Unlocking Local Finance for Sustainable Infrastructure

The global infrastructure financing gap is widening, with developing countries needing 4.5% of GDP annually to meet their needs. Achieving net-zero emissions by 2050 adds urgency, particularly in energy and transport, which drive 60% of emissions. Bridging this gap increasingly relies on private sector support, especially in fiscally constrained emerging economies.

Innovative solutions are essential to mitigate foreign exchange risks and strengthen domestic financial markets. Building robust local credit and capital markets offers a sustainable, long-term approach. Local currency financing is becoming a pivotal tool for advancing sustainable infrastructure, aligning with green, resilient, and inclusive development goals. By reducing reliance on volatile foreign capital and hard currency debt, it enables countries to channel domestic savings into transformative investments in infrastructure and climate resilience.

Supported by the Public-Private Infrastructure Advisory Facility (PPIAF), this report explores how local credit and capital markets can bridge the infrastructure financing gap. It presents a framework for building a robust local currency financing ecosystem, drawing on best practices from high-performing economies and offering a replicable model for developing markets. Highlighting the critical role of long-term credit markets in infrastructure development, the report showcases innovative and integrated strategies to ensure sustainable financing solutions.

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Key Findings

The report delves into commercial financing challenges and opportunities for mobilizing local currency financing for infrastructure and climate investments. It provides a global knowledge base, an analytical framework, and actionable insights for policymakers, financial institutions, and private sector stakeholders. The report highlights:

Key Drivers of Local Currency Financing Development

• Scale of private savings and willingness of local credit markets to provide long-term debt.
• Potential of local capital markets to finance infrastructure and climate projects.
• Cost differences between local and foreign currency debt.
• Capacity for credit evaluation and project structuring skills.

Challenges and Opportunities in Local Credit Markets

Banks, the primary source of debt financing in many developing economies, face limitations in providing long-term local currency financing due to asset-liability mismatches and credit risks. Regulatory frameworks, such as Basel III, have further constrained long-term lending.

Lessons from Benchmark Countries

Case studies from Egypt, Indonesia, Kenya, the Philippines, and Uzbekistan reveal that emerging markets and developing economies are at different stages of establishing local currency financing, often hindered by key structural and institutional challenges. In contrast, examples from Malaysia and South Africa emphasize the importance of sound macroeconomic policies, efficient financial systems, and innovative tools, such as pooled investment vehicles, to effectively mobilize local currency financing.

Policy and Market Interventions

Recommendations include promoting macro-financial stability, deepening local currency markets, encouraging institutional investments, and developing attractive project pipelines through public-private partnerships.

Policy Recommendations

• Strengthen Local Financial Ecosystems: Develop efficient local credit and capital markets to mobilize domestic savings and reduce reliance on foreign debt.
• Foster Long-Term Financing: Create incentives for banks and institutional investors to participate in sustainable infrastructure financing through credit enhancement tools and risk-sharing facilities.
• Encourage Private Sector Participation: Promote mechanisms to crowd in private financing and enhance collaboration between international and local lenders.
• Support National Programs: Leverage programs that generate demand for local currency financing, such as renewable energy initiatives, to build robust pipelines of bankable projects.

To close the infrastructure financing gap, stakeholders must focus on building capacity and developing tools to support local currency financing. This includes addressing foreign exchange risks, enhancing project finance ecosystems, and fostering collaboration between public and private entities. Local financial institutions, development finance institutions, and policymakers play a pivotal role in creating the conditions for sustainable, long-term investments in infrastructure and climate projects.