A fresh report shows that the international financial system is being unfair to low-income countries, which suffer from currency fluctuations and the heightened impact of climate change.
An April report by the International Institute for Environment and Development (IIED) revealed that significant changes in currency values are forcing low-income countries to pay billions more on servicing national debt.
Low-income countries are forced to resort to international loans in efforts to mitigate the effects of climate change or secure more or less adequate social protection. These loans rarely come in the form of their local fiat assets but rather leverage leading foreign currencies, usually US dollars. As the currencies of smaller and less economically developed countries depreciate against the USD, the local currency cost of repaying that debt surges.
The study estimates that, in 2022 alone, currency fluctuations led to an additional cost of $2.66 billion just for servicing government debt for the Least Developed Countries (LDC) and the Small Island Developing States (SIDS). It is easily explained since over the 31-year period between 1991 and 2022, the average value of SIDS currencies fell against the US dollar by 264.68%. For LDCs, the difference was much higher – 366.36%.
Using the U.S. dollar’s 2022 value as a reference, SIDS faced an extra $10.25 billion in debt costs over 31 years, representing about 3% of their GDP annually. Meanwhile, LDCs had to pay an extra $9.98 billion in total, equal to 6.6% of their GDP.
In 2022 alone, currency changes meant that, on average, each SIDS country paid an additional $682 million, while each LDC paid about $1.98 billion more in debt repayments. The research group took the 2022 price as a reference, since it’s the year when the most recent data on government debt and currency correlation is available. However, one must acknowledge that, over the last three years, there has been much volatility on global markets, and most countries faced unprecedented inflation levels, which might have left vulnerable states in an even worse predicament.
Another part of the issue is that the least developed countries are also the ones most prone to the negative effects of global warming and climate change. The impact of human-induced global warming is mostly felt in regions which contribute to CO2 production the least. At the same time, the biggest carbon dioxide producers globally are not that vulnerable to climate change.
The money spent on government debt servicing is putting a significant dent in low-income and island nations’ budgets. In fact, it far exceeds the amounts they can spend on climate action, healthcare, or education. Therefore, these extra debt payments are draining funds that could be used for vital public services.
Bearing this in mind, the IIED is urging global lenders, including multilateral development banks, private lenders, China, and Paris Club nations, to issue new loans for the world’s poorest countries in local currencies. They also suggest that past excess costs should be returned to these countries through debt swaps tied to climate, environmental, or social programs.
In addition, IIED calls on G20 leaders to use key global meetings in 2025, like the Financing for Development summit and IMF/World Bank sessions, to fix the international financial system so it better supports low-income countries.
The research also showed a clear link between the extra cost of the national debt and climate hazards mitigation. Researcher Ritu Bharadwaj explained that poorer countries are stuck in a debt trap worsened by climate change. As disasters strike, they’re forced to borrow more, while their currencies lose value, making repayments in foreign currencies even harder. She emphasised that shifting risk to lenders and allowing loans in local currency would offer more stability and free up money for critical needs.
Antigua and Barbuda’s Prime Minister, Gaston Browne, added that currency losses mean essential infrastructure and services go unfunded. He stressed that reform is urgent, and he’ll push for global action to change how vulnerable countries are treated by the financial system.
Earlier, a group of fragile countries affected by both climate change-induced hazards and military conflicts also addressed the international community leaders with a pressing request to align the needs of climate-vulnerable and conflict-affected countries with global climate financing plans. Both these cases reflect imperfections of the existing global financing patterns as related to developing and vulnerable nations.
