Development Finance 2.0: Improving Conditions for Local Currency Financing
By Harald Hirschhofer, Senior Advisor, TCX 1
Achieving the UN Sustainable Development Goals (SDGs) will require very large investments measured in the trillions until 2030. To mobilise such amounts, policy makers try to crowd-in the private sector, its financial resources and its entrepreneurial creativity. But private sector engagement will not happen if risk-adjusted returns are perceived to be unattractive. While telecom and mobile banking have shown that achieving development goals also means good business, perceived risks in most other sectors and countries are still too high for expected economic returns.
That is why donors, recipients and development banks have been developing programs to lower and share risks, including policy and structural reform, technical assistance and information sharing, and providing financial de-risking instruments. Especially in situations where private investors perceive risks as higher than they actually are, such de-risking measures can be impactful in catalysing private investment flows. Accordingly, development finance institutions (DFIs) are expanding their focus from mere funding to blending risk tolerant donor funds with commercial capital to offer de-risking services and support for (perceived) high risk activities.
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