Many transactions combining development funding and commercial capital remain denominated in dollars or euros, while currency hedges can be costly or unavailable. Swedish-backed financing should therefore face a simple currency test before approval. Where the answers reveal a serious mismatch, the financing package should explain who will bear it, writes Gustavo Pessoa from Fundação Getulio Vargas in Brazil.
The opinions expressed in the article are those by the author.
For a solar project selling electricity in local currency, a dollar loan creates an exposure beyond the performance of its equipment. If the local currency weakens, the same repayment requires more local money. Even a project meeting its production targets may then struggle to cover its debt.
This should matter to Sweden as it uses public guarantees to attract private capital for development. Sida describes its guarantees as a way to share risk and mobilise investment against poverty. Their value depends partly on what happens after a loan is signed: whether the borrower can keep repaying without cutting services or passing an unaffordable bill to customers.
The OECD’s 2025 blended-finance guidance identifies a persistent weakness. Many transactions combining development funding and commercial capital remain denominated in dollars or euros, while currency hedges can be costly or unavailable. A credit guarantee does not automatically fix that mismatch. Its contractual protection against loan losses may leave the borrower exposed to currency depreciation.
Swedish-backed financing should therefore face a simple currency test before approval. In what currency will the project earn? In what currency must it repay? How far could those diverge before wages, maintenance or affordable access suffer? Where the answers reveal a serious mismatch, the financing package should explain who will bear it.
”No cheap money”
Local-currency lending is one answer, but it is no promise of cheap money. Domestic interest rates can be high, long maturities scarce and refinancing uncertain. A fixed rate may provide more predictability at a higher initial cost. Comparing that cost with the full cost of a dollar loan, including its hedge, is more useful than comparing headline interest rates alone.
There are workable tools. In results released in May 2026, The Currency Exchange Fund reported hedging $2.84 billion of currency risk during 2025 across 54 currencies. That does not settle every borrower’s problem, but it shows that exposure in less liquid markets can be managed with existing instruments.
Public support should make such protection easier to assess and obtain where it is needed. If a subsidy reduces a hedge’s price, the borrower should be told its duration and what happens when it expires. If a guarantee encourages a local bank to lend, the terms should preserve meaningful responsibility for that bank. Neither borrowers nor taxpayers benefit when a subsidy hides an exposure until it becomes a loss.
Nor should exchange-rate protection be purchased by shifting unlimited risk to customers. A water or electricity tariff linked mechanically to the dollar might protect a lender while destabilising household budgets. Any such arrangement needs an affordability assessment and a clearly financed safety net, rather than an assumption that essential-service users can absorb every shock.
The published results of a development-finance programme should include the currency of the loans reaching final borrowers, the share of mismatches protected and the cost of that protection. Projects earning foreign currency should be distinguished from those dependent on local receipts. Commercial details can remain confidential; the distribution of publicly supported risk should not be invisible.
For Sweden, that information would show whether public support has financed a durable service or left its operator exposed to a foreseeable shock. The investment is meant to deliver electricity for years. Its financing should support that work on terms the borrower can sustain.
Gustavo Pessoa
Professor at Fundação Getulio Vargas in Brazil. His work focuses on economics, finance, regulation and public policy.
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