External debt in developing countries occurs due to a mix of historical, structural, and government policy factors.

Structural causes:

• Low domestic savings: When a country cannot save enough money internally, it must borrow from abroad to invest.
• Adverse trade terms: When the prices for the goods a country sells fall, it earns less money, leading to a balance of payments deficit that requires borrowing.
• Population growth: Rapidly growing populations increase the need for new schools, hospitals, and roads, forcing governments to spend more.

Policy-related causes:

• Fiscal deficits: This happens when a government spends more money than it collects through taxes.
• Currency overvaluation: If a country’s currency is valued too highly, imports become very cheap whereas goods produced for export become too expensive for others to buy.
• High spending: Heavy spending on subsidies or social welfare programs without enough tax income leads to debt.

Historical factors:

• Colonial legacy: Many countries inherited broken institutions and infrastructure that were built to extract resources rather than to help the local economy grow.
• Cold War lending: In the past, countries were given loans for political reasons rather than for economic stability, often without proper oversight.
• Interest rates: High interest rates on loans priced in US dollars during the 1980s and 1990s made it very difficult for many countries to pay back what they owed.

External debt is cumulative, meaning that interest adds up over time. If a country’s local currency loses value (currency depreciation), it becomes even harder to pay back loans that are owed in foreign currencies.