Currency fluctuations costing low-income countries billions in higher debt repayments
In 2022 alone, sovereign debt servicing estimated to cost an extra US$2.66 billion.
Local communities in Bangladesh, especially women, face growing challenges in accessing safe water due to the rise of sea levels (Photo: UNDP Climate, via Flickr, CC BY-NC 2.0)
The world’s poorest countries are spending billions of dollars more every year to repay sovereign debt because of currency fluctuations, according to new research from IIED.
The analysis examined how debt repayments and currency fluctuations affect countries that are either members of the Least Developed Countries (LDC) Group or the Small Island Developing States (SIDS) group. It cross-referenced that data with climate intensity modelling, showing a clear link between climate disasters and currency depreciation.
Low-income countries are often required to take out loans in leading foreign currencies – usually US dollars – to fund their growth and development.
The research focused on 10 representative countries using 31 years of data between 1991 and 2022 (the most recent available). It shows:
- Over the 31-year period, the average value of SIDS currencies fell against the US dollar by 264.68%. For LDCs, it was 366.36%. As a result, the local currency cost of repaying that debt has jumped.
- By using the 2022 value of the US dollar as a baseline, the cumulative extra cost for SIDS over the 31-year period was $10.25 billion. This is the equivalent of 3% of their GDP per year. For LDCs, the cumulative value of extra repayments was $9.98 billion. This is the equivalent of 6.6% of GDP.
- In 2022 alone, the average extra debt repayments per country due to currency fluctuations during the period was $682 million for SIDS and $1.98 billion for LDCs.
These huge sums vastly outweigh the amount of money SIDS and LDCs can spend on mitigating or adapting to climate change. It also diverts scarce resources from other day-to-day spending on healthcare and education.
IIED is calling on multilateral development banks, the private sector, China and the Paris Club members to make any new loans to LDCs and SIDS in their local currencies. Historic additional costs should also be returned to debtor nations in the form of debt swaps linked to specific investments in climate, nature or social protection.
G20 nations should use the once-in-a-decade Financing for Development summit in June/July, along with regular World Bank/International Monetary Fund meetings, to make good on promises to make the international financial system fairer for low-income countries.
Ritu Bharadwaj, an IIED principal researcher and the paper’s lead author, said: “The world’s poorest countries are drowning in debt, and climate change is making it worse. With every climate-driven disaster, their requirement to borrow more money increases while their currency simultaneously devalues.
“Because the global economy is largely structured around the US dollar, these countries are taking on all the risk associated with currency fluctuations. What we’re suggesting is that creditors should take on some of that risk as part of reforms to make to global financial system fairer.
“If low-income countries were allowed to take out loans in their own currency, it would give them with more financial certainty. It would also free up funds to invest in education, healthcare or adapting to climate change.”
Prime Minister of Antigua and Barbuda, Gaston Browne, said: “The analysis presented in this paper provides an urgent and credible foundation for action. From restructuring past debt to enabling lending in local currencies, we now have the evidence to advance reforms that are fair, feasible, and necessary.
“Small Island Developing States like ours are facing a perfect storm: worsening climate shocks, rising debt burdens and volatile currency markets we do not control. This paper makes clear that the hidden cost of repaying debt in foreign currencies, especially during times of crisis, is a silent drain on our economies.
“For every dollar lost to currency depreciation, there is a clinic not built, a road not repaired, a social protection programme left underfunded.
“As co-chair of the Global SIDS Debt Sustainability Support Service, I am committed to taking this issue to the highest levels of international decision-making. The current global financial architecture places an unfair burden on the most vulnerable. It creates structural barriers to investment in resilience, adaptation and long-term development. This must change.”
Notes to editors
- This analysis used as sample countries eight LDCs: Mozambique, Bangladesh, Ethiopia, Gambia, Lesotho, Mauritania, Nepal and Sierra Leone; and five SIDS: Jamaica, Mauritius, Haiti, Guyana and the Dominican Republic. These countries were selected due to the availability of consistent time series data for currency conversion rates, debt servicing, trade and social expenditure indicators, ensuring a robust assessment of exchange rate impacts across diverse economic profiles within LDCs and SIDS.
- Previous IIED research suggests debt swaps could free up $100bn to invest in climate and nature. Another paper showed that climate finance for the world’s least developed countries is vastly outweighed by their debt repayments.
- Read a recent paper setting out IIED’s latest contribution to this debate.
- Learn about the Global SIDS Debt Sustainability Support Service, created by IIED and co-chaired by the Maldives and Antigua and Barbuda. Currently, the draft outcome document of FFD4 explicitly recognises the relevance of this service and calls for its expansion.
For more information or to request an interview, contact Jon Sharman:
+44 7407 727 886, or [email protected]
