Financing Development: External Flows of Financial Capital to Developing Countries and Their Cost

Financial capital refers to the money and liquid assets that companies, individuals and governments use to finance operations and activities, invest and generate future streams of revenue. While it can be sourced from both external and domestic sources, the focus of this report is on external flows of financial capital from non-residents into developing countries, which are highly variable in scale, insufficient and in many cases carry a high cost. This impacts the ability of developing countries to invest in the Sustainable Development Goals. The paper explores the difference sources of external financial flows and examines the scale of flows to developed and developing countries, to different developing regions and to emerging, frontier and other developing country groups - based on their levels of integration into the global capital market. These accumulated flows give rise to stocks of direct, portfolio and other investment liabilities that then need to be serviced through the payment of profits and royalties in the case of equity investments, and interest in the case of debt instruments. The report examines and compares trends in the average costs of servicing these accumulated stocks of external liabilities in terms of both their functional categories and their instruments. While the stocks of equity liabilities have increased since 2014, the costs of servicing them have increased at a slower rate. By contrast, the costs of servicing external debt liabilities have risen at a much faster rate than their underlying stocks.