Governments and businesses in emerging economies often borrow in foreign currencies such as the U.S. dollar to fund critical infrastructure or fuel growth. But there’s a fundamental mismatch: the revenue from those projects is earned in local currency. If the exchange rate remains stable, all is well. But when local currencies weaken — as they often do in times of economic stress — repaying that debt becomes far more expensive.
It’s a cycle that repeats across the developing world, contributing to financial instability, amplifying debt burdens, and making countries more vulnerable to global shocks.
Take Ghana, for example. A growing local business secures dollar-based funding to expand. But then the Ghanaian cedi loses 40% of its value. Suddenly, even though the business is thriving, its debt repayments become crushing — not because the business failed, but because the currency did.