Executive Summary: Breakfast Roundtable on Debt-for-Development Swaps and Currency Risk Mitigation
On the sidelines of the IMF/World Bank Annual Meetings in Washington, DC, we hosted a high-level breakfast roundtable at Hogan Lovells in partnership with Standard Chartered and TCX.
The discussion brought together governments, multilaterals, DFIs, insurers, rating agencies, and private investors to explore how innovative financing mechanisms can help reduce sovereign debt burdens while unlocking investment for climate, conservation, and human capital.
Purpose of the Roundtable
This roundtable was held on the sidelines of the IMF/World Bank Annual Meetings. The purpose was to bring together key stakeholders from government, multilaterals, DFIs, private capital, banks and insurers for a multifaceted discussion on reducing the debt burden in emerging markets. Debt-for-development and local currency strengthening are two important mechanisms that were central to the discussion.
Key Insights and Themes
A core theme of the discussion was the short-term borrowing costs vs. long-term financial benefit. How do institutions balance cheaper financial options with the risk of reduced fiscal predictability?
Country Perspectives
Egypt and Kenya are both actively exploring the use of debt swaps as part of their broader fiscal management and development strategies. Though at different stages of the journey, debt swaps are viewed as a financial instrument to prevent the increase of external debt exposure but to extend debt maturities. It is recognised as procedurally and legally complex, however it is perceived as a worthwhile endeavour.
As a middle income country, Egypt’s direct savings from swaps may be modest, but they provide meaningful fiscal relief to allocate resources to priority projects. Meanwhile, Kenya is focused on instruments that align with domestic and social development objectives. This includes social and human capital development in areas such as nutrition and food security.
Role of Multilaterals and DFIs
Multilateral institutions and development finance entities are increasingly shaping innovative approaches to debt-for-development mechanisms. Success has often been linked to strong coordination among financing instruments and institutions, though challenges such as limited local currency availability and information disclosure requirements continue to hinder broader adoption.
Regional development banks are leveraging their liquidity and guarantee capabilities to facilitate transactions and reduce costs, particularly in markets with underdeveloped local capital systems. These efforts create bridges between guarantees and financing decisions and directing savings toward sustainable and environmental projects. Strengthening local currency lending and mitigating foreign exchange exposure remain key focus areas in these initiatives.
New models are emerging to mobilize domestic capital in the world’s least developed markets. By deploying targeted guarantees and loans in local currency, institutions are minimizing exchange rate risk. Innovative facilities under development aim to achieve significant debt-service reductions and redirect funds toward nature conservation and climate-aligned investments, reinforcing the link between debt management and sustainable development outcomes.
Debt-for-Nature
Debt-for-nature initiatives are becoming an important tool for combining fiscal relief with environmental and climate goals. Recent efforts have converted billions in commercial debt into funding for conservation and climate resilience projects. These initiatives are increasingly coordinated through partnerships that focus on both deal execution and ensuring measurable post-deal impact.
Major recent transactions in Ecuador, the Bahamas, and Barbados demonstrate how debt-for-nature swaps can be structured at scale and incorporate blended and local-currency components. Going forward, stronger coordination across government ministries, active NGO participation, and performance-based funding are seen as essential for expanding these mechanisms and achieving long-term sustainability outcomes.
Local Currency Guarantees
Local currency guarantees are increasingly being used to strengthen infrastructure financing and reduce exposure to foreign exchange risks. Providing project financing in local currency without the need for hedging, lowers costs and helps avoid currency mismatches that can burden borrowers.
In many emerging and frontier markets, guarantee structures are being deployed to directly absorb currency risk, supporting projects that might otherwise struggle to access affordable funding. These efforts also highlight the need to address misconceptions around sovereign risk and to expand the use of local-currency instruments as a means of promoting more stable and sustainable development finance.
Credit Ratings and Risk
Political and credit risk insurance plays a critical role in supporting financing for lower-rated sovereigns, though delayed participation by insurers can lead to higher costs or unrealistic terms. Early engagement by risk providers helps balance pricing and sustainability, enhancing the feasibility of transactions.
Local currency financing is increasingly recognized for its ability to reduce external vulnerability and can positively influence credit assessments when implemented at scale with lasting impact. Transparency and sufficient transaction size are key factors in unlocking potential benefits for sovereign ratings and improving market confidence.
Key Takeaways:
The main barriers are structural complexity, risk appetite, and coordination. To scale, the ecosystem must simplify execution, share risk more efficiently, and involve local actors earlier.
Debt-for-nature swaps and local currency financing are proven but not yet scaled; coordination among lenders, guarantors, and local institutions is needed to multiply their impact.
Risk-sharing between the public and private sectors is essential. Insurers, rating agencies, and guarantee facilities must be integrated early in the process to align incentives and pricing.
The ecosystem is ready: the technical, financial, and risk instruments exist; now it’s about replication, partnerships, and execution.