The debt to export ratio is used to calculate a country’s total amount of debt in comparison to its total amount of exports. It’s an important way for countries to measure their independent sustainability. The percentage can help countries determine their growth rate, but it can also be misleading if the ratio is considered without looking at a particular country’s extenuating circumstances.
Significance of the Ratio
If you want to know what a particular country’s debt load is, the debt to export ratio is the calculation you use. Because debt can have an adverse effect on a country’s ability to grow economically and eliminate poverty, the number can be useful to determine the debt burden and has a bearing on the country’s overall development. While it measures the cash being used for debt servicing, it does not measure current cash flow requirements.
Total debt service is the debt service payments on long-term debts and can include guaranteed and non-guaranteed public money, non-guaranteed private money, International Monetary Fund credit and short-term debt interest. Exports are considered the total value of goods and services that are sold to the rest of the world, including workers’ salaries.
Why the Ratio Can Be Misleading
In some ways, this ratio might not provide a clear picture of the country’s debt burden. First, if a country is paying less than the scheduled payment on its debt burden it can render the ratio meaningless. Other problems that can make the ratio less useful includes volatility of export earnings and the level of grant money the country receives. The higher the amount of grant money, the less the ratio becomes useful.
Doing the Math
More than 130 countries send detailed loan reports to the World Bank through its Debtor Reporting Systems on a regular basis. These reports outline the loans’ status, transactions and terms for long-term debt of public agencies, or long-term debt of private agencies guaranteed by public agencies. Short-term debt data comes from sources like creditors. The IMF also accepts data regarding exports of goods and services, though it also relies on IMF export estimates to figure the ratio.
In Charge of the Ratio
The World Bank is the agency in charge of taking the information and doing the math. The World Bank accomplishes this through its Indicators and Environmental Valuation Unit. The World Bank offers financial advice to developing countries, but it isn’t a bank in the traditional sense. The World Bank focuses its energy on helping financially challenged countries around the world. It does offer low-interest loans, interest-free credits and grants to these countries so they can develop infrastructure and eventually sustain their own growth without outside assistance.