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Financial system development
The interest rate hikes by the US Federal Reserve (Fed) and the European Central Bank (ECB) are not only having an impact on the respective currency areas, they are also impacting global markets. Developing countries and emerging economies in particular often find themselves in financial difficulties through no fault of their own.
The current edition of “Development in Brief” shows the effects of recent financial decisions on the situation of developing countries and emerging economies, and how these should be addressed.
An increasing interdependency of developing countries in the international financial market and rising involvement of private capital in development financing have been observed over the past few years. From a development policy perspective, these are generally welcome trends. However, increasing exchange rate risks and rising interest charges also result from this. Moreover, the lack of transparency and heterogeneity of debt is increasing.
The current issue of Development in Brief explains the changes in debt structure of low- and middle-income countries as well as the reasons for these developments. It also goes into detail about increasing capital market interdependency and its consequences.
Are developing countries becoming more susceptible to global financial crises?
Budget support is viewed as the most consistent development policy instrument for implementing the principles of the "Paris Declaration". However, it was unable to meet many expectations regarding increasing the speed or comprehensiveness of development steps and is also subjected to the allegation of (implicitly) promoting corruption and mismanagement. Many donors have thus more or less withdrawn from providing budget support. At the same time, policy-based financing ("reform financing") is gaining significance due to good experiences with policy loans in international development cooperation.
The current issue of Development in Brief summarises the differences between reform financing and budget support and, in the process, discusses the success factors for reform financing.
In recent years, the debate surrounding international development finance has tended to shift its focus from increasing ODA and foreign direct investments to increasing domestic resource mobilisation (DRM). Increasing locally available public and private resources not only frees up significant potential for meeting the enormous financing requirements of the SDGs. There is also hope that this will decrease dependency on development aid and international financial flows in the long term.
The current edition of Development in Brief provides an overview of the most important approaches to increasing mobilisation of local resources in developing countries.
Domestic Resource Mobilisation (DRM): an overview of the diverse types of potential
The relatively positive economic situation of the past few years has also improved access to the international finance markets for many developing countries and companies based there. However, the financing offered through those markets is mostly denominated in hard currencies like the US dollar or the euro, so when borrowers accept hard currency loans they have to take on exchange-rate risks as well. If their local currency unexpectedly depreciates in real terms due to global financial crises or speculative financial transactions, they may be forced to raise significantly more domestic purchasing power than expected to service their debts.In the worst-case scenario, this can lead to insolvency for important utility companies (e.g. energy, drinking water) or even entire states.
In this issue of Development in Brief we explain the options available to countries and companies to reduce these types of foreign exchange risk, or to avoid them completely through local currency financing.
Local currency financing: an essential component of development financing
Originally, the blockchain technology has become known among experts primarily as an elegant technical device to ensure counterfeit protection of the cryptocurrency Bitcoin. Since, the enormous transformative potential of this technology has become more and more evident for many further processes dealing with reliability and transparency.
The current edition of Development in Brief explains how blockchain technology works, what relevance it holds for developing countries, and how international development cooperation can help to promote useful applications in developing countries.
Blockchain technology: how it works and what potential it offers for development
According to UN estimates, an annual USD 2.5 trillion funding gab needs to be filled in order to finance the implementation of the Sustainable Development Goals (SDG). Besides domestic sources of finance including taxation and traditional ODA, the mobilisation of private funds to finance the SDGs is crucial. In this respect, “green bonds” seem to be an important instrument offering significant prospects.
The current issue of Development in Brief briefly presents this instrument and discusses if and to what extent it appears an appropriate means to close the funding gaps encountered by developing countries in financing sustainable development projects.
Market for Green Bonds – huge potential or just "nice to have"?
