The world’s poorest countries are reeling from debt made worse by exchange rate fluctuations and worsening climate shocks, a new study has found, as officials considered ways to ease the burden at the Spring Meetings of the International Monetary Fund (IMF) and the World Bank this week.
On Friday, the International Institute for Environment and Development (IIED) issued new research showing that Least Developed Countries (LDCs) and Small Island Developing States (SIDS) have been required to take out loans for their growth and development in foreign currencies – usually US dollars – forcing them to spend billions of dollars every year repaying sovereign debt.
These poorer countries become vulnerable to currency volatility – and when extreme weather like powerful storms batters their fragile economies, their debt burden grows even bigger.
“With every climate-driven disaster, their requirement to borrow more money increases while their currency simultaneously devalues,” said Ritu Bharadwaj, IIED principal researcher and the paper’s lead author. Moreover, because the global economy is largely structured around the US dollar, “these countries are taking on all the risk associated with currency fluctuations,” she added.
Loss and damage fund to hand out $250 million in initial phase
IIED researchers examined how debt repayments and currency volatility affected 13 representative countries, and cross-referenced that data with climate modelling, showing a clear link between climate disasters and currency depreciation – which in turn leads to spiralling debt.
To solve the problem, they proposed that international financial institutions offer new loans in local currencies, while debtor nations should be allowed to swap existing debt for investments in climate, nature or social protection.
“What we’re suggesting is that creditors should take on some of that risk as part of reforms to make the global financial system fairer,” said IIED’s Bharadwaj.
At energy security talks, US pushes gas and derides renewables
The research – which focused on 13 countries across Africa, Asia and the Americas, using data from 1991 to 2022 – showed that over that 31-year period, the average value of SIDS currencies fell against the US dollar by around 265% and that of LDCs by 366%. As a result, the local currency cost of repaying their debt jumped.
Using the 2022 value of the US dollar as a baseline, the cumulative extra cost for SIDS over those three decades was $10.25 billion, the equivalent of 3% of their GDP per year. For LDCs, the cumulative value of extra repayments was $9.98 billion, equal to 6.6% of GDP.
These huge sums vastly outweigh the amounts SIDS and LDCs can spend on curbing their planet-heating emissions and adapting to climate change, and paying back debt diverts scarce resources from other day-to-day spending on healthcare and education, the study found.
Gaston Browne, prime minister of Antigua and Barbuda, said the analysis provides an “urgent and credible foundation for action”, adding that “the 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,” he said.
Xi commits China to full climate plan but emissions-cutting ambition still unclear
Ghana’s fossil fuel trap
Separately, another report from the Centre for Research on Multinational Corporations (SOMO) and ActionAid Ghana argued that fossil fuel companies have profited from World Bank support for multi-billion-dollar oil and gas projects in Ghana, while its people continue to suffer from power outages, unaffordable electricity and rising public debt.
In the report published on Thursday, the researchers said $2 billion in World Bank funding for oil and gas projects had led to surplus supplies and mainly benefited the private companies running the projects.
Oil and gas projects backed by big multinationals – including the Sankofa gas deal, Jubilee oil and gas project and the West African Gas Pipeline – have over-promised but under-performed, the report said. As a result, they have failed to solve Ghana’s energy and power crisis, causing the country to spend more on fuel imports or buying up costly unused gas.
Joseph Wilde-Ramsing, acting executive director of SOMO, said: “Ghanaians are paying high prices for electricity they can’t afford, while foreign oil and gas companies reap guaranteed profits.” He described the situation as one of “utter negligence, exploitation and a climate disaster rolled into one”.
“Ghana has been compelled to enter into energy agreements that are unaffordable and unsustainable,” said John Nkaw, country director of ActionAid Ghana. “These contracts seem to guarantee profits for oil giants while our government struggles to pay off debts.”
According to the World Bank, which provides guarantees for such projects in the host country to leverage capital investment, the Sankofa Gas Project – approved by the bank in 2015 – had the objective of increasing the availability of natural gas for “clean power generation”.
Multinational energy firms Eni and Vitol served as private sponsors alongside the Ghana National Petroleum Corporation, while the World Bank provided $700 million in guarantees to reduce financial and political risks.
Makhtar Diop, then World Bank Vice President for Africa, said at the time that the guarantee was the largest provided by the bank, and would allow the country to leverage up to $8 billion in foreign direct investment, thereby transforming electricity, enabling lower-carbon power generation, increasing electricity access and reducing oil imports.
The World Bank also provided guarantees to cover any risk eventualities for the West African Gas Pipeline, including $50 million from its International Development Association, $75 million from its Multilateral Investment Guarantee Agency, and $125 million from the Steadfast Insurance Company. Those political risk guarantees helped the project get to financial closure, with the bank saying the project would not have gone forward without them.
The World Bank was contacted for comment but had not responded by the time of publication.
Global finance system reform
Speaking to journalists this week at the IMF/World Bank Spring Meetings in Washington DC, Ceyla Pazarbasioglu, the IMF’s strategy chief, agreed there is an urgent need to address the high debt service burden facing many countries, adding that the situation is becoming more acute in the current global economic environment, Reuters reported.
Noting the growing challenges facing vulnerable low- and middle-income countries, Kristalina Georgieva, the IMF’s managing director, said the global lender must be more active in debt restructuring processes.
Commenting on the IIED’s research, Prime Minister Browne of Antigua and Barbuda said that, as SIDS face worsening climate shocks, deepening debt burdens, and volatile currency markets, the findings provide evidence to advance reforms that are “fair, feasible, and necessary”.
Browne called for change to the current global financial architecture, which he said places an unfair burden on the most vulnerable and creates structural barriers to investment in climate resilience, adaptation and long-term development. “As Co-Chair of the Debt Sustainability Support Service (DSSS), I am committed to taking this issue to the highest levels of international decision-making,” he added.
Under Ghana’s ongoing debt restructuring, SOMO and ActionAid are advocating for an independent process that assesses the historical and current levels of fossil fuel-related debt affecting Ghana’s finances, followed by the cancellation of that debt.
They called for greater transparency and fairness in global energy investments, adding that all energy contracts that shift financial risk onto countries should be reassessed.
“As the US calls for the World Bank to continue investing in fossil fuels, our latest report is a stark warning on what the World Bank’s fossil fuel investment can do to a country’s economy and energy sector,” SOMO’s Wilde-Ramsing said.
