Description
Local currency financing involves issuing debt in the currency of the borrower's income, thereby avoiding currency mismatches. Local currency financing can be provided by local financial institutions or by foreign financial institutions, which can then bear or hedge the currency risk.
Benefits
Borrowing in local currency protects projects from foreign exchange risk. Local currency loans reduce the borrower’s risk of increased debt payments in the event of currency devaluation, therefore increasing the project creditworthiness. Beyond being an effective risk mitigation strategy, local currency lending also has co-benefits such as actively contributing to the development of local financial markets by increasing demand for local currency and developing financial products such as local currency bonds and currency swaps.
Case Study
ADB financing local currency loan to ENGIE in India
In 2024, the Asian Development Bank (ADB) and the ENGIE group finalized a local currency loan agreement of 14.6 billion Indian rupees (about USD 176 million) to fund a 400-megawatt solar photovoltaic power plant in Gujarat. The solar plant will use locally produced bifacial photovoltaic modules and is expected to generate 805 gigawatt-hours of electricity annually over 25 years.
The loan was arranged by ADB, with equal contributions from ADB and the Asian Infrastructure Investment Bank. ADB helped provide long-term local currency financing not usually available in local markets and reduce the currency risk for the Gujarat Urja Vikas Nigam Limited, the state electricity regulation board, which was the sole off-taker.
Additional Sources
- https://www.cardanodevelopment.com/what-is-local-currency-finance/#:~:text=Local%20currency%20financing%20is%20the,of%20depreciation%20and%20avoid%20bankruptcy
- https://treasury.worldbank.org/en/about/unit/treasury/ibrd-financial-products/local-currency-financing
- https://www.adb.org/news/adb-engie-sa-partner-build-400-mw-solar-powerplant-gujarat-india