What is one challenge in servicing foreign debt?

One significant challenge in servicing foreign debt lies in the proportion of domestic production that must cover interest payments. When a country borrows from foreign lenders, it is obliged to make regular interest payments, which can take a substantial share of the country’s output. This can create pressure on the domestic economy, as resources that could be allocated for investment in infrastructure, social programs, or other economic activities are instead directed toward servicing the debt.

If this proportion becomes too large, it can lead to potential economic instability, limit growth opportunities, and constrain the government's ability to respond to domestic needs. High levels of debt servicing can also divert funds from necessary public services, impacting the overall welfare of the population.

In contrast, while high inflation, low interest rates, and lack of foreign investment could pose challenges in different contexts, the specific burden of ensuring that a portion of domestic production consistently meets foreign debt obligations is a direct and prominent aspect of managing foreign debt.