Import cover
Also called: Import cover of reserves · Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
Import cover is the number of months of imports that a country's foreign exchange reserves can pay for. It is a simple test of whether reserves are adequate, meaning large enough for safety. Import cover = foreign exchange reserves ÷ average monthly imports The old rule of thumb said reserves should cover at least 3 months of imports. A higher cover gives a bigger cushion if export earnings or capital inflows dry up.
Example
In mid-1991, India's foreign currency assets fell to about US$1 bn. That was barely two weeks of imports, far below the 3-month rule, and it signalled a full BoP crisis.
Don't confuse with
- Reserves to short-term debt: this compares reserves with foreign debt falling due within a year. Under the Greenspan-Guidotti rule, it should be at least 100%. Import cover compares reserves with the import bill instead.
Related concepts
- Foreign exchange reserves
- Gold reserves
- Hot money
- Sudden stop
- Capital flight
- Currency swap arrangement