The Fourth International Conference on Financing for Development (FFD4) offers a unique opportunity to address critical challenges in mobilizing capital for sustainable development. Recognizing the significant barrier posed by currency risk in channeling investments to developing countries, the GISD Alliance launched a dedicated workstream on “Tackling Local Currency Risk”, consulting with a wide range of stakeholders to evaluate the impact of currency risks and develop concrete proposals for the FFD4 preparatory process. As part of this effort, the workstream conducted in-depth interviews and analysis of hedging costs, identifying key obstacles and potential solutions to facilitate greater investment flows to developing countries.
The workstream produced a working paper presenting solutions to manage currency risks, including scaling up onshore solutions, lowering hedging costs, and developing blended finance facilities to absorb currency risk. A key proposal in the paper focuses on using a portfolio approach to managing currency risks, leveraging diversification to mitigate individual currency volatility and capitalize on the higher interest rates prevalent in developing economies.
Recommendations developed by GISD have been included in the Zero Draft Outcome Document, released on 17 January 2025, especially focusing on commitments to working with DFIs to develop cost-effective hedging solutions, improving MDB lending terms, and local currency financing, and encouraging official lenders to expand local currency lending in developing countries.
The First Draft Outcome Document, released on 10 March 2025, further reinforces the importance of addressing currency risks by emphasizing the need for fully aligned policy frameworks and incentives to attract sustainable private investment. It calls for increasing local currency lending by MDBs to better meet local development needs, strengthening the capacity of MDBs to issue local currency bonds, and creating a create a center of excellence for local currency and capital market development. The proposal from GISD on developing a joint platform to manage liquidity needs by building local currency pools and managing currency risks through diversification is also included in the draft.
Read the full paper to learn more about unlocking sustainable investment at scale.