Balance of Payments (BOP) Balance of Payments (BOP) Statistics Statistics

By

SHAMSUL ARIFEENSENIOR JOINT DIRECTOR

STATISTICS & DWH DEPARTMENT

Definition of BOPDefinition of BOPas per IMF’s Manual on Balance of as per IMF’s Manual on Balance of

Payments 5Payments 5thth Edition(BPM5) Edition(BPM5)

“ Balance of Payments in a statistical statement that systematically summarizes for a specific time period, economic transactions of an economy with the rest of the world ”

It helps monitor all international monetary transactions for a specific time period.

In the increasingly interdependent world economy,aspects such as payments imbalances and inward and outward foreign investment play leading roles in economic and other policy decisions.

The BOP records transactions The BOP records transactions between Residents & Nonresidentsbetween Residents & Nonresidents

The BOP is concerned with transactions and thus deals with flows rather than with stocks

A transaction involves two parties or transactors. Sometimes, it is not clear if there are actually two parties. (Transactions involving branches and head offices, migrants transfers etc.)

A transaction is a economic flow that reflects the creation, exchange, transfer, extinction of economic value or changes in ownership of goods / financial assets.

Exceptions in BOP transactions Exceptions in BOP transactions

•Transactions involving External financial assets and two

resident parties &External financial liabilities and two

nonresident parties are included in the BOP.

Double Entry Accounting Double Entry Accounting SystemSystem(1)(1)The basic accounting convention for a BOP

statement is that every recorded transaction has two entries with exactly same values.

Each recorded transaction has as a Credit (+) and a Debit (-) entry.

In BOP Credit entry is used to denote an increase in liabilities or a reduction in assets And

Debit entry is used to denote an increase in assets or a decrease in liabilities

Sum of all transactions is Zero.

Double Entry Accounting Double Entry Accounting SystemSystem(2)(2)

In the compiling economy Credit entry is recorded for

Exports of goods and servicesFinancial items reflecting a reduction in

economy’s external assets or an increase in external liabilities

AndDebit entry is recorded for Imports of goods and services Financial items reflecting an increase in

assets or a reduction in liabilities

Residency and Center of Economic Residency and Center of Economic InterestInterest(1)(1)

•Residence is an important attribute in BOPbecause the identification of transactions between residents and nonresidents underpins the system

• Identical concepts of residence are used in BPM5 and the 1993 Systems of National Accounts (SNA)

Residency and Center of Economic Residency and Center of Economic InterestInterest(2)(2)

Concepts of residence:•Economic connection of a unit to an

economic territory▫Not based on nationality or legal criteria▫Not based on currency used

•Expressed as an economic unit’s Center of economic interest

Residency and Center of Economic Residency and Center of Economic InterestInterest(3)(3)

Three Questions:•What is the institutional unit?•What is the economic territory?•Which territory is the unit closely

connected with?

Residency and Center of Economic Residency and Center of Economic InterestInterest(4)(4)

The residents of an economy comprise the following

types of institutional units: 1. Households

Includes the individuals who make up a household

2. Enterprises Financial and non-financial corporations Unincorporated businesses

3. Non - profit institutions serving the households

4. Government

Residency and Center of Economic Residency and Center of Economic InterestInterest(5)(5)

The economic territory of a country is the relevant geographical area to which the

concept of residence is applied.•A territory administrated by a

Government within this, persons, goods, and capital circulate freely.

•Free trade zones•Usually a country, but not necessarily

▫Economic and monetary unions▫ International organizations like IMF and UN

Residency and Center of Economic Residency and Center of Economic InterestInterest(6)(6)

Center of economic interest

“Dwelling, place of production, or other premises, within the economic territory of the country on, or from, which the unit engages, or intends to engage, in economic activities and transactions on a significant scale, for an indefinite or long period of time”

Residency and Center of Economic Residency and Center of Economic InterestInterest(7)(7)

•Households and Individuals▫The BPM5 guidelines to be used for

determining residence:“ The presence or the intention to be present

for a period of one year or more” •Exceptions

▫Diplomatic representatives▫Member of the armed forces▫Students▫Medical patients▫Crew members

Residency and Center of Economic Residency and Center of Economic InterestInterest(8)(8)

•Enterprises▫An enterprise has a center of economic

interest and is a resident unit of a territory when the unit is engaged in a significant amount of production and plans to do so over an indefinite or long period of time.

▫One year guideline by BPM5

Residency and Center of Economic Residency and Center of Economic InterestInterest(9)(9)

Particular types of enterprises• Operator of mobile equipment

▫ The residency of airlines, railway, trucking and shipping will be based on the residence of the operating unit.

• An enterprise operating in more than one economy▫ Divide operations-identify “unincorporated branch”

as separate institutional unit ▫ Criteria used:

Separate account Subject to income tax Substantial physical unit Receive funds on its own account (not as an

agent)

Principles for Valuation, Time for Principles for Valuation, Time for recording and Unit of accountrecording and Unit of account

All transactions in BOP are based on Actual Market prices agreed by willing, independent parties.

Both in the BOP and (System of National Accounts) SNA, the principle of Accrual Accounting governs the time for recoding.

Data on BOP is normally expressed in Domestic Currency or in a stable Unit of account if domestic currency undergoes major changes.

Coverage of Balance of Coverage of Balance of PaymentsPayments

•A number of transactions recorded in BOP do not involve payments of money.

•The inclusion of transactions other than those involving money forms the principal difference between a BOP statement and Exchange record.

Categories of TransactionsCategories of Transactions(1)(1)

1. Exchanges Exchanges of goods and services for

financial item. Payments for, or receipt of income on,

the factors of production. Barter (exchange of goods and

services for other goods and services). Exchanges of financial items for other

financial items.

Categories of TransactionsCategories of Transactions(2)(2)

2. Transfers These transactions differ from

exchanges in a sense that one transactor provides an economic value to other transactor but does not receive an equivalent value in return.

The lack of economic value on one side must be balanced by an entry referred to as a “Transfer ” in BOP and National Accounts.

Categories of TransactionsCategories of Transactions(3)(3)

3.Other Imputed Transactions•Attribution of reinvested earning to

foreign direct investors: The earnings, whether distributed or

reinvested in the enterprise, are recorded as a part of direct investment income.

An offsetting entry, with the opposite sign, is made in the financial account under direct investment.

BOP-Standard PresentationBOP-Standard Presentation

I. Current Account

Goods Services Income Current transfers

II. Capital and Financial Account Capital Account Financial Account

Direct investment Portfolio investment Financial derivatives Other investment Reserve Assets

III. Errors and omissions

BOP Statement SBP Website

Classification of GoodsClassification of Goods

1. General merchandise2. Goods for processing3. Repairs on goods 4. Goods procured in ports by carriers5. Nonmonetary gold

Classification of ServicesClassification of Services

Services organized by production1. Transportation services2. Communication services3. Construction services4. Insurance services5. Financial services6. Computer and information services7. Royalties and license fees8. Other business services9. Personal, cultural and recreation services

Classification of ServicesClassification of Services

• Services organized by function

1. Travel services2. Government services n.i.e.

Classification of IncomeClassification of Income

• Compensation of Employees• Investment Income

1. Direct Investment Income On equity On debt

2. Portfolio Investment Income On equity On debt

3. Other Investment Income

Classification of Current Classification of Current TransfersTransfers

•General Government•Other Sectors

▫Workers’ remittances▫Other current transfers

Classification of Capital AccountClassification of Capital Account

•Capital Transfers▫General government

Debt forgiveness Other

▫Other Sectors Migrants’ transfers Debt forgiveness Other

•Acquisition / Disposal of non-produced non- financial assets

Classification in the Financial Classification in the Financial AccountAccount(1)(1)

Functional Subdivision: Direct Investment Portfolio Investment Financial derivatives Other Investment & Reserve Assets

Direction of Investment Outward Investment Inward Investment

Classification in the Financial Classification in the Financial AccountAccount(2)(2)

Type on Instrument:▫ Equity▫ Debt Instruments

Institutional Sector:▫ Monetary Sector▫ General Government▫ Banks▫ Other sectors

Maturity▫ Short-term▫ Long-term

Classification of Direct Classification of Direct InvestmentInvestment•Direct Investment Abroad:

▫Equity Capital▫Reinvested Earnings▫Other Capital

•Direct Investment in the Reporting Economy:▫Equity Capital▫Reinvested Earnings▫Other Capital

Classification of Portfolio InvestmentClassification of Portfolio Investment

•Assets ▫Equity Securities▫Debt Securities

Bonds and notes Money Market Instruments

•Liabilities▫Equity Securities▫Debt Securities

Bonds and notes Money Market Instruments

Classification of Financial Classification of Financial DerivativesDerivativesAssets

Monetary AuthoritiesGeneral GovernmentBanks Other Sectors

LiabilitiesMonetary AuthoritiesGeneral GovernmentBanks Other Sectors

Classification of Other Investment: Classification of Other Investment: Assets / LiabilitiesAssets / Liabilities

1. Trade Credits2. Loans3. Currency and Deposits4. Other Assets

Reserve AssetsReserve Assets

1. Monetary Gold2. Special Drawing Rights (SDRs)3. Reserve Position in the Fund4. Foreign Exchange

▫ Currency and Deposits▫ Securities

5. Other claims

Net errors and omissionsNet errors and omissions•They arise because unlike business

accounting, the two sides of the transactions are measured independently.

• It is a balancing item.• It reflects under / overestimation of

recorded transaction and / or the existence of unrecorded transactions.

•The size of the net errors and omissions is an indicator of the quality.If the size is large, BOP analysis is limited

Recent DevelopmentsRecent DevelopmentsFollowing release of sixth edition of the IMF’s Manual on Balance of Payments and International Investment Position (BPM6) in 2009 &

Submission of implementation plan survey by IMF’s member countries ,where some advanced economies are expected to implement BPM6 in 2012.Majority of European countries would however, convert their presentations to BPM6 by 2014.

Statistics and DWH of State Bank of Pakistan has planned to implement BPM6 in three phases starting from fiscal year 2011 and by 2013.

Thank You