What is the scope for raising local currency financing from domestic sources for agriculture finance? What are the international facilities available for managing currency risk (e.g., cross-border local currency loans, currency swaps, political risk insurance)?
It is in principle very attractive for farmers, local value chain actors and banks to get access to hard currency funding and guarantees – interest rates and other terms such as tenor are much more attractive than what is offered in local currency. However, except if one is active in a sector that generates hard currency (such as cocoa or coffee), earnings are in local currency. A currency mismatch between the terms of financing and the revenues is risky for both lender and borrower. Apart from currency exchange risk, there is also inconvertibility risk – the risk that a local government will not permit local currency to be exchanged for hard currency, or will otherwise restrict the repayment of the loan in hard currency.
Unless if one can manage such local currency risk, international blending facilities are difficult to use for most agricultural value chains. But there are risk management tools. One can hedge the exchange rates with TCX, for tenors longer than two years and if the transaction is large enough. Afreximbank has currency risk management instruments for shorter tenors. Central banks could, by offering guarantees or discount windows, promote local currency lending into projects to achieve a better balance between hard and local currency components.
This session will discuss the tools available to manage currency risk, and how they can be used to boost blended finance for agriculture. Reducing the costs of hedging through improved country risk mitigation will also be discussed.
Moderated by Harald Hirschhofer, Senior Advisor, the Currency Exchange Fund (TCX).
Day 2: 08 November 2016 11:15 - 13:00
Hall 300Session organisers