Which of the following best describes the term ‘import cover’, sometimes seen in the news?
[UPSC Civil Services Exam – 2016 Prelims]
(a) It is the ratio of value of imports to the Gross Domestic Product of a country
(b) It is the total value of imports of a country in a year
(c) It is the ratio between the value of exports and that of imports between two countries
(d) It is the number of months of imports that could be paid for by a country’s international reserves
Answer: (d)
Explanation:
- Import cover is a metric used to assess a country’s ability to finance its imports using its international reserves.
- It quantifies the number of months of imports that could be sustained by these reserves.
- The import cover serves as a significant indicator of a currency’s stability.
- It is generally considered crucial for a currency to maintain a minimum import cover of eight to ten months to ensure stability.
- By ensuring an adequate import cover, a country can mitigate the risk of a Balance of Payments (BoP) crisis. It allows for early preventive measures to be taken, thereby safeguarding the country’s economic stability.
