Unlocking local currency financing in emerging markets and developing economies

Scaling local currency financing solutions in emerging markets and developing economies (EMDEs) requires addressing critical foreign exchange (FX) risks that limit the mobilisation of resources towards sustainable development outcomes. Challenges include structural constraints in multilateral development bank (MDB) and development finance institution (DFI) business models, underdeveloped local financial markets, and a lack of incentives and scalable instruments to engage institutional investors. While current market solutions provided by donors – such as currency hedging tools, local currency bonds, and other blended finance approaches – offer potential, they also face a number of critical limitations. This paper proposes policy options for expanding local currency financing flows, deepening domestic capital markets and mobilising local actors, with aims of fostering long-term economic resilience and stability in EMDEs.