Raphael John-Lall

Roger Ho­sein, pro­fes­sor of Eco­nom­ics at the St Au­gus­tine cam­pus of The Uni­ver­si­ty of the West In­dies (UWI), has stat­ed that T&T’s Im­port Cov­er Ra­tio (ICR) re­mained sta­ble be­tween 2019 and 2025, large­ly be­cause of ex­ter­nal bor­row­ing.

The ICR al­so known as im­port cov­er­age in­di­cates how many months of im­ports a coun­try can fi­nance with its for­eign ex­change re­serves. It is a mea­sure of a coun­try’s abil­i­ty to meet its im­port oblig­a­tions and re­flects the sta­bil­i­ty of its ex­ter­nal trade. A high­er ICR gen­er­al­ly sug­gests greater eco­nom­ic sta­bil­i­ty.

In an in­ter­view with the Sun­day Busi­ness Guardian, Ho­sein ex­plained that the ICR, de­fined as the ra­tio of a coun­try’s for­eign re­serves to its an­nu­al im­port bill, is a key in­di­ca­tor of ex­ter­nal sta­bil­i­ty.

When re­serves fall be­low crit­i­cal thresh­olds such as three months of im­ports, a coun­try be­comes vul­ner­a­ble to sud­den stops, cur­ren­cy pres­sure, and forced pol­i­cy tight­en­ing. Im­prov­ing the ICR there­fore re­quires tar­get­ed strate­gies root­ed in trade per­for­mance, bal­ance of pay­ments ad­just­ment, and struc­tur­al com­pet­i­tive­ness.

“On the sur­face, this sug­gest­ed that ex­ter­nal buffers were hold­ing firm. How­ev­er, the un­der­ly­ing da­ta re­veal a dif­fer­ent sto­ry: this ap­par­ent sta­bil­i­ty was not sup­port­ed by stronger ex­port per­for­mance or cur­rent ac­count sur­plus­es, but rather by a con­tin­ued ex­pan­sion of ex­ter­nal bor­row­ing,” Ho­sein said.

Giv­ing his con­tri­bu­tion in the Mid-Year Bud­get Re­view de­bate on June 18, for­mer fi­nance min­is­ter and now op­po­si­tion MP, Colm Im­bert said in­ter­na­tion­al re­serve cov­er­age is ex­pect­ed to re­main ad­e­quate at 7.5 months of prospec­tive to­tal im­ports, but ar­gued that the new Gov­ern­ment could re­verse the sta­ble macro eco­nom­ic fun­da­men­tals the for­mer gov­ern­ment left be­hind.

Dur­ing that de­bate, the Fi­nance Min­is­ter Dave Nan­coo coun­tered by say­ing that the Gov­ern­ment met the econ­o­my in need of in­ten­sive care and vowed to re­vive the coun­try’s eco­nom­ic for­tunes.

Ho­sein added that gross re­serves de­clined on­ly mod­er­ate­ly—from US$6.9 bil­lion in 2019 to US$4.9 bil­lion in 2025 (lat­est da­ta from the Cen­tral Bank) but ex­ter­nal debt surged, ris­ing from US$4.2 bil­lion to US$5.76 bil­lion over the same pe­ri­od. As a re­sult, net re­serves (re­serves mi­nus ex­ter­nal debt) de­te­ri­o­rat­ed sharply, plung­ing from pos­i­tive US$2.7 bil­lion in 2019 to neg­a­tive US$864 mil­lion by 2025.

This trend, Ho­sein said, rep­re­sents a full re­ver­sal of ex­ter­nal sol­ven­cy, as the coun­try tran­si­tioned from a net for­eign as­set to a net li­a­bil­i­ty po­si­tion.

“This di­ver­gence high­lights a cru­cial is­sue: the ap­par­ent sta­bil­i­ty in the Im­port Cov­er Ra­tio dur­ing this pe­ri­od was large­ly main­tained through in­creased ex­ter­nal bor­row­ing. Rather than re­flect­ing stronger ex­port per­for­mance or cur­rent ac­count im­prove­ments, the head­line re­serve po­si­tion was sup­port­ed by debt in­flows. This pat­tern rais­es con­cerns from a bal­ance-of-pay­ments sus­tain­abil­i­ty per­spec­tive and is in­con­sis­tent with the prin­ci­ple ar­tic­u­lat­ed in Thirl­wall’s Law, which holds that, over the long run, a coun­try’s sus­tain­able growth is con­strained by its ca­pac­i­ty to earn for­eign ex­change through ex­ports rather than re­ly­ing on per­sis­tent ex­ter­nal bor­row­ing.”

Ho­sein said, “What may seem like sta­bil­i­ty in head­line in­di­ca­tors is, in many re­spects, a debt-sup­port­ed po­si­tion that con­strains macro­eco­nom­ic flex­i­bil­i­ty and in­creas­es vul­ner­a­bil­i­ty to ex­ter­nal shocks. If this trend con­tin­ues un­ad­dressed, it could un­der­mine sov­er­eign cred­it rat­ings, raise risk pre­mi­ums and ne­ces­si­tate abrupt and painful macro­eco­nom­ic ad­just­ments.”

Strate­gies

Ho­sein said there are sev­er­al ways to in­crease the im­port cov­er ra­tio, but ex­pand­ing the vol­ume and com­plex­i­ty of ex­ports re­mains the most po­tent and sus­tain­able strat­e­gy.

He added that re­serve ac­cu­mu­la­tion, at its core, is a func­tion of per­sis­tent cur­rent ac­count sur­plus­es or sta­ble cap­i­tal in­flows.

He said, “Ex­port growth, par­tic­u­lar­ly in high­er-val­ue-added goods and ser­vices, strength­ens the trade bal­ance and ac­cu­mu­lates for­eign ex­change re­serves with­out adding to ex­ter­nal debt. To re­al­ize this, trade pol­i­cy should pri­or­i­tize sec­tors where the coun­try demon­strates a Re­vealed Com­par­a­tive Ad­van­tage (RCA) and ac­tive­ly in­te­grate them in­to glob­al val­ue chains. RCA high­lights ar­eas of rel­a­tive ef­fi­cien­cy, mak­ing these sec­tors prime can­di­dates for scal­able, com­pet­i­tive ex­port ex­pan­sion.”

How­ev­er, he al­so ex­plained that vol­ume alone is in­suf­fi­cient. Coun­tries must climb the prod­uct com­plex­i­ty lad­der by mov­ing in­to sec­tors with high­er tech­no­log­i­cal in­ten­si­ty, in­put link­ages, and de­mand elas­tic­i­ty.

“This re­quires a de­lib­er­ate shift from low-skill, low-mar­gin ex­ports to goods and ser­vices em­bed­ded with in­no­va­tion, knowl­edge, and brand­ing, sec­tors ca­pa­ble of gen­er­at­ing su­pe­ri­or terms of trade. Pol­i­cy­mak­ers must fa­cil­i­tate this tran­si­tion through in­dus­tri­al up­grad­ing, work­force reskilling, and greater tech­nol­o­gy dif­fu­sion to raise do­mes­tic val­ue added. In­te­gra­tion in­to high­er tiers of glob­al val­ue chains can al­so catal­yse learn­ing-by-ex­port­ing ef­fects, re­in­forc­ing pro­duc­tiv­i­ty, dy­nam­ic com­par­a­tive ad­van­tage, and long-run ex­ter­nal com­pet­i­tive­ness.”

Ho­sein said the “prod­uct space frame­work” pro­vides a pow­er­ful di­ag­nos­tic tool for iden­ti­fy­ing ad­ja­cent ex­port op­por­tu­ni­ties, prod­ucts that are close­ly re­lat­ed to a coun­try’s ex­ist­ing pro­duc­tive ca­pa­bil­i­ties but of­fer high­er com­plex­i­ty and greater po­ten­tial for ex­port growth.

“By analysing the struc­ture of re­lat­ed­ness be­tween goods, this frame­work al­lows pol­i­cy­mak­ers to tar­get in­dus­tries that are both fea­si­ble to de­vel­op and strate­gi­cal­ly valu­able for di­ver­si­fi­ca­tion. Gov­ern­ments should, there­fore, align ex­port in­cen­tives, such as tax ex­emp­tions, sub­sidised cred­it, trade fa­cil­i­ta­tion mea­sures, and in­fra­struc­ture up­grades, with prod­ucts sit­u­at­ed in “dense” ar­eas of the prod­uct space. These ‘dense’ zones rep­re­sent clus­ters of eco­nom­i­cal­ly con­nect­ed goods that share in­puts, skills, and tech­nol­o­gy plat­forms. Tar­get­ing these zones al­lows a coun­try to deep­en spe­cial­i­sa­tion in sec­tors that of­fer spillovers and scale economies. It al­so helps build re­silience by re­duc­ing de­pen­dence on a nar­row ex­port base.”

He said ex­port elas­tic­i­ty al­so mat­ters in the sense that the coun­try needs to pri­ori­tise sec­tors with high in­come and price elas­tic­i­ty that will help to en­sure that ex­ter­nal de­mand re­mains buoy­ant even dur­ing glob­al slow­downs.

He added that prod­ucts and ser­vices with elas­tic de­mand re­spond more strong­ly to im­prove­ments in com­pet­i­tive­ness, en­abling faster ex­port growth when con­di­tions im­prove. This makes them valu­able in sus­tain­ing for­eign ex­change in­flows and smooth­ing cur­rent ac­count volatil­i­ty over the busi­ness cy­cle.

“In par­al­lel, ex­port di­ver­si­fi­ca­tion in­to ser­vices, par­tic­u­lar­ly tourism, lo­gis­tics, and dig­i­tal ser­vices, can sta­bi­lize ex­ter­nal earn­ings and re­duce ex­po­sure to com­mod­i­ty price swings. Tourism of­fers em­ploy­ment ab­sorp­tion and for­eign ex­change link­ages when leak­age is con­trolled. Lo­gis­tics ser­vices en­hance trade fa­cil­i­ta­tion and re­gion­al in­te­gra­tion, po­si­tion­ing the coun­try as a hub. dig­i­tal ser­vices, such as busi­ness process out­sourc­ing (BPO), fin­tech, and cre­ative in­dus­tries, are unique­ly po­si­tioned to scale with min­i­mal re­liance on heavy phys­i­cal in­fra­struc­ture.”

He said un­like man­u­fac­tur­ing, they do not re­quire in­dus­tri­al zones, ports, or en­er­gy-in­ten­sive in­puts. In­stead, they de­pend pri­mar­i­ly on broad­band con­nec­tiv­i­ty, a skilled labour force, and sup­port­ive reg­u­la­to­ry frame­works. This low cap­i­tal in­ten­si­ty low­ers en­try bar­ri­ers and al­lows for faster mar­ket en­try and ex­pan­sion. As a re­sult, dig­i­tal ex­ports of­fer a cost-ef­fi­cient path­way to for­eign ex­change gen­er­a­tion and struc­tur­al trans­for­ma­tion. These sec­tors al­so gen­er­ate net­work ex­ter­nal­i­ties, pro­mote skills up­grad­ing, and are less vul­ner­a­ble to the terms-of-trade shocks that typ­i­cal­ly af­flict re­source-de­pen­dent economies. By ex­pand­ing the trad­able ser­vices fron­tier, coun­tries can bol­ster their im­port cov­er ra­tio through steady, knowl­edge-dri­ven for­eign ex­change flows.

He added that Strate­gic Im­port Sub­sti­tu­tion in high for­eign ex­change drain­ing sec­tors can al­so be of im­mense help as we hur­tle to­wards prob­lems as­so­ci­at­ed with a de­te­ri­o­rat­ing stock of re­serves. Rather than blan­ket pro­tec­tion­ism, tar­get­ed im­port sub­sti­tu­tion in ar­eas with low im­port con­tent of ex­ports such as processed foods, light man­u­fac­tur­ing can help to re­duce for­eign ex­change leak­ages.

“Heavy ex­ter­nal debt ser­vice erodes re­serves by gen­er­at­ing sus­tained for­eign ex­change out­flows. A for­ward-look­ing strat­e­gy in­volves, where fea­si­ble, front-load­ing con­ces­sion­al bor­row­ing, ex­tend­ing ma­tu­ri­ties, and se­lec­tive­ly in­creas­ing lo­cal cur­ren­cy debt un­der favourable mar­ket con­di­tions to re­duce ex­ter­nal de­pen­den­cy. At the same time, deep­en­ing do­mes­tic cap­i­tal mar­kets en­ables fis­cal fi­nanc­ing with­out de­plet­ing re­serves, while di­ver­si­fy­ing risk across a broad­er in­vestor base.”