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Review of Lending Foreign Exchange for Local Currency Expenditures on Projects

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I. Introduction

1. In 1974 the Bank introduced local cost financing (LCF) by lending foreign exchange for local currency expenditures on projects. The 1974 LCF policy framework was first reviewed in 1978, and subsequently in 1983.¹ The main objectives of the present review are to examine the need for changes in Bank policies and procedures towards LCF in the light of changing operational directions and priorities, and to propose appropriate changes.

2. Since the 1983 review of LCF, the Bank's operations have changed significantly, involving new borrowers; expansion of lending modalities; adoption of the strategic planning approach; and increased emphasis on cross-cutting concerns, namely poverty reduction, equity, gender issues, and the environment. In the last two decades, the Asian and Pacific Region has demonstrated great dynamism, and many of the Bank's developing member countries (DMCs) are carrying out major economic reforms. On the other hand, the Region continues to be the home for most of the world's poor and faces major environmental problems and serious infrastructure constraints. Considering the changed circumstances, a review of the Bank's existing LCF policy was undertaken to assess past experience and examine the scope for improvements to respond to the emerging situation. While the discussion in this Paper is directed mainly to the Bank's lending operations in the public sector, the analysis will also generally apply to Bank lending operations in the private sector.

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