The capacity of the country to develop is greatly undermined by debt crisis because the country is always involved in the repayment of the principle loans of the interests. This is a significant outflow of capital to finance debts. Excessive debt, burdens the poor nations since they are forced to drain away all the resources meant for development in order to finance their debts. Underdevelopment is worse when the money borrowed is embezzled hence ending up in private pockets which leads to the whole country repaying what they never used. The economy of the country is also undermined since all the sectors of the economy including health sector, education sector, agricultural sector, tourism sector and other sectors are compromised for the country to repay back the debts.
2. Its leads to low capital stock
This is experienced due to regular payments of debts by the developing countries. Low level of investments, low outputs from the industries and farms, low savings are also experienced due to repayments of loans. A country fails to save any money for use in profitable projects; little or no capital is accumulated for development purposes. A country fails to attract F.D.Is i.e. foreign direct investments which could bring about development processes. These investors curtail their investments in these poor countries and transfer them to safer countries hence causing capital flights.
3. Debt leads to inflation.
This is the general rise in price of goods and services in a country. The money borrowed may exceed the supply of goods and services hence causing inflation. If a debt is not managed properly then it will affect the whole country and its production systems. These leads to loss in stability in real value of money and other monetary items. It discourages investments of savings and shortages of goods if the consumer begins hoarding out of concern that prices will increase in future.
4. Weak currencies.