Funding Development without Debt

Two of the Muslim world’s largest economies, Turkey and Indonesia have announced ambitious plans for infrastructure development. More than anything, the funding of these ambitions will be the main challenge. Faced with inadequate domestic savings and capital formation, the financing of development infrastructure becomes a huge challenge for developing countries. They often have little choice but borrowing externally to fund pressing development needs. Such debt financing however, causes a number of problems. First, they face exchange rate risk given the mismatch between the denomination of the debt and the home currency. The borrowing nation is also faced with foreign interest rate exposure. On top of this, debt increases the nation’s leverage and thereby raises macroeconom...