De-risking Developing Country Currencies for Climate Financing

Climate investments in the Global South require trillions of dollars annually. Private investors from the Global North, making such investments, are deterred by the possibility of sharp depreciation of currencies. The market mechanism for hedging long-term emerging market currency risk is broken. Global South sovereigns can bolster confidence about the availability of foreign exchange, if the central bank of a developing country has swap arrangements with central banks of hard currency countries to assure that such currency can be made available when required. The International Monetary Fund, with support from G20 countries, and the Bank for International Settlements can create an ecosystem for facilitating large capital flows between countries by parcelling risks to those who can best afford to bear them. This Policy Brief recommends, among others, that the G20 encourage its partner countries to create long-term central bank swap arrangements with specific currency covers for green investments.