Riding the Global Financial Cycle: How Capital Flows into LICs

IMF Working Papers, August 28, 2026

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As low-income countries (LICs) gain access to international capital markets, the scope for increased financing rises but so does the risk of shocks.
After the global financial crisis (GFC), the global financial cycle has been a significant driver of private capital flows to LICs.
A stronger US dollar (against advanced economy currencies) was associated with weaker net inflows to LICs.
External government borrowing in LICs had a statistically significant but relatively small counter-cyclical component, inversely related to global financial and economic cycles, complementing policy responses to shocks.

Global financial cycle: Identified as a significant driver of private capital flows to LICs in the post-GFC period.
Exchange rate influence: Stronger US dollar (against advanced economy currencies) correlated with weaker net private inflows.
External government borrowing: Exhibited a statistically significant but relatively small counter-cyclical response; borrowing was inversely related to global financial and economic cycles and served to complement policy responses to shocks.

Increased access to international capital markets expands financing opportunities for LICs but raises exposure to global financial cycle shocks.
Counter-cyclical external government borrowing can play a complementary role in policy responses to global financial and economic cycles, though its magnitude was found to be relatively small.