost 42% of its value across 2022 and 2023, and public debt reached 92.7% of GDP. Ghana defaulted in December 2022. Because revenue mobilisation did not improve, the correction fell almost entirely on spending: education budgets fell from around 4% of GDP to below 3.1%, teacher numbers dropped roughly 10% between 2019 and 2024, and net secondary enrolment fell from 33.7% to 25.4%. Public debt was near 49% by October 2025, but the currency mismatch in foreign borrowing remains unaddressed.
Source: TCX and OGResearch country case study developed for Wilton Park event, 2026.
Targeted interventions show that LCY finance can be scaled through different channels, depending on market depth and institutional capacity. TCX addresses the offshore risk-sharing gap by providing hedging where onshore markets are unavailable or too shallow. Integrated approaches such as Brazil’s Eco Invest programme and IDB’s FX EDGE combine financing, incentives and market-building to expand LCY investment in specific sectors and countries. BII’s Growth Investment Partners demonstrates how local investment vehicles can mobilise domestic institutional capital and provide longer-tenor growth finance to firms in the currency in which they earn revenues. The wider lesson is that scaling LCY finance requires a portfolio of models: some that absorb FX risk where markets are missing, and others that strengthen the domestic institutions and incentives needed to intermediate LCY over time.
Deep domestic capital markets remain the long-term foundation, enabling financing to be originated and funded locally. However, in many EMDEs these markets are not yet sufficiently developed, and international capital cannot on its own provide local-currency financing. The policy objective is therefore to enable international capital to operate more effectively in LCY terms while supporting the gradual development of domestic markets over time.