INTRODUCTION:

Emerging markets are home to some of the most vibrant and quickly expanding economies in the world. However, these countries also face several challenges, such as limited access to financing, restricted access to funding, lack/poor infrastructure, and high levels of poverty.  

One way to address the challenges faced by emerging markets listed above is the use of Local Currency Guarantees (LCGs). Local currency guarantees can be a valuable tool for addressing these challenges and unlocking economic prosperity in emerging countries. It can be seen as a form of risk mitigation that can help reduce the cost of borrowing for businesses and governments in emerging markets. This article explores the potential of local currency guarantees as a catalyst for unlocking economic prosperity in emerging countries.

What are Local Currency Guarantees?

Local currency guarantees are guarantees that protect lenders and investors providing debt in the event of a loan default caused by the borrower.  Local currency guarantees are a type of financial instrument that protects against exchange rate fluctuations. They are typically used to support infrastructure projects, as these projects are often financed in foreign currency but generate revenue in local currency. By providing a guarantee, local currency guarantees can help reduce the risk of exchange rate fluctuations and make infrastructure projects more attractive to investors.

LCGs can be provided by a variety of sources, including governments, development banks, and private sector institutions. They typically involve a guarantee from the guarantor to repay a loan in local currency if the borrower defaults.  LCGs have been used successfully in several emerging countries, including Nigeria. 

In Nigeria, LCGs have been used to support a variety of sectors, including infrastructure, agriculture, and manufacturing. They have also been used to support small and medium-sized enterprises (SMEs). One example of the use of LCGs in Nigeria is the InfraCredit program. InfraCredit is a private-sector credit enhancement institution that provides LCGs for infrastructure projects. The program has been successful in attracting private capital to infrastructure projects in Nigeria.

How can local currency guarantees be used to unlock economic prosperity in emerging countries?

Local currency guarantees can be used to unlock economic prosperity in emerging countries in several ways. They can help to:

• Increase access to financing for infrastructure projects: By reducing the risk of exchange rate fluctuations, local currency guarantees can make infrastructure projects more attractive to investors, leading to increased investment in infrastructure.

• Promote economic growth: Infrastructure investment is a key driver of economic growth. By increasing access to financing for infrastructure projects, local currency guarantees can help to promote economic growth in emerging countries.

• Create jobs: Infrastructure projects create jobs, both during construction and in operation. Local currency guarantees can help to create jobs in emerging countries by increasing investment in infrastructure.

• Reduce poverty: Infrastructure investment can help to reduce poverty by providing access to essential services such as transportation, electricity, and water. Local currency guarantees can help to reduce poverty in emerging countries by increasing investment in infrastructure.

• Sustainable development: Sustainable development requires investment in infrastructure that is environmentally and socially responsible. Local currency guarantees can help to promote sustainable development in emerging countries by supporting investment in green infrastructure.

• Reduced cost of borrowing: LCGs can help to reduce the cost of borrowing for businesses and governments in emerging markets. This is because lenders are willing to accept a lower interest rate in exchange for the guarantee from the guarantor.

• Reduced risk of exchange rate fluctuations: LCGs can help to protect lenders from the risk of exchange rate fluctuations. This is because the guarantor is responsible for repaying the loan in local currency, even if the currency depreciates.

There are also several challenges associated with using local currency guarantees, including:

• Cost of guarantees: LCGs can be expensive to provide. This is because the guarantor must be able to cover the potential losses if the borrower defaults.

• Limited availability: LCGs are not always available in all emerging markets. This is because there may not be enough demand for LCGs, or there may not be enough capacity to provide them.

• Risk of moral hazard: LCGs can create a risk of moral hazard, where borrowers may be more likely to default because they know that the guarantor will repay the loan.

The Function of Legal Practitioner in Local Currency Guarantee

A legal practitioner can play a crucial role in ensuring the effectiveness and security of LCG. They contribute through various stages, depending on the nature of the guarantee, the parties involved, and the applicable legal framework. from structuring the agreement to managing potential disputes.

However, here are some general areas where legal personnel can play a crucial role:

1. Drafting and reviewing guarantee agreements:

• Negotiate key terms: Legal personnel can assist in negotiating and drafting the local currency guarantee agreement, ensuring it clearly defines the rights and obligations of each party, including the scope of the guarantee, conditions for payment, and dispute resolution mechanisms.

• Compliance with legal requirements: They can ensure the agreement complies with all relevant laws and regulations governing local currency guarantees, including foreign exchange controls and banking regulations.

• Minimize risks: They can identify and mitigate potential legal risks associated with the guarantee, including issues related to currency fluctuations, default, and fraud.

2. Advising on legal and regulatory issues:

• Foreign currency regulations: Legal personnel can advise on the implications of foreign currency regulations on the guarantee, including any limitations on payments or repatriation of funds.

• Tax implications: They can advise on the tax implications of the guarantee for both the guarantor and the beneficiary, including withholding taxes and potential tax treaties.

• Compliance with international law: They can advise on compliance with relevant international law principles, such as the UNIDROIT Principles for International Commercial Contracts.

3. Conducting legal due diligence:

• Due diligence on the guarantor: Legal personnel can conduct due diligence on the guarantor to assess its financial strength, creditworthiness, and ability to meet its obligations under the guarantee.

• Due diligence on the underlying transaction: They can review the underlying transaction for which the guarantee is being provided to identify any legal risks or potential disputes.

4. Representation in case of disputes:

• Dispute resolution: In the event of a dispute regarding the interpretation or performance of the guarantee agreement, legal personnel can represent the guarantor or the beneficiary in negotiations or legal proceedings.

• Litigation and arbitration: They can handle any litigation or arbitration arising from the guarantee, including representing their client in court and defending their interests.

5. Ongoing monitoring and compliance:

• Monitor legal and regulatory changes: Legal personnel can monitor changes in legal and regulatory requirements that may affect the guarantee and advise on necessary adjustments.

• Ensure compliance with the agreement: They can help ensure that all parties comply with the terms of the guarantee agreement and address any potential issues or breaches.

In addition to the roles mentioned above, legal personnel may also be involved in other aspects of local currency guarantees, such as:

• Structuring the guarantee: Legal personnel can advise on the most appropriate structure for the guarantee, taking into account the specific needs and risks of the transaction.

• Obtaining regulatory approvals: They can assist in obtaining any necessary regulatory approvals for the guarantee, such as approvals from central banks or foreign exchange authorities.

• Liaising with government agencies: They can liaise with government agencies on behalf of the guarantor or the beneficiary regarding the guarantee.

By understanding the legal and regulatory framework surrounding local currency guarantees, legal personnel can play a vital role in ensuring the smooth operation and effectiveness of these arrangements.

Specific Contributions of Legal Personnel:

• Expertise in contract law: They ensure the LCG agreement is legally binding and enforceable.

• Knowledge of financial regulations: They understand the legal framework governing financial transactions, including currency exchange and guarantees.

• Experience in dispute resolution: They can effectively handle legal disputes arising from the LCG.

• Attention to detail and risk management: They identify potential risks and implement safeguards to protect the interests of their clients.

Overall, legal personnel play a critical role in ensuring the success and security of Local Currency Guarantees. Their expertise and experience contribute significantly to mitigating risks, resolving disputes, and protecting the interests of all parties involved.

Conclusion

Local currency guarantees can be a valuable tool for unlocking economic prosperity in emerging countries. They can help to address several challenges faced by these countries, including limited access to financing, infrastructure bottlenecks, and high levels of poverty. In the case of Nigeria, Local Currency Guarantees can be used effectively to support infrastructure projects and promote economic growth.