Role of local currency financing in navigating debt challenges for low-income countries

Low-income countries in Africa are facing mounting debt distress as currency volatility continues to rock regional markets, according to a recent report by Africatalyst. The report highlights the risks associated with local currency financing for these countries and emphasizes the need for effective solutions to address the challenges at hand. Jean-Claude Tchatchouang, Senior Advisor at Africatalyst, discussed the implications of the report in an interview with CNBC Africa. Tchatchouang emphasized two key areas of concern for low-income countries: the reliance on foreign currency debt and the impact of exchange rate volatility. He noted that these factors could lead to debt default, high debt burden, economic instability, and sustainability concerns. Ethiopia was cited as a prime example of a country grappling with the repercussions of fluctuating exchange rates. The decision to move from a fixed to a floating exchange rate led to a significant depreciation of the national currency, exacerbating debt repayment challenges. Tchatchouang underscored the importance of multilateral development banks (MDBs) in providing effective solutions for countries facing similar difficulties. He called for MDBs to increase their portfolio of local currency loans and outlined various risk mitigation strategies, including project-based lending and currency swaps. Additionally, Tchatchouang highlighted the role of the World Bank's International Development Association (IDA) in supporting low-income countries through affordable loans and capacity building initiatives. With a new replenishment on the horizon, Tchatchouang urged IDA to prioritize local currency financing for the sustainable development of these nations.