October 1, 2024

Most low-income countries accumulate debt in currencies other than their local currency. This is both a blessing and an “original sin.” While foreign currency-denominated loans provide a valuable source of hard currency, they also create repayment risks and have been linked to rising debt burdens. Can multilateral development banks (MDBs), one of the largest creditors to the world’s poorest countries, help their low-income clients manage these risks? In this paper, we examine this original sin, particularly among sub-Saharan African countries. Using an illustrative case from Ethiopia, we show that decreasing exchange rates increases the local currency value of most debt owed to external lenders. Since most low-income countries service their debt using government revenues earned in their local currency, this negatively impacts the overall debt burden. We argue that MDBs can offer an immediate-term solution: sovereign local currency loan offerings. Focusing on the special case of the World Bank’s International Development Association (IDA), we evaluate the challenges and opportunities associated with local currency financing as a multilateral initiative. Our conclusions emphasize the need for IDA to play a leading role in this initiative, helping low-income economies avoid worsening debt positions.

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