Debt service ratio
Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
The debt service ratio shows how heavy a country's external debt repayments are compared with what it earns from abroad. Debt service ratio = (principal repayment + interest payments) ÷ current receipts × 100 Current receipts are earnings from exports of goods and services, income and transfers. A high ratio means a large share of foreign earnings goes on repaying debt, which leaves the country open to a crisis.
Example
In 1990-91, just before India's BoP crisis, the ratio was about 35%. Roughly a third of India's foreign earnings went on servicing its debt. Today it is in single digits.
Don't confuse with
- External debt to GDP ratio: this compares the total stock of debt with the size of the economy. The debt service ratio measures the yearly repayment burden against foreign earnings.
Related concepts
- External debt
- Sovereign credit rating
- Sovereign default
- Sovereign debt restructuring
- Official Creditor Committee
- Comparability of treatment
- Debt-for-nature swap
- Blended finance