In LDCs where the level of incomes and hence private savings is low it is foreign capital flows that provide much needed private investment. However, there are costs of taking of such debt. The financial cost of accumulating a large debt is called debt service. Microfinance Unfortunately Zambia cannot pay these in its own currency, the kwacha.
Foreign creditors require payment in their own currency or in a convertible hard currency.
Hence, both of these must be paid off by using foreign exchange. However, not all suffer to the same extent as Zambia and other LDCs. An external shock such as an increase in the price of oil or a hike in world interest rates increasing the scale of any commercial debt the country faces The country faces severe longer term balance of payments problems as the prices of primary commodities fall causing the terms of trade to worsen Capital flight causes local residents to move large sums of foreign exchange out of the country When these combine together the debt becomes self-reinforcing and the debt becomes a major barrier to economic development. In the case of Zambia during the 1980's and 1990's all of the above factors have had some impact on the debt situation in the country.