Exchange rate and balance of payment crisis risks in the global development finance architecture

Abstract

We analyze exchange rate and balance of payment crisis constraints when multilateral development banks (MDBs) lend, in hard currency, to national development banks (NDBs), for NDBs to onlend to investment projects. Investment projects may be “export-enhancing” (EXIPs), which generate hard currency, or “domestic-oriented” (DOIPs), which do not generate hard currency. To increase the proportion of onlending to DOIPs, MDBs should increase their refinancing to NDBs. Furthermore, MDBs have to reduce the interest rate charged on NDBs. In addition, high return EXIPs need to be financed, and more locally-produced supplies, in contrast with imported supplies, should be fostered.