CURRENCIES UNDER PRESSURE: HOW CURRENCY FLUCTUATIONS AND CLIMATE RISKS IMPACT DEBT SUSTAINABILITY IN SIDS AND LDCS

Small Island Developing States (SIDS) and least developed countries (LDCs) are facing growing debt burdens, as volatile exchange rates, amplified by climate shocks, inflate the cost of servicing external debt.

The reliance by SIDS and LDCs on US dollars for debt and trade is a critical vulnerability, with their fragile economies suffering massively from exchange rate volatility — fluctuations in currency value driven by global markets and local disruptions.  Meanwhile, climate disasters disproportionately impact SIDS and LDCs, with greater frequency and severity compared to developed countries, and this burden directly undermines their currency stability. The resulting currency depreciation places a severe financial burden on SIDS and LDCs, with losses accumulating over decades and diverting critical resources away from development priorities and social protection, reinforcing cycles of vulnerability.  This paper quantifies the economic impact and outlines practical solutions to mitigate debt distress and promote resilient, equitable growth. These solutions include debt restructuring, local currency financing and trade, and global financial reforms.