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Why you need import cover at household level
Christopher Nantagya
What you need to know:
- The International Monetary Fund (IMF) defines import cover as a measure of the number of months imports can be sustained, using its foreign exchange reserves, should all inflows (such as export revenue and external financing) cease.
We often hear economists appraising the economy on the basis of import cover or forex reserves. If by any chance you are half as dis-interested in economics as I was when taking my A-levels, then I know that’s your cue to check out into Facebook, Instagram, WhatsApp or Twitter.
I have come to appreciate that what Ms Nansubuga toiled to teach me in that lecture theatre many years ago, would later come back to be perhaps the topic I find most interesting in life. But when economists talk economics, it seems like some obscure rocket science-like subject that is so far from our very own day-to-day life.
The International Monetary Fund (IMF) defines import cover as a measure of the number of months imports can be sustained, using its foreign exchange reserves, should all inflows (such as export revenue and external financing) cease.
Put quite simply, import cover is the country’s back-up plan if all was to go belly-up – much like stress scenario readiness. In most cases, a country’s Central Bank will prioritise building this import cover to a given level either to meet a self-set target or to be enlisted into a certain club.
As an example, the East African Community (EAC) member states have agreed to maintain at least four and a half months-worth of import cover – very important for monetary integration and currency unification.
Bringing it home, import cover can be looked at as a safety net or reserve should all income and revenue to your household cease. At this point, I would urge you all to ask yourselves a question; how many months of financial independence would you enjoy if you lost your job today, lost your business or sales did not go as planned?.
The common mistake we tend to make when saving or investing is that we tend to rush to build up assets into riskier buckets that will not help us much in such stress scenarios.
Because this is a safety net, it should always be invested in near cash assets like money market unit trusts, fixed deposits and treasury bills – basically an option where principal is always protected, fees and taxes are minimal all the while giving a decent return on the investment.
Remember this is a safety net; we are not trying to chase Jeff Bezos on the Forbes list, so steer this pot clear of high-risk assets like equities, commodities and real estate.
We assume all investment cashflows have ceased – we are planning for a stress scenario so envision the very worst that could happen.
When coming up with this safety net, we simply add up all our monthly expenses like telephone and data bills, fuel, rent, meals, pay TV, school fees, transfer payments and perhaps most importantly debt service payments.
The choice for the number of months cover you need is up to you, but a few factors to consider are what alternative sources of income you have, how long it takes to move between jobs and flexibility of your expenses.
Experts do tend to recommend three months cover – personally I recommend anywhere between six months to one year worth of cover.
So just because you planned to spend on pay tv doesn’t mean you have to spend on it; allow for flexibility when that time comes. What matters is that you plan for that unlikely yet possible event efficiently and sufficiently.
Mr Christopher Segawa Nantagya is a Financial Markets and Investment Professional
[email protected]
