balance of payments manual - imf

BALANCE OF

PAYMENTS

M ANUAL

I N T E R N AT I O N A L M O N E T A R Y F U N D

iv

Contents

Foreword ix

Preface xi

CONCEPTUAL FRAMEWORK

I. Introduction 3

Purposes of the Balance of Payments Manual 3Changes from the Fourth Edition 3Uses of Balance of Payments and International Investment Position Data 4Structure of the Manual 5

II. Conceptual Framework of the Balance of Payments and International Investment Position 6

Definitions 6Principles and Concepts 6Double-entry System 6Concepts of Economic Territory, Residence, and Center of Economic Interest 7Principles for Valuation and Time of Recording 7Concept and Types of Transactions 8Changes Other Than Transactions 9

III. Balance of Payments and National Accounts 10

Introduction 10Relationship Between the SNA and Principles Underlying the Balance of Payments 10Classification 11Integrated Economic Accounts 11

IV. Resident Units of an Economy 20

Concept and Definition of Residence 20Economic Territory of a Country 20Center of Economic Interest 20Resident Institutional Units 21Residence of Households and Individuals 21Residence of Enterprises 22Residence of Nonprofit Institutions 24General Government 24Regional Central Banks 25

V. Valuation of Transactions and of Stocks of Assets and Liabilities 26

Concept of Market Price 26Transactions and Market Price 26Valuing Transactions in the Absence of Market Price 26Market Price Equivalents 26Affiliated Enterprises 27Noncommercial Transactions 28Financial Items 28Valuation of Stocks of Assets and Liabilities 28

VI. Time of Recording 30

Principle of Timing 30Application to Goods 30Exceptions to the Change of Ownership Principle 31Applications to Other Transactions 31Other Timing Adjustments 32

VII. Unit of Account and Conversion 33

Unit of Account 33Conversion Principles and Practices 33Multiple Official Exchange Rates and Conversion 34Black or Parallel Market Rates 34

STRUCTURE AND CLASSIFICATION

VIII. Classification and Standard Components of the Balance of Payments 37

Structure and Classification 37Standard Components 37Net Errors and Omissions 38Major Classifications 38Detailed Classifications 38Balance of Payments: Standard Components Table 43Selected Supplementary Information Table 49

IX. Structure and Characteristics of the Current Account 51

Characteristics and Classification 51Gross Recording, Valuation, and Time of Recording 52

X. Goods 54

Coverage and Principles 54Definitions 54Change of Ownership 55Goods Classified Under Other Categories 57Special Types of Goods 57Time of Recording 58Valuation 58

CONTENTS

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XI. Transportation 61

Definition and Coverage 61Passenger Services 61Freight Services and Conventions for Recording 61Rentals of Transportation Equipment with Crew 62Supporting and Auxiliary Services 62

XII. Travel 64

Nature of Travel Services 64Definition 64Types of Travel 64Goods and Services Covered 65

XIII. Other Services 66

Coverage 66Definitions 66

XIV. Income 70

Coverage 70Definition and Classification 70Time of Recording of Investment Income 72Measurement and Recording of Direct Investment Earnings 72Stock Dividends, Bonus Shares, and Liquidating Dividends 73

XV. Current Transfers 74

Definition and Coverage 74Distinction Between Current and Capital Transfers 74Classification 75Valuation and Timing 76

XVI. Structure and Characteristics of the Capital and Financial Account 77

Coverage 77Capital Account 77Financial Account 78Liabilities Constituting Foreign Authorities’ Reserves 82Valuation and Timing 82

XVII. Capital Transfers and Acquisition or Disposal of Nonproduced, Nonfinancial Assets 83

Coverage 83Capital Transfers 83Classification 83Acquisition or Disposal of Nonproduced, Nonfinancial Assets 84

CONTENTS

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XVIII. Direct Investment 86

Concept and Characteristics 86Direct Investment Enterprises 86Direct Investors 87Direct Investment Capital 87Extent of Net Recording 88Valuation of Flows and Stocks 89Other Special Cases of Direct Investment Enterprises 89Selected Supplementary Information 89

XIX. Portfolio Investment 91

Coverage 91Classification and Definitions 91Selected Recording Issues 92Valuation 94

XX. Other Investment 95

Coverage 95Classification 95Definitions and Recording 95

XXI. Reserve Assets 97

Concept and Coverage 97Identification of Reserve Assets 97Exclusion of Valuation Changes and Other Adjustments 99Classification 99Valuation 100Interpretation of Changes in Reserve Assets 100

XXII. Supplementary Financial Account Information 101

Coverage 101Liabilities Constituting Foreign Authorities’ Reserves 101Exceptional Financing and the Balance of Payments 102Balance of Payments Accounting for Selected Exceptional Financing Transactions 102Foreign Sources of Financing 103

XXIII. International Investment Position 104

Concept and Coverage 104Classification 104Valuation of Components 105Relationship of the International Investment Position to External Debt 106Investment Income, Rates of Return, and the International Investment Position 106International Investment Position: Standard Components Table 108

CONTENTS

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REGIONAL ALLOCATION

XXIV. Regional Statements 115

Regional Allocation Principles 115Problems and Limitations 116Analytical Implications 117Selection of Regions 117

APPENDICES

I. Relationship of the Rest of the World Account to the Balance of Payments Accounts and the International Investment Position 121

II. A Note on Sectors 145

III. Balance of Payments Classification of International Services and the Central Product Classification 146

IV. Accounting for Exceptional Financing Transactions 150

V. Selected Issues in Balance of Payments Analysis 158

INDEX

CONTENTS

viii

Foreword

Measurement of the external positions of membercountries has been a central feature of InternationalMonetary Fund operations since inception. Suchmeasurement is conducted in the dual context of Fundresponsibility for surveillance of countries’ economicpolicies and provision of financial assistance in supportof adjustment measures to correct balance of paymentsdisequilibria. Consequently, the Fund has a compellinginterest in developing and promulgating appropriateinternational guidelines for the compilation of soundand timely balance of payments statistics. Suchguidelines, which have evolved to meet changingcircumstances, have been embodied in successiveeditions of the Balance of Payments Manual (theManual) since the first edition was published in 1948.Because of the important relationship between externaland domestic economic developments, timely, reliable,and comprehensive balance of payments statisticsbased on an appropriate and analytically orientedmethodology are an indispensable tool for economicanalysis and policy making. Indeed, with the growinginterdependence of the world’s economies, the needfor such statistics—which reflects in part the underlyingmovement towards greater liberalization and integrationof markets—has increased over time.

I am particularly pleased to introduce the fifth editionof the Manual, which addresses the many importantchanges and innovations that have occurred ininternational transactions since the fourth edition waspublished in 1977. The fifth edition of the Manual alsoaddresses, for the first time, the important area ofinternational investment position statistics. In addition,concepts in the Manual have been harmonized, asclosely as possible, with those of the revised System ofNational Accounts 1993 and with the Fund’smethodologies pertaining to money and banking andgovernment finance statistics.

The revised Manual has been prepared by the Fund’sStatistics Department in close consultation with balanceof payments experts in member countries andinternational and regional organizations (including theStatistical Office of the European Communities, theOrganisation for Economic Cooperation andDevelopment, the United Nations, and the WorldBank). The process underlying the revision of theManual demonstrates the spirit of internationalcollaboration and cooperation, and I would like tothank all of the national and international expertsinvolved for their invaluable assistance. In this regard, Iam particularly grateful to Mr. Pierre Esteva, chairmanof the Fund’s Working Party on the StatisticalDiscrepancy in World Current Account Balances, and toBaron Jean Godeaux, chairman of the Working Party onthe Measurement of International Capital Flows. Theirassessments of the effects of the unprecedentedchanges in the conduct of international transactionscontributed significantly to the revision of the structureand classification of the international accounts.

I would like to commend the Manual to compilersand users around the world and to urge membercountries to adopt the conceptual guidelines of the fifthedition as the basis for compiling balance of paymentsand international investment position statistics and forreporting this information to the Fund.

Michel CamdessusManaging Director

International Monetary Fund

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ix

Preface

The fifth edition of the Balance of Payments Manual(the Manual) continues the series of international standards that have been issued by the InternationalMonetary Fund (IMF) for providing guidance to membercountries in the compilation of balance of payments andrelated data on the international investment position.

Since the fourth edition of the Manual was publishedin 1977, important changes have occurred in the man-ner in which international transactions are conducted.These changes are, in particular, a result of the liberal-ization of financial markets, innovations in the creationand packaging of financial instruments, and newapproaches to the restructuring of external debt. Inaddition, there has been unprecedented growth in thevolume of international trade in services. All thesedevelopments have necessitated changes in the treat-ment and classification of such transactions within thestructure of the balance of payments accounts. Further-more, since publication of the fourth edition, experiencewith application of that edition has brought to light anumber of instances in which guidelines could usefullybe augmented and recommendations clarified. Anadditional impetus to the preparation of the fifth editionof the Manual was the work undertaken to revise thesystem of economic and financial statistics encompassedin the System of National Accounts 1993 (SNA). Therewas the need to achieve, to the maximum extentpossible, harmonization between the two systems andwith IMF statistical systems pertaining to money andbanking statistics and government finance statistics.

The fifth edition of the Manual provides internationalguidelines for the compilation of data for an articulatedset of international accounts encompassing the measure-ment of external transactions (balance of payments), onthe one hand, and the stock of external financial assetsand liabilities (the international investment position) onthe other. This edition of the Manual provides explicitlinks between the outstanding stock of external financialassets and liabilities and corresponding changes thatoccur, during specified periods, in these external finan-cial instruments. The changes reflect transactions,valuation changes, and other adjustments in the relevantfinancial instruments. The delineation of an articulatedset of international accounts represents a major shift in

orientation from the fourth to the fifth edition. The fifthedition also differs from its predecessor in other impor-tant respects. First, the current account of the balance ofpayments is redefined to exclude capital transfers,which are included in an expanded and renamed capitaland financial account. This change provides for agreater degree of harmonization and integration withthe SNA in terms of the underlying concepts and theidentification of major aggregates. Second, within thecurrent account, clear distinctions are made amonggoods, services, income, and current transfers. As areflection of the heightened analytical and policyinterest in data on international trade in services(particularly in the context of the General Agreement onTariffs and Trade negotiations on services) considerabledisaggregation is introduced in the classification ofinternational services transactions.

The classification of the financial account follows ahierarchical structure for functional categories, asset orliability distinctions, instrument specification, sectoriza-tion, and the distinction between long- and short-terminstruments. In addition, the classifications underlyingthe income components of the current and financialaccounts and the international investment position areclosely aligned to enhance analytic potential.

Despite the extensive revision of the Manual, IMFrecommendations for balance of payments compilationmaintain a high degree of continuity. Thus, compilerswho have been producing statistics that conformreasonably well to the standards established in previouseditions should not experience great difficulty in adapt-ing procedures for data collection or in reportingaccording to the recommendations of the fifth edition.The basic concepts and principles in the Manual remaingenerally valid and any necessary adjustments may bereadily effected within a largely unchanged theoreticalframework.

The fifth edition of the Manual was produced by theIMF Statistics Department—primarily through the workof a consultant, Mr. Jack Bame (formerly the associatedirector for international economics at the Bureau ofEconomic Analysis, U.S. Department of Commerce), andthrough close consultation with national compilers of

xi

PREFACE

balance of payments statistics and experts frominterested international and regional organizations. Thereports of the IMF working parties on the StatisticalDiscrepancy in World Current Account Balances and onthe Measurement of International Capital Flows alsocontributed to the development of the Manual. Inaddition, an advisory group of IMF staff providedassistance in articulating IMF operational and analyticneeds in the area of balance of payments statistics. Themembers of the group were Mr. Bruce Smith, senioradvisor in the Southeast Asia and Pacific Department;Mr. Peter Clark, assistant director in the ResearchDepartment; and Mr. Michael Kuhn, division chief in thePolicy Development and Review Department. Theproject was supervised by Mr. Mahinder S. Gill, assistantdirector for the Balance of Payments and External DebtDivision in the IMF Statistics Department. Most of theoriginal drafting was done by Mr. Bame. He also wasresponsible for subsequent redrafting undertaken toreflect comments received from national compilers andconcerned international and regional organizations andto incorporate conclusions that were reached at themeeting of balance of payments experts held at IMFheadquarters in March 1992. Through comments onearlier drafts or through drafting of selected chaptersand appendices, staff of the Balance of Payments andExternal Debt Division made specific contributions: Mr.Gill (Chapter 3 and Appendix 1), Mr. Jan Bové and Mrs.Florencia Frantischek (Appendix 4), and Mr. AbulSiddique (Appendix 3). Mr. Clark of the ResearchDepartment made a particularly valuable contribution bypreparing Appendix V, which addresses selected issuesin balance of payments analysis. Ms. Nancy Basham,Statistics Department, edited and coordinated printproduction and Ms. Suzanna Persaud, administrativestaff of the Balance of Payments and External DebtDivision, typed the various drafts and the final versionof the Manual.

The IMF benefitted immensely from the contributionsand comments made by experts who participated in theMarch 1992 meeting of balance of payments experts.Their deliberations culminated in a set of conclusionsthat, coupled with further consultation through corre-spondence, formed the basis for redrafting and finalizingthe fifth edition. The IMF staff wishes to acknowledge,with thanks, indebtedness to the following experts in

xii

national balance of payments offices and to represen-tatives from regional and international organizations whoparticipated in the meeting and contributed to thepreparation of the Manual.

Australia Ms. Barbara DunlopBrazil Ms. Maria Oliveira NabaoCanada Ms. Lucie LalibertéChile Mrs. Teresa Cornejo BlackChina Ms. Wang LingfenFrance Mr. Jacques Cuny

Dr. Marc AuboinGermany Dr. Rudolf SeilerHungary Mrs. P. HorvathIran Mrs. Mehrangiz TavassoliItaly Dr. Antonello BiagioliJapan Mr. Shinichi Yoshikuni

Mr. Takashi KoriKenya Mr. Pius P. KallaaLibya Mr. Ali Ramadan ShnebeshMexico Mr. Jorge CarrilesNetherlands, The Dr. Marius van NieuwkerkSaudi Arabia Mr. Mohammed Al-Hakami

Mr. Mohanna Al-MohannaSweden Mr. Gunnar BlombergUnited Kingdom Mr. John E. Kidgell

Mr. Bruce BuckinghamUnited States Dr. J. Steven LandefeldZaire Ms. Nkobafily Marie

Marthe LebugheEUROSTAT Mr. J. C. RomanOECD Mr. Erwin VeilUN Mr. Jan van TongerenWorld Bank Datuk Ramesh Chander

John B. McLenaghanDirector, Statistics DepartmentInternational Monetary Fund

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B A L A N C E O F P A Y M E N T S

C O N C E P T U A L F R A M E W O R K

Purposes of the Balance of Payments Manual

1. Like editions issued in 1948, 1950, 1961, and 1977,this 1993 edition of the Balance of Payments Manual(the Manual) serves as an international standard for theconceptual framework underlying balance of paymentsstatistics. The Manual also functions as a guide formember countries submitting regular balance ofpayments reports to the International Monetary Fund(the IMF or the Fund). In preparing this fifth edition,the IMF made every effort to ascertain the needs and toreflect the viewpoints of national compilers and varioususers of balance of payments statistics and internationalinvestment position data.

2. The primary purposes of the Manual are (i) to provide standards for concepts, definitions,classifications, and conventions and (ii) to facilitate thesystematic national and international collection, organi-zation, and comparability of balance of payments andinternational investment position statistics. A companionvolume, the Balance of Payments Compilation Guide(the Guide), provides practical guidance to nationalcompilers on the collection, presentation, andsystematization of external statistics. The Guide isparticularly useful for countries in which statisticalsystems are in the early stages of development or intransition.

Changes from the Fourth Edition

3. The scope and orientation of this Manual differfrom those of the fourth edition in a number ofrespects. One important change is the expansion of theconceptual framework to encompass balance ofpayments flows (transactions) and stocks of externalfinancial assets and liabilities (the internationalinvestment position). A clear distinction is madebetween (i) transactions and (ii) other changes in theaccounts—valuation, reclassification, and otheradjustments. Transactions or other changes may resultin changes in stocks, but only transactions are reflectedin balance of payments accounts. For example, in thefifth edition, the allocation or cancellation of specialdrawing rights (SDRs) and the monetization ordemonetization of gold (each with counterpart entry)

are not included among transactions in the balance ofpayments accounts but as adjustment items affectingthe international investment position.

4. Additionally, linkage of the international investmentposition and balance of payments accounts to the restof the world account in the System of NationalAccounts (SNA) is strengthened and harmonized to themaximum extent possible. Cases in point are identicaltreatments, in the two systems, of residence, valuation,timing, and reinvested earnings on direct investment.Also, to increase harmonization with the SNA, adistinction between current and capital transfers isintroduced in the Manual. As a result of the change,the former balance of payments capital account isredesignated as the capital and financial account.These and other changes reflect the efforts ofinternational experts and coordinating groups, includingnational accountants and balance of paymentscompilers. Their efforts also serve to integrate thebalance or payments more effectively with other IMFstatistical systems such as money and banking,government finance, and international banking.

5. There are also changes in the treatments ofinternational services, income, and certain financialtransactions. First, in contrast to the fourth edition, thefifth edition makes a clear distinction in the currentaccount between international transactions in servicesand transactions in income. In the fourth edition, laborand nonfinancial property income were groupedtogether with services other than shipment, travel, andtransportation, and investment income was coveredseparately. In the fifth edition, the two maincomponents of income flows between residents andnonresidents—compensation of employees andinvestment income—are separately identified as compo-nents of the current account. This treatmentharmonizes with the concept of income presented inthe System of National Accounts 1993 (SNA) andstrengthens the links between the balance of paymentsincome account and financial account and betweenbalance of payments flows and the stocks of assets andliabilities comprising the international investmentposition. Second, the component list of transactions inservices is expanded to reflect the growing importance

3

I. Introduction

of services and the contributions of various inter-national fora to the development of a codified list thatsatisfies the requirements and provides links betweenseparate statistical systems.

6. In the fifth edition, coverage of financial flows andstocks is significantly expanded and restructured. Themodification reflects, first, an orientation towardscompatibility with other IMF statistical systems and theSNA and, second, widespread alterations in the natureand composition of international financial transactionssince publication of the fourth edition in 1977. Thesechanges include the emergence of financial innovations,new instruments, and transactors that are partlyassociated with a trend towards increased asset securi-tization. Such developments tend, in many instances, toblur the distinction between long- and short-termmaturities and to make it more difficult to identifyresident/nonresident transactions, especially when suchtransactions involve a number of currencies and avariety of actual and contingent financial instruments orarrangements. Together with the easing or abolition ofexchange controls in many countries and the progres-sive deregulation of national financial markets, thesedevelopments create new challenges and problems forcompilers and data users. Further complications arise asa result of external debt problems experienced by anumber of countries (e.g., accounting for arrears, debtforgiveness or debt reduction schemes, and associatedinnovative financial arrangements). Partly in responseto such developments, classification of the financialaccount is re-oriented. To cover new financialinstruments, coverage of nonequity portfolio investmentis broadened to include long- and short-term securities,and supplementary classifications covering exceptionalfinancing transactions (with selected arrears-relatedentries for balance of payments accounts) and otheritems of analytical interest are introduced.

Uses of Balance of Payments and InternationalInvestment Position Data

7. Balance of payments and international investmentposition data are most important, of course, for nationaland international policy formulation. External aspects(such as payments imbalances and inward and outwardforeign investment) play a leading role in economicand other policy decisions in the increasingly inter-dependent world economy. Such data are also used foranalytical studies; that is, to determine the causes ofpayments imbalances and the necessity for implement-ing adjustment measures; relationships betweenmerchandise trade and direct investment; aspects of

international trade in services; international bankingflows and stocks; asset securitization and principalmarket developments; external debt problems, incomepayments, and growth; and links between exchangerates and current account and financial account flows.In addition, external data are utilized extensively, alongwith other variables, for balance of paymentsprojections and the relationship of these projections tochanges in countries’ stocks of external assets andliabilities. Finally, balance of payments andinternational investment position data constitute anindispensable link in the compilation of data forvarious components of the national accounts (e.g.,production accounts, income accounts, capital andfinancial accounts, and the related measurement ofnational wealth).

8. Previous brief references to changes in coverage,classification, and orientation do not represent an all-inclusive list of differences between the fourth andfifth editions of the Manual. Other modifications in thetreatment of specific components will be evident—andthoroughly covered—in appropriate chapters. In directinvestment, for example, changes are effected in criteriafor flows between affiliated banks (and related stockpositions) and in the distinction between long- andshort-term intercompany transactions. Aspects ofregional presentation, covered in an appendix in thefourth edition, comprise a chapter in this Manual toreflect growing international interest in this area. Toaddress the expanded conceptual framework thatencompasses stocks of external assets and liabilities,the fifth edition presents a new chapter on theinternational investment position and a full expositionof the classification, components, and links to balanceof payments accounts and balance sheet aspects of theSNA.

9. In contrast to a rather central position in the fourthedition, the discussion of selected issues in balance ofpayments analysis is presented in Appendix 5 of thefifth edition. Such issues and the nature and limitationsof various presentations can be better understood afterthe concepts, structure, and classification of standardcomponents have been covered. A thorough treatmentof analytic material requires more extensive coveragethan would be appropriate in this Manual. Therefore,only selected issues are highlighted to help identifycauses of payments imbalances, to determine financingrequirements, and to focus on appropriate adjustmentmeasures.

10. Although there are significant differences betweenthe fourth and fifth editions of the Manual, the latter


4

preserves the continuity of the data collection frameworkand IMF reports. Every effort has been made todelineate principles and concepts clearly; to relate theseappropriately to practical considerations and limitations;and to establish conventions that may be applied, whendata sources allow, within a consistent framework.Because the development of statistical systems varies,standard components and classification schemespresented in the Manual may be excessively detailed formany IMF member countries and inadequately detailedfor others. The framework provides flexibility in this

respect. The former group may provide limited data onselected components—and subsequently add to these, ifpossible—and the latter group may be encouraged toprovide supplementary data.

Structure of the Manual

11. Part one of the Manual covers the conceptualframework of international accounts. Part two dealswith the structure and classification of accounts, andpart three is concerned with regional allocation.

CHAPTER I

5

Definitions

12. Part one of this Manual deals with the conceptualframework of balance of payments accounts and theinternational investment position. Part one covers theframework’s relationship to national accounts; toconcepts of residence, valuation, and time of recording;and to the unit of account and conversion.

13. The balance of payments is a statistical statementthat systematically summarizes, for a specific timeperiod, the economic transactions of an economy withthe rest of the world. Transactions, for the most partbetween residents and nonresidents,1 consist of thoseinvolving goods, services, and income; those involvingfinancial claims on, and liabilities to, the rest of theworld; and those (such as gifts) classified as transfers,which involve offsetting entries to balance—in anaccounting sense—one-sided transactions. (Seeparagraph 28.)2 A transaction itself is defined as aneconomic flow that reflects the creation, transformation,exchange, transfer, or extinction of economic value andinvolves changes in ownership of goods and/orfinancial assets, the provision of services, or theprovision of labor and capital.

14. Closely related to the flow-oriented balance ofpayments framework is the stock-oriented internationalinvestment position. Compiled at a specified date suchas year end, this investment position is a statisticalstatement of (i) the value and composition of the stockof an economy’s financial assets, or the economy’sclaims on the rest of the world, and (ii) the value andcomposition of the stock of an economy’s liabilities tothe rest of the world. In some instances, it may be ofanalytic interest to compute the difference between thetwo sides of the balance sheet. The calculation would

provide a measure of the net position, and the measurewould be equivalent to that portion of an economy’snet worth attributable to, or derived from, itsrelationship with the rest of the world. A change instocks during any defined period can be attributable totransactions (flows); to valuation changes reflectingchanges in exchange rates, prices, etc.; or to otheradjustments (e.g., uncompensated seizures). Bycontrast, balance of payments accounts reflect onlytransactions.

Principles and Concepts

15. The remainder of this chapter deals with theconceptual framework of international accounts; that is,the set of underlying principles and conventions thatensure the systematized and coherent recording ofinternational transactions and stocks of foreign assetsand liabilities. Relevant aspects of these principles,together with practical considerations and limitations,are thoroughly discussed in subsequent chapters.

Double-entry System

16. The basic convention applied in constructing abalance of payments statement is that every recordedtransaction is represented by two entries with equalvalues. One of these entries is designated a credit witha positive arithmetic sign; the other is designated adebit with a negative sign. In principle, the sum of allcredit entries is identical to the sum of all debit entries,and the net balance of all entries in the statement iszero.

17. In practice, however, the accounts frequently donot balance. Data for balance of payments estimatesoften are derived independently from different sources;as a result, there may be a summary net credit or netdebit (i.e., net errors and omissions in the accounts). A separate entry, equal to that amount with the signreversed, is then made to balance the accounts.Because inaccurate or missing estimates may beoffsetting, the size of the net residual cannot be takenas an indicator of the relative accuracy of the balanceof payments statement. Nonetheless, a large, persistent

6

II.Conceptual Framework of the Balance of Payments andInternational Investment Position

1The exceptions to the resident/nonresident basis of the balance of paymentsare the exchange of transferable foreign financial assets between residentsectors and, to a lesser extent, the exchange of transferable foreign financialliabilities between nonresidents. (See paragraph 318.)

2The definitions and classifications of international accounts presented in thisManual are intended to facilitate reporting of data on international transactionsto the Fund. These definitions and classifications do not purport to give effectto, or interpret, various provisions (which pertain to the legal characterization ofofficial action or inaction in relation to such transactions) of the Articles ofAgreement of the International Monetary Fund.

residual that is not reversed should cause concern.Such a residual impedes analysis or interpretation ofestimates and diminishes the credibility of both. A largenet residual may also have implications for interpreta-tion of the investment position statement (See thediscussion in Chapter 23.)

18. Most entries in the balance of payments refer totransactions in which economic values are provided orreceived in exchange for other economic values. Thesevalues consist of real resources (goods, services, andincome) and financial items. Therefore, the offsettingcredit and debit entries called for by the recordingsystem are often the result of equal amounts havingbeen entered for the two items exchanged. When itemsare given away rather than exchanged, or when arecording is one-sided for other reasons, special typesof entries—referred to as transfers—are made as therequired offsets. (The various kinds of entries that maybe made in the balance of payments are discussed inparagraphs 26 through 31.)

19. Under the conventions of the system, a compilingeconomy records credit entries (i) for real resourcesdenoting exports and (ii) for financial items reflectingreductions in an economy’s foreign assets or increasesin an economy’s foreign liabilities. Conversely, acompiling economy records debit entries (i) for realresources denoting imports and (ii) for financial itemsreflecting increases in assets or decreases in liabilities.In other words, for assets—real or financial—a positive figure (credit) represents a decrease inholdings, and a negative figure (debit) represents anincrease. In contrast, for liabilities, a positive figureshows an increase, and a negative figure shows adecrease. Transfers are shown as credits when theentries to which the transfers provide the offsets aredebits and as debits when those entries are credits.

20. The content or coverage of a balance of paymentsstatement depends somewhat on whether transactionsare treated on a gross or on a net basis. The Manualcontains recommendations on which transactionsshould be recorded gross or net. The recommendationsare appropriately reflected in the list of standardcomponents and in suggested supplementarypresentations.

Concepts of Economic Territory, Residence,and Center of Economic Interest

21. Identical concepts of economic territory, residence,and center of economic interest are used in thisManual and in the SNA. Economic territory may not

be identical with boundaries recognized for politicalpurposes. A country’s economic territory consists of ageographic territory administered by a government;within this geographic territory, persons, goods, andcapital circulate freely. For maritime countries,geographic territory includes any islands subject to the same fiscal and monetary authorities as themainland.

22. An institutional unit has a center of economicinterest and is a resident unit of a country when, fromsome location (dwelling, place of production, or otherpremises) within the economic territory of the country,the unit engages and intends to continue engaging(indefinitely or for a finite period) in economicactivities and transactions on a significant scale. (Oneyear or more may be used as a guideline but not as aninflexible rule.)

Principles for Valuation and Time of Recording

23. A uniform basis of valuation for the internationalaccounts (both real resources and financial claims andliabilities) is necessary for compiling, on a consistentbasis, any aggregate of individual transactions and an asset/liability position consistent with suchtransactions. In this Manual, the basis of transactionvaluations is generally actual market prices agreedupon by transactors. (This practice is consistent withthat of the SNA.) Conceptually, all stocks of assets and liabilities are valued at market prices prevailing atthe time to which the international investment positionrelates. A full exposition of valuation principles;recommended practices; limitations; and the valuationof transfers, financial items, and stocks of assets andliabilities appears in Chapter 5. (The expositionincludes cases in which conditions may not allow forthe existence or assumption of market prices.)

24. In the Manual and the SNA, the principle of accrualaccounting governs the time of recording for transac-tions. Therefore, transactions are recorded wheneconomic value is created, transformed, exchanged,transferred, or extinguished. Claims and liabilities arisewhen there is a change in ownership. The change maybe legal or physical (economic). In practice, when achange in ownership is not obvious, the change may beproxied by the time that parties to a transaction recordit in their books or accounts. (The recommended timingand conventions for various balance of paymentsentries, together with exceptions to and departures fromthe change of ownership principle, are covered inChapter 6.)

CHAPTER II

7

Concept and Types of Transactions

25. Broadly speaking, changes in economicrelationships registered by the balance of paymentsstem primarily from dealings between two parties.These parties are, with one exception (see footnote 1),a resident and a nonresident, and all dealings of thiskind are covered in the balance of payments.Recommendations for specific entries are embodied inthe list of standard components (see Chapter 8) and arespelled out in detail from Chapter 9 onward.

26. Despite the connotation, the balance of paymentsis not concerned with payments, as that term isgenerally understood, but with transactions. A numberof international transactions that are of interest in abalance of payments context may not involve thepayment of money, and some are not paid for in anysense. The inclusion of these transactions, in additionto those matched by actual payments, constitutes aprincipal difference between a balance of paymentsstatement and a record of foreign payments.

Exchanges

27. The most numerous and important transactionsfound in the balance of payments may be characterizedas exchanges. A transactor (economic entity) providesan economic value to another transactor and receivesin return an equal value. The economic valuesprovided by one economy to another may becategorized broadly as real resources (goods, services,income) and financial items. The parties that engage inthe exchange are residents of different economies,except in the case of an exchange of foreign financialitems between resident sectors. The provision of afinancial item may involve not only a change in theownership of an existing claim or liability but also thecreation of a new claim or liability or the cancellationof existing ones. Moreover, the terms of a contractpertaining to a financial item (e.g., contractual maturity)may be altered by agreement between the parties. Sucha case is equivalent to fulfillment of the originalcontract and replacement by a contract with differentterms. All exchanges of these kinds are covered in thebalance of payments.

Transfers

28. Transactions involving transfers differ fromexchanges in that one transactor provides an economicvalue to another transactor but does not receive a quidpro quo on which, according to the conventions andrules adopted for the system, economic value is placed.

This absence of value on one side is represented by anentry referred to as a transfer. Such transfers (economicvalue provided and received without a quid pro quo)are shown in the balance of payments. Currenttransfers are included in the current account (seeChapter 15) and capital transfers appear in the capitalaccount. (See Chapter 17.)

Migration

29. Because an economy is defined in terms of theeconomic entities associated with its territory, the scopeof an economy is likely to be affected by changes inentities associated with the economy.

30. Migration occurs when the residence of anindividual changes from one economy to anotherbecause the person moves his or her abode. Certainmovable, tangible assets owned by the migrant are, ineffect, imported into the new economy. The migrant’simmovable assets and certain movable, tangible assetslocated in the old economy become claims of the neweconomy on the old economy. The migrant’s claims on,or liabilities to, residents of an economy other than thenew economy become foreign claims or liabilities ofthe new economy. The migrant’s claims on, or liabilitiesto, residents of the new economy cease to be claimson, or liabilities to, the rest of the world for anyeconomy. The net sum of all these shifts is equal to thenet worth of the migrant, and his or her net worth mustalso be recorded as an offset if the other shifts arerecorded. These entries are made in the balance ofpayments where the offset is conventionally includedwith transfers.

Other imputed transactions

31. In some instances, transactions may be imputedand entries may be made in balance of paymentsaccounts when no actual flows occur. Attribution ofreinvested earnings to foreign direct investors is anexample. The earnings of a foreign subsidiary orbranch include earnings attributable to a directinvestor. The earnings, whether distributed orreinvested in the enterprise, are proportionate to thedirect investor’s equity share in the enterprise.Reinvested earnings are recorded as part of directinvestment income. An offsetting entry with oppositesign is made in the financial account under directinvestment-reinvested earnings to reflect the directinvestor’s increased investment in the foreignsubsidiary or branch. (Reinvested earnings arediscussed in chapters 14 and 18.)


8

Changes Other Than Transactions

Reclassification of claims and liabilities

32. The classification of financial items presented inthis Manual is designed to reveal the motivation ofcreditor or debtor. Financial items are subject toreclassification in accordance with changes inmotivation. A case in point is the distinction betweendirect investment and other types of investment. Forexample, several independent holders of portfolioinvestment (in the form of corporate equities issued bya single enterprise located abroad) may form anassociated group to have a lasting, effective voice inthe management of the enterprise. Their holdings willthen meet the criteria for direct investment, and thechange in the status of the investment could berecorded as a reclassification. Such a reclassificationwould be reflected, at the end of the period duringwhich it occurred, in the international investment

position but not in the balance of payments. Similarly,claims on nonresidents can come under, or be releasedfrom, the control of resident monetary authorities. Insuch cases, there are reclassifications between reserveassets and assets other than reserves.

Valuation changes

33. The values of real resources and financial items areconstantly subject to changes stemming from either orboth of two causes. (i) The price at which transactionsin a certain type of item customarily take place mayundergo alteration in terms of the currency in whichthat price is quoted. (ii) The exchange rate for thecurrency in which the price is quoted may change inrelation to the unit of account that is being used.Valuation changes are not included in the balance ofpayments but are included in the internationalinvestment position.

CHAPTER II

9

10

III. Balance of Payments and National Accounts

Introduction

34. Conceptually, balance of payments accounts andrelated data on the international investment positionare closely linked to a broader system of nationalaccounts that provides a comprehensive and systematicframework for the collection and presentation of theeconomic statistics of an economy. The internationalstandard for this framework is the System of NationalAccounts (SNA), which encompasses transactions,other flows, stocks, and other changes affecting thelevel of assets and liabilities from one accountingperiod to another. Linkage of the balance of payments and the SNA is reinforced by the fact that, in almost all countries, balance of payments andinternational investment position data are compiledfirst and subsequently incorporated into nationalaccounts.

35. The SNA is a closed system in that both ends ofevery transaction are recorded; that is, each transactionis shown as a use for one part of the system and as aresource for another part. Stocks of assets affected bytransactions are covered as of the beginnings and endsof appropriate periods. Stocks of assets also areaffected by valuation and other volume changes (suchas uncompensated seizures or destruction of assets)that occur during the period and cause additionaldifferences in stock value.

36. In the SNA, transactors and holders of stocks arethe resident economic entities of a particular economy.For the SNA to be closed, there must be a segment tocapture flows that involve uses or resources fornonresident entities. That segment is known as the restof the world account. The segment for resident entitiesor sectors consists of accounts for production, incomegeneration, primary and secondary distribution ofincome, redistribution of income, consumption, andaccumulation. Since the system is closed, the rest of theworld account is constructed from the perspective ofthe rest of the world rather than that of the compilingeconomy. Consequently, entries in the balance ofpayments and the international investment position arereversed in the presentation of rest of the worldaccounts.

37. In this chapter, the balance of payments and theinternational investment position are described inrelation to the SNA and links between those inter-national accounts and relevant segments of the SNA are discussed.

Relationship Between the SNA and PrinciplesUnderlying the Balance of Payments

38. As the balance of payments and the internationalinvestment position are integral parts of the SNA, thereis virtually complete concordance—between the Manualand the SNA—on such issues as the delineation ofresident units (producers or consumers), valuation oftransactions and the stock of external assets andliabilities, time of recording transactions and stocks,conversion procedures, coverage of internationaltransactions in real resources (goods, services andincome), and transfers (current and capital). There isconcordance, as well, on external financial assets andliabilities and coverage of the international investmentposition.

Resident units

39. The SNA and the Manual identify residentproducers and consumers in identical fashion. Bothinvoke the concepts of economic territory and thecenter of economic interest to identify resident units.(These concepts are elaborated in Chapter 4.)

Valuation

40. In the Manual and the SNA, market price is theprimary concept for valuation of transaction accountsand balance sheet accounts. (The market price conceptis defined and elaborated in Chapter 5.)

Time of recording

41. Balance of payments and national accounts areconstructed, in principle, on an accrual basis. The twosystems employ essentially identical applications of theaccrual basis in specific categories of transactions.(Chapter 6 provides a full discussion on application of

the accrual basis underlying balance of paymentsaccounts.)

Conversion procedures

42. Both systems employ consistent procedures forconverting transactions denominated in a variety ofcurrencies or units of account into the unit of account(usually the domestic currency) adopted for compilingthe balance of payments statement or the nationalaccounts. (See Chapter 7.) There also is concordancebetween the two systems on conversion proceduresused in constructing balance sheet accounts.

Classification

43. It would be convenient, for some purposes, if theclassification of transactions in the balance of paymentsand the rest of the world account of the SNA wereidentical in all respects. Differences are justifiable,however, because the two statements have differentuses. Whereas the classification scheme of the rest ofthe world account maintains the basic, fundamentaldistinction between production flows, income flows,and accumulation flows, that subclassification is oflesser importance in the context of balance ofpayments analysis. Congruence of underlying principlesmakes the balance of payments consistent with the SNAframework and permits the balance of payments to bedescribed in the context of the SNA. This overallcongruence is more important than exact, detailedconcordance between the balance of payments andSNA accounts pertaining to relationships of residentunits with the rest of the world.

44. Before examining the relationship between the SNArest of the world account and the balance of paymentsaccounts and international investment position, readersmay find it useful to consider how the broad elementsof the latter two statements relate to integratedeconomic accounts for the economy as a whole, aswell as to institutional sectors of the economy.

Integrated Economic Accounts

45. Integrated economic accounts (see pages 14–19)in the form of T-accounts provide an overview ofstructural elements of the SNA by depicting variousfacets of economic phenomena (e.g., production,income, consumption, accumulation, and wealth) inthree types of accounts: current accounts, accumulationaccounts, and balance sheets. Details for the totaleconomy and various institutional sectors are presented

separately in these accounts. Resources, stocks ofliabilities, and net worth (and changes thereof) areshown on the right side of the accounts; uses andstocks of assets (and changes thereof) are shown onthe left side in the tabular presentation. However, inthe account for goods and services, the sources ofsupply (resources) from the economy’s output andimports are shown on the left side, and the distributionof that supply (uses such as exports, intermediateconsumption, and final consumption by the economy)is shown on the right side. For each category oftransactions, the sum of the entries on the right side ofthe accounts is equal to the sum of the entries on theleft side. Because the SNA is closed, external flows areportrayed or measured from the perspective of the restof the world to achieve this equality. Thus, for example,payments of compensation to employees (uses) byvarious institutional sectors may exceed receipts(resources) for the household sector because somepayments are made to nonresidents (resources for therest of the world). The inclusion of payments tononresidents on the resources side (for the rest of theworld sector) ensures that both sides of the account areequal.

46. SNA current (transactions) accounts—the first set ofintegrated economic accounts—portray (i) output,intermediate consumption, and value added for eachsector and the total economy, as well as the disposition of domestic production and imports ofgoods and services; (ii) distributive, from the viewpoint of producers, transactions that are directlylinked to the process of production or, alternatively, the composition of value added; (iii) primary incomedistribution showing how gross value added isdistributed to factors of labor, capital, and governmentand, when appropriate, reflects flows to and from therest of the world; (iv) secondary income distribution;(v) income redistribution covering, in principle, current taxes on income, wealth, and other currenttransfers and allowing for the derivation of disposableincome and adjusted disposable income; and (vi) useof income. Saving is a balancing item for alltransactions accounts and provides a link toaccumulation accounts.

47. Accumulation accounts of the SNA show changesin assets and liabilities and net worth (the difference,for any sector or for the total economy, between assetsand liabilities) and follow a presentation similar tobalance sheets. A first group of accounts coverstransactions that would correspond to all changes inassets, liabilities, and net worth if saving and voluntary

CHAPTER III

11

transfers of wealth were the only sources of change innet worth. A second group of accounts relates tochanges—in assets, liabilities, and net worth—that aredue to other factors. The first group of accumulationaccounts contains the capital account and the financialaccount. These two accounts are distinguished to showa balancing item (i.e., net lending/net borrowing)useful for economic analysis. The second group coverschanges—in assets, liabilities, and net worth—that area result of other factors affecting the values andvolume of assets and liabilities. Examples of suchchanges are discoveries or depletion of subsoilresources, natural catastrophes, uncompensatedseizures of assets, etc., and price and exchange ratechanges that affect only the values of assets andliabilities.

48. Flows reflected in the balance of payments affect,in important ways, the total economy’s activitiesassociated with production, generation and distributionof income, consumption, and accumulation activities.For instance, credit and debit entries for goods andservices in balance of payments accounts are equivalentto flows of exports and imports of goods and services.These flows are reflected in the economy’s account forgoods and services and consequently affect themeasurement of gross domestic product (GDP) and itscomposition in terms of final demand components(e.g., final consumption, gross capital formation, etc.).When measured from the final demand side, GDP isequivalent to the sum of entries in the uses column ofthe goods and services account less imports (the firstentry on the resources side of the account) in theintegrated accounts. Flows of exports and imports ofgoods and services are defined, in terms of coverage,in virtually identical fashion in the SNA and theManual.

49. In viewing—for both institutional sectors and thetotal economy—the generation of income, theallocation of primary income, the secondary distributionof income, and the redistribution of income in kind,readers should note that, apart from income flowsgenerated domestically and included in the measure ofgross value added or GDP, there are income flows to orfrom the rest of the world. These flows (in the form ofcompensation of employees; property income; taxes onproduction and imports; current taxes on income,wealth, etc.; and other current transfers) constituteadditional sources of income. These additional sourcesof income are included in the measurement of sectoraland national disposable income and, consequently, insectoral and national saving—the balancing item

between disposable income and final consumption. Interms of the balance of payments, compensation ofemployees and property income flows comprise theincome category, while taxes and other current transfers are identical with the coverage of currenttransfers.

50. Accumulation activity of the total economy anddomestic institutional sectors is portrayed, in the SNA, in the capital and financial accounts. The capitalaccount shows (i) sources of financing accumulation(saving and net capital transfers) on the changes inliabilities side; (ii) the composition of investment (grossor net) which takes into account the consumption offixed capital (capital formation) on the changes in assets side; and (iii) acquisitions less disposals ofnonproduced, nonfinancial assets. Changes in net worth that result from saving and net capital transfersrepresent the sum of sources of financing accumulation.The balancing item between sources of financing andthe sum of net capital formation and net purchases ofnonproduced, nonfinancial assets constitutes netlending/net borrowing for each sector and the nation as a whole. Net capital transfers (capital transfersreceivable less capital transfers payable) for each sector contain both intersectoral flows and transactionswith the rest of the world. Within the total economy,however, intersectoral flows cancel each other so thatthe net flow constitutes transactions relating only to the rest of the world. In the balance of payments, netlending/net borrowing for the total economycorresponds to the sum of the current account balance and the balance on capital account transactions within the capital and financial account.The measure of net lending/net borrowing for the total economy also represents net financial investmentvis-à-vis the rest of the world. In the integratedaccounts, net lending/net borrowing for the totaleconomy is equivalent to amounts shown in columnsfor the rest of the world. However, because the rest of the world columns are viewed from the perspectiveof nonresidents and balance of payments accounts are viewed from that of the compiling economy,changes in assets of the rest of the world representchanges in liabilities of the compiling economy, andvice versa.

51. According to the guidelines for residence (seeChapter 4), transactions in land can only take placebetween resident entities. When a nonresident entity(other than a foreign government or internationalorganization acquiring land for use as an extraterritorialenclave) acquires land in the domestic economy, the


12

acquisition is considered a financial investment(included in net incurrence of liabilities) in a notionalresident enterprise.

52. The financial account of the SNA shows the netacquisition of financial assets and the net incurrence ofliabilities. Transactions in financial assets and liabilitiesfor each institutional sector and the total economyencompass those among domestic sectors and thoserelated to the rest of the world. Consolidated domesticflows cancel each other so that transactions for theeconomy as a whole are (i) accounted for bytransactions vis-à-vis the rest of the world and (ii) equal to flows shown in columns for the rest of the world. In the balance of payments, transactions(from the viewpoint of the compiling economy) in thefinancial account of the capital and financialaccount correspond to entries in columns for thefinancial account of the rest of the world, but changesin assets of the rest of the world represent changes inliabilities for the compiling economy and vice versa.

53. The linkage between key aggregates of accounts of the total economy and balance of payments flowscan, by the use of symbols, be summarizedalgebraically within a savings/investment framework.

C = private consumption expenditureG = government consumption expenditure

I = gross domestic investmentS = gross saving

X = exports of goods and servicesM = imports of goods and services

NY = net income from abroadGDP = gross domestic product

GNDY = gross national disposable incomeCAB = current account balance in the balance of

payments

NCT = net current transfersNKT = net capital transfers

NPNNA = net purchases of nonproduced, nonfinancialassets

NFI = net foreign investment or net lending/netborrowing vis-à-vis the rest of the world

Balance of payments flows are italicized in thefollowing equations.

GDP = C + G + I + X–M(X–M = balance on goods and services in the balance of payments)

CAB = X – M + NY+NCTGNDY = C + G + I + CAB

GNDY – C – G = SS = I + CAB

S – I = CABS – I + NKT – NPNNA = CAB + NKT–NPNNA = NFI(NKT – NPNNA = balance on the capital account of the balance ofpayments)

54. Balance sheet accounts for the total economy anddomestic institutional sectors depict the level andcomposition of the stock of assets and liabilities at thebeginnings and ends of appropriate reference periods.

55. The difference between the sum of assets and thesum of liabilities equals the net worth of the economyand the sectors. In the integrated accounts, financialassets and liabilities recorded in columns for the totaleconomy are an aggregation of the financial assets andliabilities of individual sectors; balance sheet accounts of a nation as a whole are not fully consolidated. Ifaccounts were fully consolidated, the financial assetsand liabilities of domestic sectors would cancel eachother, and the economy’s financial assets and liabilitieswould refer to the stock of external assets and liabilities(the international investment position). From thatperspective, the national wealth or net worth of aneconomy consists of its stock of nonfinancial assets plusthe net international investment position (stock ofexternal assets minus stock of external liabilities). TheIIP also may be derived from the integrated accountscolumn for assets and liabilities of the rest of the world.As the IIP viewpoint is that of the compiling economy,the assets of the rest of the world represent liabilities ofthe compiling economy and vice versa.

56. Appendix 1 contains a discussion of the relation-ship of (i) various SNA accounts pertaining to the restof the world to (ii) balance of payments accounts andthe IIP. Because there is concordance between theunderlying principles of the two systems, the focus ofAppendix 1 is on classification issues and ways ofconstructing bridges to derive relevant nationalaccounts flows and stocks from balance of paymentsaccounts and the IIP.

CHAPTER III

13

14

INTEGRATED ECONOMIC ACCOUNTS — CURRENT ACCOUNTS

USESS.15

Nonprofit S.13 S.12 S.11Goods and S.2 S.1 institutions S.14 General Financial Nonfinacial

services Rest of Total serving House- govern- copor- corpor-Accounts Total (resources) world economy households holds ment ations ations

I.

PRODUCTION/EXTERNALACCOUNT OF GOODS AND SERVICES

II.1.1

GENERATIONOF INCOME ACCOUNT

II.1.2.

ALLOCATION OF PRIMARY INCOME ACCOUNT

II.2

SECONDARYDISTRIBUTIONOF INCOMEACCOUNT

II.3

REDISTRIBUTION OF INCOME IN KIND ACCOUNT

II.4

USE OF INCOME ACCOUNT

S.15S.11 S.12 S.13 Nonprofit Goods

Nonfinan- Financial General S.14 institutions S.1 S.2 andcial corpor- corpor- govern- House- serving Total Rest of services

Code Transactions and Balancing Items ations ations ment holds households economy the world (uses) Total Accounts

P.7 Imports of goods and services I.P.6 Exports of goods and servicesP.1 Output PRODUCTION/P.2 Intermediate consumption EXTERNALD.21-D.31 Taxes less subsidies on ACCOUNT OF

products GOODS ANDSERVICES

B.1g/B.1*g Value added, gross/Gross domestic product

K.1 Consumption of fixed capitalB.1n VALUE ADDED, NET/NET

DOMESTIC PRODUCTB.11 EXTERNAL BALANCE OF

GOODS AND SERVICES

D.1 Compensation of employees II.1.1D.2-D.3 Taxes less subsidies on

production and imports GENERATION D.21-D.31 Taxes less subsidies on OF INCOME

products ACCOUNTD.29-D.39 Other taxes less subsidies on

productionB.2g Operating surplus, grossB.3g Mixed income, grossB.2n OPERATING SURPLUS, NETB.3n MIXED INCOME, NET

D.4 Property income II.1.2.

B.5g Balance of primary incomes, ALLOCATION gross/National income, gross OF PRIMARY

B.5n BALANCE OF PRIMARY INCOMES INCOMENET/NATIONAL INCOME, NET ACCOUNT

D.5 Current taxes on income, II.2wealth, etc.

D.61 Social contributions SECONDARYD.62 Social benefits other than DISTRIBUTION

social transfers in kind OF INCOMED.7 Other current transfers ACCOUNT

B.6g Disposable income, grossB.6n DISPOSABLE INCOME, NET

D.63 Social transfers in kind II.3

B.7g Adjusted disposable income, REDISTRIBUTION gross OF INCOME IN

B.7n ADJUSTED DISPOSABLE KIND ACCOUNTINCOME, NET

B.6g Disposable income, gross II.4B.6n DISPOSABLE INCOME, NETP.4 Actual final consumption USE OF INCOMEP.3 Final consumption expenditure ACCOUNTD.8 Adjustment for the change in net

equity of households inpension funds

B.8g Saving, grossB.8n SAVING, NETB.12 CURRENT EXTERNAL BALANCE

15

INTEGRATED ECONOMIC ACCOUNTS — CURRENT ACCOUNTS

RESOURCES

16

INTEGRATED ECONOMIC ACCOUNTS — ACCUMULATION ACCOUNTS

CHANGES IN ASSETSS.15



III.1

CAPITAL ACCOUNT

III.2

FINANCIAL ACCOUNT

III.3.1.

OTHER CHARGES IN VOLUME OF ASSETS ACCOUNT

III.3.2

REVALUATION ACCOUNT




B.8 SAVING, NET III.1B.12 CURRENT EXTERNAL BALANCEP.51 Gross fixed capital formation CAPITALK.1 Consumption of fixed capital (–) ACCOUNTP.52 Changes in inventoriesP.53 Acquisitions less disposals

of valuablesK.2 Acquisitions less disposals of

nonproduced, nonfinancial assetsD.9 Capital transfers, receivableD.9 Capital transfers, payable (-)B.10.1 CHANGES IN NET WORTH DUE TO

SAVING AND CAPITAL TRANSFERS

B.9 NET LENDING (+)/NETBORROWING (–)

F Net acquisition of financial assets III.2F Net incurrence of liabilitiesF.1 Monetary gold and SDRs FINANCIALF.2 Currency and deposits ACCOUNTF.3 Securities other than sharesF.4 LoansF.5 Shares and other equityF.6 Insurance technical reservesF.7 Other accounts receivable/payable

K.3 through Other volume changes, total III.3.1.K.10 andK.12 OTHERK.3 Economic appearance CHANGES IN

of nonproduced assets VOLUMEK.4 Economic appearance OF ASSETS

of produced assets ACCOUNTK.5 Natural growth of non-cultivated

biological resourcesK.6 Economic disappearance of

nonproduced assetsK.7 Catastrophic lossesK.8 Uncompensated seizuresK.9 Other volume changes in

nonfinancial assets n.e.c.K.10 Other volume changes in financial

assets and liabilities n.e.c.K.12 Changes in classifications and

structure

Of whichAN Nonfinancial assetsAn 1 Produced assetsAN 2 Nonproduced assetsAF Financial assets/liabilities

B.10.2 CHANGES IN NET WORTH DUETO OTHER CHANGES IN VOLUME OF ASSETS

K.11 Nominal holding gains/losses III.3.2AN Nonfinancial assetsAN.1 Produced assets REVALUATIONAN.2 Nonproduced assets ACCOUNTAF Financial assets/liabilities

B.10.3 CHANGES IN NET WORTH DUETO NOMINAL HOLDINGGAINS (+)/LOSSES (–)

17

INTEGRATED ECONOMIC ACCOUNTS — ACCUMULATION ACCOUNTS

CHANGES IN LIABILITIES AND NET WORTH

18

INTEGRATED ECONOMIC ACCOUNTS — BALANCE SHEETS

ASSETSS.15



IV.1

OPENINGBALANCESHEET

IV.2

CHANGES INBALANCESHEET

IV.3

CLOSINGBALANCESHEET




AN Nonfinancial assets IV.1AN.1 Produced assetsAN.2 Nonproduced assets OPENINGAF Fnancial assets/liabilities BALANCE

SHEETB.90 NET WORTH

Total changes in assets IV.2

AN Nonfinancial assets CHANGES INAN.1 Produced assets BALANCEAN.2 Nonproduced assets SHEETAF Financial assets/liabilities

B.10 CHANGES IN NET WORTH, TOTALB.10.1 SAVING AND CAPITAL TRANSFERSB.10.2 OTHER CHANGES IN VOLUME

OF ASSETSB.10.3 NOMINAL HOLDING GAINS (+)/

LOSSES (–)

AN.1 Nonfinancial assets IV.3AN.2 Produced assetsAF Nonproduced assets CLOSING

Financial assets/liabilities BALANCESHEET

B.90 NET WORTH

19

INTEGRATED ECONOMIC ACCOUNTS — BALANCE SHEETS

LIABILITIES

Concept and Definition of Residence

57. Residence is a particularly important attribute of aninstitutional unit in the balance of payments becausethe identification of transactions between residents andnonresidents underpins the system. Residence is alsoimportant in the SNA because the residency status ofproducers determines the limits of domestic productionand affects the measurement of GDP and manyimportant flows.

58. The concept of residence used in this Manual isidentical to that used in the SNA. The concept is notbased on nationality or legal criteria, although it maybe similar to concepts of residence used for exchangecontrol, tax, and other purposes in many countries. Theconcept of residence is based on a sectoral transactor’scenter of economic interest. Moreover, countryboundaries recognized for political purposes may notalways be appropriate for economic purposes.Therefore, it is necessary to recognize the economicterritory of a country as the relevant geographical areato which the concept of residence is applied. Aninstitutional unit is a resident unit when it has a centerof economic interest in the economic territory of acountry.

Economic Territory of a Country

59. The economic territory of a country consists of thegeographic territory administered by a government;within this territory, persons, goods, and capitalcirculate freely. In a maritime country, economicterritory includes islands that belong to the country andare subject to the same fiscal and monetary authoritiesas the mainland; goods and persons move freely to andfrom the mainland and the islands without any customsor immigration formalities. The economic territory of acountry includes the airspace, territorial waters, andcontinental shelf lying in international waters overwhich the country enjoys exclusive rights and has, orclaims to have, jurisdiction over fishing rights and rightsto fuels or minerals below the sea bed. The economicterritory of a country also includes territorial enclaves inthe rest of the world. These are clearly demarcated landareas (such as embassies, consulates, military bases,

scientific stations, information or immigration offices,aid agencies, etc.) located in other countries and usedby governments that own or rent them for diplomatic,military, scientific, or other purposes with the formalpolitical agreement of governments of countries wherethe land areas are physically located. While goods orpersons may move freely between a country and itsterritorial enclaves located abroad, such goods orpersons become subject to control by governments ofthe countries where the goods or persons are located ifthey move out of the enclaves. In addition, economicterritory includes free zones and bonded warehouses orfactories operated by offshore enterprises undercustoms control. (These are considered part of theeconomic territory of the country in which the freezones, etc. are physically located.)

60. The economic territory of an international organi-zation (see paragraph 88 for characteristics) consists ofterritorial enclave(s) over which the organization hasjurisdiction; these are clearly demarcated land areas orstructures that the international organization owns orrents and uses for organizational purposes formallyagreed upon with the country, or countries, in whichthe enclave(s) are physically located.

61. Therefore, although territorial enclaves used byforeign governments or international organizations maybe physically located within a country’s geographicalboundaries, such enclaves are not included in thecountry’s economic territory.

Center of Economic Interest

62. An institutional unit has a center of economic interestwithin a country when there exists, within the economicterritory of the country, some location, dwelling, place ofproduction, or other premises on which or from whichthe unit engages and intends to continue engaging, eitherindefinitely or over a finite but long period of time, ineconomic activities and transactions on a significant scale.The location need not be fixed so long as it remainswithin the economic territory.

63. In most cases, it is reasonable to assume that aninstitutional unit has a center of economic interest in a

20

IV. Resident Units of an Economy

country if the unit has already engaged in economicactivities and transactions on a significant scale in thecountry for one year or more, or if the unit intends todo so. The conduct of economic activities andtransactions over a period of one year normally impliesa center of interest, but the choice of any specificperiod of time is somewhat arbitrary. The one-yearperiod is suggested only as a guideline and not as aninflexible rule.

64. Ownership of land and structures located within acountry’s economic territory is sufficient qualification forthe owner to have a center of economic interest in thecountry. Land and buildings can only be used forpurposes of production in the country where they arelocated and their owners, in their capacity as owners,are subject to the laws and regulations of that country.However, an owner who is resident in another countrymay not have any economic interest, other thanownership of land or buildings, in the country wherethe land or buildings are located. In that case, theowner is treated as if he has transferred his ownershipto a notional institutional unit that is actually resident inthe country. The notional unit is treated as being ownedand controlled by the nonresident owner—much as aquasi-corporation is owned and controlled by its owner.Rents and rentals paid by the tenants of the land orbuildings are paid to the notional resident unit; in turn,this unit transfers the income to the actual nonresidentowner.

Resident Institutional Units

65. The sectors of an economy are composed of twomain types of institutional units: (i) households andindividuals who make up a household and (ii) legaland social entities, such as corporations and quasi-corporations (e.g., branches of foreign direct investors),nonprofit institutions, and the government of thateconomy. These institutional units must meet certaincriteria to be considered resident units of the economy.

Residence of Households and Individuals

66. A household has a center of economic interestwhen household members maintain, within the country,a dwelling or succession of dwellings treated and usedby members of the household as their principalresidence. All individuals who belong to the samehousehold must be residents of the same country. If amember of an existing household ceases to reside inthe country where his or her household is resident, theindividual ceases to be a member of that household.

67. If a resident household member leaves theeconomic territory and returns to the household after alimited period of time, the individual continues to be aresident even if he or she makes frequent journeysoutside the economic territory. The individual’s centerof economic interest remains in the economy in whichthe household is resident. Treated as residents are

travelers or visitors—individuals who leave aneconomic territory for limited periods of time (lessthan one year) for business or personal purposes(see paragraphs 71, 243, and 244);

workers or employees—individuals who work someor all of the time in economic territories that differfrom those of their resident households. Suchindividuals are

workers who may, because of seasonal demandfor labor, work part of the year in another countryand then return to their households;

border workers who regularly (each day) orsomewhat less regularly (e.g., each week) crossfrontiers to work in neighboring countries;

staff of international organizations who work inthe enclaves of those organizations;

locally recruited staff of foreign embassies,consulates, military bases, etc.;

crews of ships, aircraft, or other mobileequipment operating partly or wholly outside aneconomic territory.

68. An individual may cease being a member of aresident household when he or she works continuouslyfor one year or more in a foreign country. If theindividual rejoins his or her original household only forinfrequent short visits and sets up a new household orjoins a household in the country where he or sheworks, the individual can no longer be treated as amember of the original household. Most of theindividual’s consumption takes place in the countrywhere he or she lives or works, and the individualclearly has a center of economic interest there.

69. Even if an individual continues to be employed andpaid by an enterprise that is resident in his or her homecountry, that person should normally be treated as aresident in the host country if he or she workscontinuously in the host country for one year or more.In these circumstances, the person should be treated asan employee of a quasi-corporation owned by theenterprise and resident in the country where the worktakes place. Technical assistance personnel on long-term

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assignments should be treated as residents of thecountries where they work and as employees of theirhost governments, of international organizationsfunctioning on behalf of governments, or of internationalorganizations actually financing the technical assistancework. Transfers of funds should be imputed from thegovernments or international organizations that actuallyemploy the technical assistance personnel to the hostgovernments to cover the cost of salaries, allowances,transportation expenses, administrative costs, etc. relatedto the technical assistance personnel.

70. The situation differs for military personnel and civilservants (including diplomats) employed abroad ingovernment enclaves. Those enclaves—military bases,embassies and the like—form part of the economicterritory of the employing government, and thepersonnel often live as well as work in the enclaves.Therefore, government employees working in suchenclaves continue to have centers of economic interestin their home countries while, and however long, theywork in the enclaves. They continue to be residents intheir home countries even if they live in dwellingsoutside the enclaves.

71. However long they study abroad, students shouldbe treated as residents of their countries of origin, aslong as they remain members of households in theirhome countries. In these circumstances, their centers ofeconomic interest remain in their countries of originrather than in the countries where they study. Medicalpatients staying abroad are also treated as residents oftheir countries of origin, even if their stays are one yearor more, as long as they remain members ofhouseholds in their countries of origin.

72. Some individuals have several internationalresidences where they may remain for short periods(e.g., three months in each of four countries) during aspecific year. For these individuals, the centers ofeconomic interest often are international rather thandesignated economies. While consideration should begiven to such factors as tax status, citizenship (can bedual), etc., this Manual and the SNA do notrecommend a specific treatment. The choice is left tothe discretion of the economies concerned. Thetreatment should be coordinated, if possible, to fosterinternational comparability.

Residence of Enterprises

73. An enterprise is said to have a center of economicinterest and to be a resident unit of a country(economic territory) when the enterprise is engaged in

a significant amount of production of goods and/orservices there or when the enterprise owns land orbuildings located there. The enterprise must maintain atleast one production establishment in the country andmust plan to operate the establishment indefinitely orover a long period of time. Together with otherconsiderations covered in paragraph 78, a guideline ofone year or more, to be applied flexibly, is suggested.

Definition and activity

74. The term enterprise, as used in this Manual , isinclusive of the terms corporation and quasi-corporationas defined in the SNA. A corporation is a legal entitycreated for the purpose of producing goods or servicesfor the market. A corporation may be a source of profitor other financial gain to its owner(s). A corporation iscollectively owned by shareholders who have theauthority to appoint directors responsible for the generalmanagement of the corporation. Owned by a resident ora nonresident institutional unit, a quasi-corporation is anunincorporated enterprise that is operated as if it were aseparate corporation with a complete set of accounts.The de facto relationship of a quasi-corporation to itsowner is the same as that of a corporation to itsshareholders. (For purposes of sectoring, in the SNA,quasi-corporations are treated as corporations—that is, asinstitutional units separate from the units to which thequasi-corporations legally belong.)

Types of enterprises

75. Enterprises may be either privately owned and/orcontrolled, publicly owned and/or controlled, orcontrolled by residents and/or nonresidents. Enterprisesmay be financial or nonfinancial institutions.

76. In accord with the preceding definition, privateenterprises include (i) incorporated enterprises (e.g.,corporations, joint stock companies, limited liabilitypartnerships, cooperatives, or other businessassociations recognized as independent legal entities byvirtue of registration under company and similar acts,laws, or regulations); (ii) unincorporated enterprises;and (iii) nonprofit institutions.

77. Public enterprises are (i) unincorporatedgovernment enterprises and (ii) public corporationsincorporated by virtue of company acts or other publicacts, special legislation, or administrative regulations.Public corporations hold and manage the financialassets and liabilities, as well as the tangible andnonfinancial intangible assets, that are involved incorporation business. Both government enterprises and


22

public corporations sell to the public most of the goodsor services they produce. The principal publicmonetary institution, which issues currency and(sometimes) coin and is commonly the chief holder ofthe country’s international reserves, is usually thecentral bank—the publicly owned and/or controlledmonetary authority.

Attribution of production

78. Production undertaken outside the economicterritory of a resident enterprise by the personnel,plant, and equipment of that resident enterprise istreated as part of host country production and theenterprise is treated as a resident unit (branch orsubsidiary) of that country if the enterprise meets theconditions noted in paragraph 73. In addition, theenterprise must, among other considerations, maintain acomplete and separate set of accounts of local activities(i.e., income statement, balance sheet, transactions withthe parent enterprise), pay income taxes to the hostcountry, have a substantial physical presence, receivefunds for enterprise work for the enterprise account,etc. If these conditions are not met, the activity shouldbe classified as an export of services by a residententerprise. Production can generate such an exportonly if the production is classified as domesticproduction (undertaken by a resident even though thephysical process takes place outside the economicterritory). These considerations also apply to theparticular case of construction activity carried outabroad by a resident producer. Special mention shouldbe made of construction involving major specificprojects (bridges, dams, power stations, etc.) that oftentake several years to complete and are carried out andmanaged by nonresident enterprises throughunincorporated site offices. In most instances, siteoffices will meet the criteria that require site officeproduction to be treated (as would that of a branch oraffiliate) as the production of a resident unit and aspart of the production of the host economy rather thanas an export of services to that economy.

79. Offshore enterprises engaged in manufacturingprocesses (including assembly of componentsmanufactured elsewhere) are residents of theeconomies in which the offshore enterprises arelocated. This statement applies regardless of location inspecial zones of exemption from customs or otherregulations or concessions. The statement also appliesto nonmanufacturing operations (i.e., trading andfinancial enterprises), including so-called specialpurpose enterprises. (See paragraphs 365 and 381.)

Units operating mobile equipment

80. Principles used to determine the residence of anenterprise are likewise applicable to an enterprise thatoperates mobile equipment outside the economicterritory where the enterprise is resident. (The mobileequipment could consist of ships, aircraft, drilling rigsand platforms, railway rolling stock, etc.) Suchoperations may take place in (i) international waters orairspace or (ii) another economy. In the first case (anenterprise with operations taking place in internationalwaters or airspace), the activities should be attributedto the economy in which the operator maintainsresidence. In the second case (an enterprise withproduction taking place in another economy), theenterprise may be considered to have a center ofeconomic interest in the other economy. Thus, if theenterprise is accounted for separately by the operatorand is recognized as a separate enterprise by tax andlicensing authorities of the other economy, productionshould be attributed to the economy in which theproduction occurs. Otherwise, production is attributedto the original operator’s country of residence. Ifoperations (such as a railway network) are carried outby an enterprise on a regular and continuing basis intwo or more countries, the enterprise is deemed tohave a center of economic interest in each country andthus to have separate resident units in each. Theenterprises must also be accounted for separately bythe operator and recognized as separate enterprises bytax and licensing authorities in each country ofoperation. In cases involving the leasing of mobileequipment to one enterprise by another for a long orindefinite period, the lessee enterprise is deemed to bethe operator, and activities are attributed to the countrywhere the lessee is resident.

81. For ships flying flags of convenience, it is oftendifficult to determine the residence of the operatingenterprise. There may be complex arrangementsinvolving ownership, mode of operation, and charteringof such ships. In addition, the country of registrydiffers, in most instances, from the operator’s (orowner’s) country of residence. Nonetheless, inprinciple, the shipping activity is attributed to thecountry of residence of the operating enterprise. If anenterprise establishes, for tax or other considerations, abranch (direct investment) in another country tomanage the operation, the operation is attributed to theresident (branch) operating in that country.

82. In certain exceptional cases, it may be difficult todetermine the residence of an enterprise that operatesmobile equipment. For example, the enterprise may

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consist of a corporation that is registered in two ormore countries as a result of being established throughspecial legislation enacted cooperatively by two ormore governments. Such enterprises may be treated intwo ways. All of the corporation’s transactions may beallocated to the countries of registry in proportion tothe amounts of financial capital that the countries havecontributed or in proportion to their shares in theequity of the corporation. Alternatively, the corporationmay be treated as a resident of the country wherecorporation headquarters are located. Corporationpremises in other countries would be treated as foreignbranches (direct investment enterprises) and classifiedas residents of the countries where the premises arelocated. The first method is preferable, but both waysof treating such corporations are consistent with thegeneral principles of the Manual and the SNA. Thechoice between methods may be made, with referenceto consistent treatment by partner countries, on thebasis of statistical convenience.

Agents

83. Transactions of agents should be attributed to theeconomies of principals on whose behalf thetransactions are undertaken and not to the economiesof agents representing or acting on behalf of principals.However, services rendered by agents to enterprisesrepresented should be attributed to the economies inwhich the agents are residents.

Residence of Nonprofit Institutions

84. A nonprofit institution (NPI) is resident in thecountry or economic territory where the NPI has acenter of economic interest. In most instances, thiscenter of economic interest lies in the country wherethe NPI was legally created and is officially recognizedand recorded as a legal or social entity. In practice,residence of the vast majority of NPIs may bedetermined without ambiguity. However, when an NPIis engaged in charity or relief work on an internationalscale, it is necessary to specify the residence of anybranches the NPI may maintain for dispensing relief inindividual countries. If an NPI maintains a branch orunit for one year or more in a particular country, thatbranch or unit should be considered a resident NPI thatis financed largely or entirely by transfers from abroad.

General Government

85. General government agencies that are residents ofan economy include all departments, establishments,

and bodies located in the economic territory of aneconomy’s central, state, and local governments and allembassies, consulates, military establishments, andother entities, which are located elsewhere, of aneconomy’s general government.

86. The general government of an economy covers allunclassified agencies of the public authorities. Suchagencies include government departments, offices, andother bodies (whether these are covered in ordinary orextraordinary budgets or in extrabudgetary funds) thatengage in administration, defense, and regulation of thepublic order; promotion of economic growth, welfare,and technological development; and provision ofeducational, health, cultural, recreational, and othersocial and community services free of charge or at salesprices that do not cover most or all of the costs ofproduction. Also included are other nonprofitorganizations serving individuals or business enterprisesthat are wholly, or mainly, financed and controlled bythe public authorities and nonprofit organizationsprimarily serving government bodies. This categorycovers, as well, social security arrangements that areimposed, controlled, or financed by the government forlarge sections of the community. These arrangementsinclude voluntary social security arrangements forcertain sections of the community and pension fundsthat are considered part of public social securityschemes. Such agencies may be unincorporatedgovernment enterprises that primarily produce goodsand services for the government or primarily sell goodsand services to the public. In addition, there are public,nonmonetary saving and lending bodies that arefinancially integrated with a government or that lackthe authority to acquire financial assets or incurliabilities in the capital market.

87. Embassies, consulates, military establishments, andother entities of a foreign general government areconsidered extraterritorial by the economies in whichthe embassies, etc. are physically located. Whenresident producers of an economy construct embassies,structures, or other works in an extraterritorial enclave,the construction is part of the production and exportsof the economy in which the enclave is located. Wagesand salaries paid to locally recruited staff of foreigndiplomatic, military, and other establishments arepayments to residents of the economies in which theseestablishments are located.

88. International organizations that do not qualify asenterprises (see paragraph 74) form part of foreigngeneral government for balance of payments purposes.Most political, administrative, economic, social, or


24

financial institutions in which the members aregovernments (or other international organizations withmemberships consisting of governments) do not qualifyas enterprises. International organizations are createdfor the purpose of engaging in one, or both, of thefollowing activities: (i) the provision of nonmarketservices of a collective nature for the benefit ofmembers and/or (ii) financial intermediation, or thechanneling of funds between lenders and borrowers indifferent economies. International organizations areestablished by political agreement among organizationmembers. Such agreements have the status ofinternational treaties. International organizations areaccorded appropriate privileges and immunities and arenot subject to the laws and regulations of theeconomies in which the organizations are located.Thus, such bodies are not considered residents of anynational economy, including the economies in whichthe organizations are located or conduct affairs. Theinternational organizations are treated as extraterritorialentities by those economies. (However, pension fundsoperated by these bodies are treated as residents of theeconomies in which the organizations are located.)Nevertheless, the employees of these bodies areresidents of national economies—specifically, of theeconomies in which they are expected to maintain theirabodes for one year or more. In most cases, thateconomy will be the one in which the particularinternational unit is located or the one in which theemployee is engaged in technical assistance or other

activities on behalf of the international organization.Wages and salaries paid by international organizationsto their employees are payments to residents of theeconomies in which the employees are stationed forone year or more. (For the treatment of technicalassistance personnel, see paragraph 69.)

89. In contrast, enterprises owned jointly by two ormore governments are not treated as internationalbodies but are, like other enterprises, considered to beresidents of the economic territories where theenterprises operate.

Regional Central Banks

90. A regional central bank is an international financialinstitution that acts as a common central bank for agroup of member countries. Such a bank hasheadquarters in one country and maintains nationaloffices in each member country. Each national officeacts as the central bank for that country and must betreated as an institutional unit that is separate from theheadquarters institution. Each national office is aresident unit of the country where the office is located.The financial assets and liabilities of a regional centralbank should be allocated among the national offices.The allocation should be made in proportion to theclaims that such offices have over the bank’s collectiveassets.

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Concept of Market Price

91. A uniform system of valuation for the internationalaccounts—for valuation of (i) transactions in realresources and financial assets and liabilities and (ii) stocks of assets and liabilities—is required for thecompilation of aggregates of such statistics on aconsistent basis and for international comparabilitypurposes. The recommendation in this Manual is thatmarket price be used as the basis of valuation for bothtransactions and stocks. Thus, transactions are generallyvalued at the actual prices agreed upon by transactors;stocks of assets and liabilities are valued at marketprices in effect at the time to which the balance sheetrelates. (See paragraphs 93, etc. for discussion ofinstances in which the concept may be impractical ordifficult to apply.) These principles are in accord withthose presented in the SNA.

Transactions and Market Price

92. In the frameworks of the balance of payments andthe national accounts, market prices for transactions aredefined as amounts of money that willing buyers pay toacquire something from willing sellers; the exchanges aremade between independent parties and on the basis ofcommercial considerations only. Thus, according to thisstrict definition, a market price refers only to the price forone specific exchange under the stated conditions. Asecond exchange of an identical unit, even undercircumstances that are almost exactly the same, couldresult in a different market price. A market price definedin this way is to be clearly distinguished from a pricequoted in the market, a world market price, a goingprice, a fair market price, or any price that is intended toexpress the generality of prices for a class of supposedlyidentical exchanges rather than a price actually applyingto a specific exchange. Furthermore, a market priceshould not necessarily be construed as equivalent to afree market price; that is, a market transaction should notbe interpreted as occurring exclusively in a purelycompetitive market situation. In fact, a market transactioncould take place in a monopolistic, monopsonistic, orany other market structure. Indeed, the market may be sonarrow that it consists of the sole transaction of its kindbetween independent parties.

Valuing Transactions in the Absence ofMarket Price

93. Although conditions necessary for establishingmarket prices are probably present for mosttransactions with which the balance of payments isconcerned, there may be situations in which one ormore of the essential elements is lacking. Somecommon circumstances under which a market price, inthe literal sense, cannot be readily determined are

a direct exchange of goods for other goods ratherthan for money (barter);

a transaction that occurs despite the fact that oneparty does not enter into the transaction willingly(tax payments);

a transaction in which a buyer and seller are thesame entity from a legal standpoint but constituteseparate entities under balance of paymentsconventions (a branch and the parent enterprise);

a transaction between separate legal entities that arenot independent (affiliated enterprises);

a transaction in which a legal change of ownershipbetween the two parties involved does not actuallyoccur (goods transferred under a financial leasearrangement);

a transaction that often involves private, nonprofitentities or general government bodies as one or bothof the parties, that contains at least some element ofa gift or grant, and that is undertaken for other thanpurely commercial considerations.

94. The examples enumerated in paragraph 93 are byno means all-inclusive or mutually exclusive. In anyparticular case, a market price may not exist becausemore than one of the conditions necessary to establishit are absent.

Market Price Equivalents

95. For purposes of balance of payments recording,therefore, it is sometimes necessary to resort to theexpedient of developing proxies, or substitutemeasures, for market prices when no actual marketprices have been set.

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V.Valuation of Transactions and of Stocksof Assets and Liabilities

96. A customary approach is to construct such prices byanalogy with known market prices established underconditions that are considered essentially the same. Forexample, if a buyer and a seller engage in a bartertransaction—the exchange of goods or services for othergoods, services, or assets (of equal value)—the goods orservices bartered should be valued at the prices thatwould have been received if the goods or services hadbeen sold (e.g., a standard market quotation). Thisapproach must be limited to those transactions to whichthe approach is really applicable. Transactions that aresuperficially alike may, in fact, be subject to implicit orconcealed factors that strongly affect the values thatshould be placed on them.

Affiliated Enterprises

97. Transactions between affiliated enterprisesintegrated under the same management cannotnecessarily be considered market transactions becauseof the lack of independence among the parties to theexchange. Whether or not the transactions portrayed inthe books of the enterprises actually reflect marketvalues can only be judged for each individualenterprise. To the extent that a group of affiliatedenterprises desires to allocate its gross earnings in arealistic fashion among its separate units, bookkeepingpractices would have to reflect market-related pricingfor all purchases and sales by the units. In that situation,the view might reasonably be taken that pricingadopted for bookkeeping purposes, often referred to astransfer pricing, is no different from, or is equivalent to,market valuation. On the other hand, transfer pricingnot based closely on market considerations could beexpected to be common among affiliated enterprisesconducting business across national boundaries becausedisparities between taxes and regulations imposed bydifferent governments are a factor in managementdecisions on the optimum allocation of profits amongunits. In those circumstances, it cannot be presumedthat the mode of valuation used will accurately reflecteconomic relationships (e.g., the ratio of income tocapital). When the distortions are large, replacement ofbook values with market value equivalents is desirablein principle.

98. The attempt to substitute market values for bookvalues, however, raises questions about procedure andthe propriety of pricing measures substituted. Indeed, avalue approximating the market price frequently will bedifficult to estimate. The values to be placed ontransactions among affiliated units are not necessarilyequal to the market prices for any similar transactions

of those units with outside parties because, bydefinition, market prices are established in response todemand and supply conditions prevailing in eachspecific market. Commodities that are otherwisephysically indistinguishable might be viewed differentlyfrom a market standpoint and therefore have differentmarket prices. For example, goods transferred to anaffiliate might represent components but, if sold tooutside parties, could constitute spare parts.

99. In determining how far a transfer price deviatesfrom or approximates a market price, the relevantcomparison is not necessarily between (i) the bookvalue for the transfer of something from one affiliate toanother and (ii) the market price for the sale of thesame thing by an affiliate to an outsider. A transferbetween affiliates may be evaluated by measuring fromthe relative position of the transfer in the chain ofproduction to the point of actual sale to an indepen-dent party. The comparison could be made in terms ofcosts embodied up to that stage of production. There-fore, a transfer price that does not seem commensuratewith production costs incurred up to that stage isprobably not an adequate proxy for a market price. Ifthe transfer price covers the costs of production, thetransfer price could be accepted as a suitable proxy fora market price, even though the transfer price isdifferent from the price charged for a similar exchangebetween the affiliate and an independent party.Production cost information available in the books ofan affiliate may, of course, be affected by the use oftransfer pricing for the input of goods and servicesacquired from other affiliates.

100. The exchange of commodities between affiliatedenterprises may often be one that does not occurbetween independent parties (for example, specializedcomponents that are usable only when incorporated ina finished product). Similarly, the exchange of services,such as management services and technical know-how,may have no near equivalents in the types oftransactions in services that usually take place betweenindependent parties. Thus, for transactions betweenaffiliated parties, the determination of valuescomparable to market values may be very difficult, andcompilers may have no choice other than to acceptvaluations based on explicit costs incurred inproduction or any other values assigned by theenterprise. Such values will probably not be entirelyarbitrary as the tax, customs, exchange control, andother public authorities usually exercise some influenceover the accounting practices of these enterprises inorder to establish conformance with governmentregulations by affiliated and independent enterprises.

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101. Because balance of payments accounting is basedon the axiom of double entries, any substitutionshould, in principle, be applied consistently in thestatement. If, for example, the book value of goodsshipped from a direct investment enterprise to theparent is to be replaced by a market value equivalent,the double entry rule requires that the direct investmentincome and/or financial flows also be adjusted by thesame amount.

102. In view of practical difficulties involved insubstituting an imputed or notional market value for anactual transfer value, substitution should be theexception rather than the rule. If certain transfer pricesare so divorced from those of similar transactions thatthe transfer prices significantly distort measurement, theprices should either be replaced by market priceequivalents or be separately identified for analyticalpurposes.

103. Selection of the best market value equivalents toreplace book values is an exercise calling for cautiousand informed judgment. In most cases, sample surveys,contacts with enterprises and government agenciesengaging in international transactions on a large scale,exchanges of information between compilers in partnercountries, or similar statistical research will be neces-sary to provide the basis for such judgment.

Noncommercial Transactions

104. One important category of transaction that is, bydefinition, noncommercial and thus has no marketprice is the provision of an economic value for whichthe offset constitutes a transfer. In such a transaction,one party receives a real or financial asset from anotherparty and, in return, provides nothing of economicvalue. In addition to outright gifts, other transactionsmay take place at implied prices that include someelement of grant or concession so that those prices alsoare not market prices. Examples of such transactionscould include negotiated exchanges of goods betweengovernments and government loans bearing lowerinterest rates than those consistent with grace andrepayment periods or other terms for purely commer-cial loans. Transactions by general government bodies and private, nonprofit entities not engaged inpurely commercial undertakings are often subject tononcommercial considerations. Transfers may also beprovided or received, however, by other sectors of theeconomy.

105. When real resources are transferred, without aquid pro quo, to nonresidents by the government or

private, nonprofit institutions of an economy, the samevalues must be reflected in the balance of payments ofboth recipient and donor. In conformity with theprocedure used for the national accounts, suchresources should be valued at the market prices thatwould have been received if the resources had beensold. Imputations made in this way may not alwaysapproximate the desired basis of valuation. The donor’sview of the imputed value of the transaction will oftenbe quite different from that of the recipient. Thesuggested rule of thumb is to use the value assigned bythe donor as a basis for recording.

Financial Items

106. Transactions in financial items should be recordedin the balance of payments at the prices at which theitems are acquired or disposed of. If financial items aretraded in an organized market and if the buyer andseller deal with each other through an agent, the pricesestablished in the market—which will probably be theprices recorded in the statistics in any case—will meetthe definition of a market price for purposes of thebalance of payments. If financial items are not traded inthe market, however, application of the market priceconcept may not be so apparent. In fact, cash items(currency and transferable deposits that can beredeemed on demand at the nominal values) have onlyone value that could be assigned for any purpose, sothis value could be regarded as the actual market price.Market prices to be imputed to nonmarketable financialitems, which are primarily loans in one form oranother, are the nominal values. However, if asecondary market in such items is created and theitems become marketable, often—as in the case ofloans to some heavily debt-burdened countries—atsubstantial discounts from nominal values, those marketprices should be recorded for transactions in suchloans. (For details on related valuation adjustments,debt/equity swaps, etc., see paragraphs 456 and 471.)Valuation of financial items in the balance of paymentsshould exclude any service charges, fees, commissions,or income; these amounts should be recorded in theappropriate component of the current account.

Valuation of Stocks of Assets and Liabilities

107. In principle, all asset and liability stockscomprising a country’s international investment positionshould be measured at market prices. This conceptassumes that such stocks are continuously (regularly)revalued—for example, by reference to actual marketprices for financial assets such as shares and bonds or,


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in the case of direct investment, by reference toenterprise balance sheets.

108. The market price measurement cannot always beimplemented because of the absence of regularrevaluations. For example, balance sheet value is oftenthe only valuation available or reported for direct

investment. That value might be assigned on the basisof original cost, a more recent revaluation, or currentvalue. (The use of current value would be inaccordance with the market price principle.) Whendirect investment enterprises are listed on stockexchanges, the listed prices should be used as themarket values of shares in those enterprises.

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30

VI. Time of Recording

Principle of Timing

109. In the double-entry system of the balance ofpayments, two entries must be recorded simultaneouslyfor each transaction. Simultaneous recording ensuresthat both entries show the transaction occurring at thesame time, that is, on the same date. Determination ofthe time, or date, when a transaction occurs isgoverned by rules.

110. A typical transaction consists of a series ofactions. For example, a party may engage in a set ofactions and transactions by entering into a formalagreement to provide goods or services, by acquiring aclaim for payments, and by receiving settlement on thatclaim.

111. All of the actions that make up a transaction aresignificant from an economic standpoint, and some canbe assigned specific dates (date of contract orcommitment, for example). In addition, an action—suchas entering into a contract—may establish parametersfor subsequent transactions—such as settlement bypayment or other considerations. However, in balanceof payments accounts (and in the SNA), transactions arerecorded when economic value is created, transformed,exchanged, transferred, or extinguished. The time ofrecording for a transaction is governed by the principleof accrual accounting. Claims and liabilities arise whenthere is a change in ownership. The change may be alegal one or a physical or economic one involvingcontrol or possession.

112. If an exchange of resources involves a change ofownership, double-entry recording of both sides of theexchange is required. Two stages of the exchange maybe involved: (i) provision of one resource accompaniedby the acquisition of a financial claim on the recipientof the resource, and (ii) provision of the other resourceaccompanied by extinguishment of the claim.

113. Because a double-entry system is used to recordbalance of payments transactions, it is especiallyimportant to establish a principle for determining thetime when the two sides of a transaction should beentered in the accounts. The principle helps to ensuresimultaneous recording of the entries. When a change

in ownership is not obvious, the change is consideredto occur at (or is proxied by) the time the parties to thetransaction record it in their books or accounts. Inpractice, however, the two entries for a transactionoften are derived independently from different sourcesand accounting records, and conventions for time ofrecording for the participants in that transaction maydiffer. Consequently, simultaneous recording of the twosides may not be achieved.

Application to Goods

114. (Also see Chapter 10.) Trade statistics, byconvention or necessity, often are recorded on thebasis of customs documents reflecting the physicalmovement of goods across the national or customsfrontier of an economy. Actual movement of the goodsmay not occur at the same time as the change, betweena resident and a nonresident, in ownership of thegoods. Likewise, an exchange record system thatreflects payments may not coincide in timing with thechange in ownership of the goods. The change inownership, as noted in paragraph 123, is considered tooccur at (or is proxied by) the time the parties to thetransaction record it in their books or accounts. Thus,goods for export are generally considered to changeownership when the exporter ceases to carry the goodson his books as a real asset and makes a correspondingchange in his financial items. Goods for import areconsidered to change ownership when the importerenters the goods on his books as a real asset andmakes a corresponding change in his financial items.This convention is designed to promote consistencybetween goods and the financial account in thebalance of payments of the compiling country, as wellas consistency between the compilation of goods byexporting and importing countries.

115. Under this convention, it is seldom difficult toperceive the time at which ownership of an assetchanges. Numerous transactions consist of anexchange, such as goods for financial assets, betweentwo enterprises. Accounting entries will be made ineach company’s books for this exchange; the entrieswill show the same dates for acquisition of the goods

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and relinquishment of the financial asset, on the onehand, and for acquisition of the financial asset andrelinquishment of the goods, on the other. Ideally, theentries should be dated the same by both parties. Thistreatment provides a fixed point of time to which abalance of payments transaction may be related.

116. However, even when this convention is followed,the two parties to a transaction may not enter it in theirbooks at the same time. As a result, differences intiming and possible inconsistencies arise between thecompilations of partner countries.

117. In practice, trade statistics based on customsdocuments reflecting physical movement of goodsacross national or customs frontiers may be used in theabsence of other statistics to approximate, by showingevidence of physical possession, the timing of changesin ownership.

118. When the provision of a real resource and arelated extension of credit are involved, eachtransaction should be recorded in the balance ofpayments at the time it occurs. That is, when animporter turns over cash (a prepayment) to an exporterbefore he acquires ownership of the goods, recordsmust also show the importer’s acquisition of a claim,which remains outstanding for the duration of theinterim period, on the exporter. Similarly, when animporter makes a postpayment some time after heacquires goods, records must show the importer’sinterim liability to the exporter. These claims andliabilities are extinguished in due course; that is, in thefirst instance, by the delivery of the goods and, in thesecond, by the cash payment made for the goods. Thecreation and the extinguishing of an obligation, as wellas the change in ownership of goods and payment forthe goods, are shown in the balance of payments in theperiods in which each occurs.

Exceptions to the Change of OwnershipPrinciple

119. Some goods transactions are recorded in thebalance of payments even though no change of legalownership occurs. Among such transactions are thosethat involve goods under financial lease arrangements(see paragraph 206) and goods shipped between theparent of a direct investment enterprise and branchesor affiliates (see paragraph 205). For both parties toachieve simultaneous recording in such transactions, itis recommended that the entries be dated, wheneverpossible, as of the day that most closely approximatesthe change in physical possession of the goods. For

financial leases, commencement of the leases wouldbest approximate the change in control and possession.For affiliated transactions, dates of entry in the books ofthe entities involved would be appropriate.

120. Another exception to the change of ownershipprinciple relates to goods that are sent abroad forprocessing but do not change ownership. For purposesof recording in the rest of the world account of theSNA, goods sent abroad for processing that involves asubstantial physical change are distinguished from otherprocessing. In the SNA, goods sent abroad forprocessing and reclassified, upon return, in a differentthree-digit group of the Central Product Classification(CPC) are included, on a gross basis, under goods. Thevalue of other processing is recorded under services.Although that concept is recognized in this Manual,because of practical difficulties in implementation, it isrecommended that all processing of goods that cross thefrontier be recorded, on a gross basis, under goods.The processing may be performed abroad (and involvethe export of a good and its subsequent re-import) orperformed in the compiling economy (and involve animport and subsequent export). Further elaboration ofthe treatment of goods for processing (and of the valueof repairs on goods) appears in paragraphs 197 through200.

Applications to Other Transactions

121. Transactions in services are generally recordedwhen the services are rendered (delivered or received);these dates often coincide with dates on which theservices are produced. In some instances, there may beprepayments or postpayments for such services (freight,insurance, port services, etc.). Entries in the appropriateaccounts should then be made (as explained inparagraph 118). Under investment income, interest isrecorded on an accrual basis, which is a continuousmethod of recording that matches the cost of capitalwith the provision of capital. If the interest is notactually paid, an entry is required, together with anoffsetting credit entry in the financial account for theclaim associated with nonpayment (i.e., an increase inliabilities). The two entries are particularly important forzero coupon and other deep discounted bonds. Thedifference between the issue price and the value atmaturity is treated, on an accrual basis, as interest overthe life of the bond. (See paragraph 396 for details.)Dividends are recorded as of the dates payable.Reinvested earnings on direct investment are recordedin the periods when earned.


32

122. One party may impose various taxes, fines, andother components of transfers on another party. Theseamounts are recorded upon the occurrence of under-lying transactions or other flows that give rise to theliabilities. In some instances, taxes on income may berecorded in a subsequent period. (See paragraph 307.)Other transfers are recorded when the resources(goods, services, financial items) to which the transfersprovide offsets change ownership.

123. Transactions in financial items are considered tohave taken place when both creditor and debtor haveentered the claim and liability, respectively, in theirbooks. A date (the value date) may actually bespecified to ensure matching entries in the books ofboth parties. If no precise date can be fixed, the dateon which the creditor receives payment or some otherfinancial claim is decisive. Loan drawings are entered in the accounts when actual disbursements are made;loan repayments are entered when due for payment.For loan repayments not made, entries are recorded asif repayments of the contractual obligations were made.In addition, entries are recorded for (i) replacements bynew liabilities that are short-term (for immediatepayment) or (ii) replacements by new loans, if theoriginal loans are subject to rescheduling or otherspecial financing arrangements associated with balanceof payments difficulties in an economy. (Seeparagraphs 454 through 458 for comments relating toexceptional financing.)

Other Timing Adjustments

124. In choosing among available statistical sources,compilers may wish to consider the advantage of usingdata for which the correct timing is already recorded.For example, records of actual drawings on loans arepreferable to sources that quote authorization dates orprogram dates that may not be realized in fact. Evensources chosen by compilers as generally the mostsuitable may not have been specifically designed toyield balance of payments information.

125. Timing adjustments to trade statistics may benecessary because trade statistics do not reflect physicalmovements correctly in all cases. (However, systematicdefects of that sort would not create noticeable errorsunless the value of trade changed sharply from periodto period.) Timing adjustments could be necessary, forexample, if compilers of trade accounts cease recordingmonthly statistics before all customs declarations havebeen tabulated and defer the recording of the remain-der to the following month. When practices of this sortlead to distortions, the amounts should be estimatedand timing adjustments applied.

126. A change in the ownership of goods can varywidely from the time at which the goods are recordedin trade statistics if a lengthy voyage is part of theprocess of importing or exporting. If the unit value oftrade changes substantially from the beginning to theend of the reporting period, the possible difference ofone or two months between the shipment or receipt ofgoods and the change of ownership can be a source oferror in the statement for a particular country and asource of asymmetries between partner countries. Noempirical basis has been established for presuming thatownership normally changes either at the beginning orthe end of a voyage. Inquiries, perhaps on a samplebasis, are required to ascertain specific practices, andtiming adjustments should, in principle, be applied tocorrect the trade statistics for those classes of goodsthat are found to change ownership at times other thanthose at which the goods were recorded in the tradestatistics.

127. Goods on consignment (goods intended for salebut not actually sold when the goods cross the frontier)should, in principle, be included in goods only at thetime ownership changes. Such goods are oftenrecorded, on the assumption that a change of owner-ship has occurred or will shortly occur, at the time thegoods cross the frontier. If that treatment is followedand there is no change of ownership, the goods willsubsequently have to be recorded again as a deductionfrom exports and imports.

128. The compilation of balance of payments andinternational investment position statements iscomplicated by the fact that the values of transactionsin real resources and financial items and the values ofcomponents of stocks of external financial assets andliabilities may be expressed initially in a variety ofcurrencies or in other standards of value, such as SDRsor European currency units (ECUs). The conversion ofthese values into a reference unit of account (usuallythe national currency of the compiler) is a requisite forthe construction of consistent and analyticallymeaningful statements. In addition, a standard oruniversal unit of account is necessary to allow foraggregation on a global or regional basis and tofacilitate international comparisons.

Unit of Account

129. There are two viewpoints, not mutually exclusive,as to the necessary attributes of a unit of account—thatof the national compiler and that of internationalorganizations, such as the International Monetary Fund.From the perspective of the national compiler, thenational currency unit is the obvious choice for thebalance of payments and international investmentposition statements. Statements so denominated arecompatible with the national accounts and most of theeconomy’s other economic and monetary statisticsexpressed in that unit. Also, some statistics (such ascustoms returns for goods, banking data, and directinvestment estimates) will already have been convertedfrom foreign currencies to the national currency and/orbe expressed in the national unit when such statisticsare reported to the compiler. However, if the currencyis subject to significant depreciation relative to othercurrencies involved in the international transactions ofthe economy, a statement denominated in nationalcurrency would be of diminished analytical value. Forexample, if transactions are expressed in nationalcurrency, apparent growth in current transactions couldbe the result of an unstable national currency that hasdepreciated in comparison with currencies actuallyused for the transactions. Such a circumstance mightcomplicate the analysis of balance of paymentsdevelopments.

130. From the perspective of internationalorganizations such as the IMF, a standard unit ofaccount is required for global presentation and analysis.It is preferable that the unit of account be a stable one;that is, values of international transactions expressed inthat unit should not be significantly affected by changes(relative to the unit of account) in values of currenciesin which those transactions occur. Transactionsexpressed in a unit that is stable in this sensenonetheless may reflect price changes resulting fromother causes; that is, a series expressed in a so-calledstable unit of account is not the equivalent of a volumeor constant price series. Another consideration is theconvenience of using a unit (such as the U.S. dollar orSDR) that is reasonably familiar to most users ofbalance of payments statistics. The theoretical ideal of awidely recognized and perfectly stable standard unit ofaccount simply does not exist.

131. For reporting to the IMF, countries are requestedto compile statements in the unit of account adoptedfor national use. A country that employs a multipleexchange rate system and prepares a statement innational currency should do so by utilizing one ofseveral methods suggested in this chapter. (Seeparagraphs 134 and 135.) The IMF may, for itspurposes, convert countries’ statements into theuniversal unit considered most suitable in existingcircumstances. That unit may be periodically changedaccording to developments in the relationships amongtransactions currencies and according to the time spancovered by balance of payments statistics for which aunit of account is selected.

Conversion Principles and Practices

132. In concordance with the principles defined in thisManual and in the SNA for time of recording andvaluation, the most appropriate exchange rates to beused for conversion of balance of payments entriesfrom transaction currencies into units of account are themarket rates prevailing on the transaction dates. Ifthose market rates are not available, the average ratesfor the shortest period applicable should be used. Themidpoint between buying and selling rates should be

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VII. Unit of Account and Conversion

used so that any service charge—the spread betweenthe midpoint and those rates—is excluded. Whenforward contracts are utilized to hedge or protecttransactors against changes in exchange rates, suchtransactions are conceptually distinct from thoseinvolved with the acquisition or sale of goods, services,or financial items from or to nonresidents. Exceution ofthe contract is virtually simultaneous with the change ofownership or delivery of the underlying asset. If thereis a difference between the prevailing exchange rateand the actual rate of conversion established by theforward contract (or other financial derivative), thatdifference is reflected in a separate transaction relatedto the contract (derivative).

133. For conversion of data on stocks of externalfinancial assets and liabilities, the market exchangerates prevailing on the date to which the balance sheetrelates (i.e., the midpoint between the buying andselling spot rates) is recommended.

Multiple Official Exchange Rates andConversion

134. Under a multiple exchange rate regime, two ormore exchange rates are applicable to differentcategories of transactions; the rates favor somecategories and discourage others. Such ratesincorporate elements similar to taxes or subsidies.Because the multiple rates influence the values and theundertaking of transactions expressed in nationalcurrency, net proceeds implicitly accruing to authoritiesas a result of these transactions are calculated asimplicit taxes or subsidies. The amount of the implicittax or subsidy for each transaction can be calculated asthe difference between the value of the transaction innational currency at the actual exchange rate applicableand the value of the transaction at a unitary rate that iscalculated as a weighted average of all official ratesused for external transactions.

135. A unitary rate might be used for conversion by aneconomy that has a multiple exchange rate system (andwishes to express its balance of payments statements inthe national currency) to avoid expressing transactionsat values including elements of transfers betweenresidents and authorities. Although the unitary rate mayapproximate a single official rate that would exist in theabsence of multiple rates, this single calculated ratemay not approximate any equilibrium or market rate.As a result, the calculated implicit taxes, subsidies, or

transfers may not fully reflect the impact of a multipleor rate system. Thus, from a purely conceptual point ofview, the usefulness of the unitary rate for conversionis somewhat limited. Another alternative is the use of aprincipal rate (the actual exchange rate applying to thelargest part of external transactions) for conversion.

136. For conversion of stocks of external financialassets and liabilities in a multiple rate system, the actualexchange rate applicable to specific assets or liabilitiesat the beginning or end of the accounting period isused.

Black or Parallel Market Rates

137. Parallel (unofficial) or black market rates cannotbe ignored in the context of a multiple rate regime andcan be treated in different ways. For instance, if there isone official rate and a parallel market rate, the twoshould be handled separately; transactions should beconverted at the exchange rate for each. If there aremultiple official rates and a parallel rate, the officialrates and the parallel rate should be treated as distinctmarkets in any calculation of a unitary rate. Themultiple official rates, which involve implicit officialtaxes, subsidies, or transfers, should be used tocalculate a weighted average rate that can serve as thebasis for estimating the tax or subsidy component ofthe various rates. (See paragraph 134.) Transactionseffected at the parallel rate usually should be separatelyconverted at that rate. However, in some instances,parallel markets may be considered effectivelyintegrated with the official exchange rate regime. Suchis the case when most or all transactions in the parallelmarket are sanctioned by the authorities and/or whenthe authorities actively intervene in the market to affectthe parallel rate. In this instance, the calculation of theunitary rate should include both the official and parallelmarket rates. If only limited transactions in the parallelmarket are sanctioned by the authorities, the parallelrate should not be included in the calculation of aunitary rate.

138. The midpoint between buying and selling ratesin the parallel market should be calculated (separatelyfrom official rates) for conversion so that any servicecharge is excluded. The same practice is recommendedfor official rates. (See paragraph 132.) Revenuesobtained from trading currencies between official andparallel markets are treated as holding (capital) gains.


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S T R U C T U R E A N D C L A S S I F I C AT I O N

Structure and Classification

139. Part two of this Manual deals with the structureand classification of balance of payments accounts andthe international investment position. Part twoencompasses the standard components of both sets ofaccounts and contains discussions and elaboration ofthe current account, the capital and financialaccount, selected supplementary information, and theinternational investment position.

140. Balance of payments statistics must be arrangedwithin a coherent structure to facilitate their utilizationand adaptation for multiple purposes—policyformulation, analytical studies, projections, bilateralcomparisons of particular components or totaltransactions, regional and global aggregations, etc.(See paragraph 7.)

141. The structure and classification of balance ofpayments standard components reflect conceptual andpractical considerations, take into account viewsexpressed by national balance of payments experts,and are in general concordance with the SNA and withharmonization of the expanded classification ofinternational transactions in services with the CentralProduct Classification (CPC). (See Appendix 3.)

142. The classification system also reflects efforts tolink the structure of the financial account to that ofthe income accounts and that of the internationalinvestment position. The scheme is designed as aflexible framework to be used by many countries in thelong-term development of external statistics. Somecountries may not be able to provide data for manyitems; other countries may be able to provideadditional data.

Standard Components

143. The determination of standard components (seethe table at end of this chapter) is based on a numberof considerations. The following list comprises thosethat have been given the greatest weight:

The item should exhibit distinctive behavior. Theeconomic factor or factors that influence the item

should be different from those that influence otheritems, or the item should respond differently to thesame factor or combination. This response toeconomic influences is what the balance ofpayments purports to make evident.

The item should be important for a number ofcountries. Importance may be defined as a functionof behavior (unusual variability, for example) or asabsolute size.

It should be possible to collect statistics for the itemwithout undue difficulty. However, the desirability ofcollection should be evaluated according to the twoprevious criteria.

The item should, on a separate basis, be necessaryfor other purposes—such as incorporation into, orreconciliation with, the national accounts.

The list of standard components should not beunduly long. A large number of countries, includingmany that are statistically less advanced, are asked toreport uniformly on the components.

To the extent practicable, standard componentsshould be in concordance with, and apply to, otherIMF statistical systems, the SNA, and—for servicesin particular—the CPC.

144. The list of standard components carries noimplication that recommendations made in this Manualare intended to inhibit countries from compiling andpublishing additional data of national importance. IMFrequests for information will not be limited to standardcomponents when further details are required tounderstand the circumstances of particular countries orto analyze new developments. Supplementaryinformation can also be most useful for verifying andreconciling the statistics of partner countries and, forexample, analyzing exceptional financing transactions.(See the Selected Supplementary Information tableat the end of this chapter.) IMF staff will, from time totime, consult with countries to decide on the reportingof additional details.

145. Few countries are likely to have significantinformation to report for every standard component.

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VIII.Classification and Standard Componentsof the Balance of Payments

Furthermore, several components may be available onlyin combination, or a minor component may be groupedwith one that is more significant. The standardcomponents should nevertheless be reported to the IMFas completely and accurately as possible. Nationalcompilers are in better positions than IMF staff to makeestimates and adjustments for components that do notexactly correspond to the basic series of the compilingeconomy.

Net Errors and Omissions

146. Application of the principles presented in thisManual should result in a consistent body of positiveand negative entries with a net (conceptual) total ofzero. In practice, however, when all actual entries aretotaled, the resulting balance will almost inevitablyshow a net credit or a net debit. That balance is theresult of errors and omissions in the compilation ofstatements. Some errors and omissions may be relatedto recommendations for practical applicationsapproximating principles.

147. In balance of payments statements, the standardpractice is to show a separate item for net errors andomissions. Labeled by some compilers as a balancingitem or statistical discrepancy, that item is intended asan offset to the overstatement or understatement of therecorded components. Thus, if the balance of thosecomponents is a credit, the item for net errors andomissions will be shown as a debit of equal value, andvice versa.

148. Sometimes the errors and omissions that occur inthe course of compilation offset one another. Therefore,the size of the residual item does not necessarilyprovide any indication of the overall accuracy of thestatement. Nonetheless, interpretation of the statementis hampered by a large net residual.

Major Classifications

149. The standard components, which are listed at theend of this chapter, are comprised of two main groupsof accounts:

The current account pertains to goods andservices, income, and current transfers.

The capital and financial account pertains to(i) capital transfers and acquisition or disposal ofnonproduced, nonfinancial assets and (ii) financialassets and liabilities.

This arrangement is based on historical precedentcommon in most countries and on a major change

introduced in this Manual. The former capital accountis renamed and becomes the capital and financialaccount. Reflecting harmonization with the SNA, thischange introduces that system’s distinction betweencapital transfers and current transfers into thebalance of payments and concordance of the accountswith the capital and financial accounts of the SNA.

150. Most items entered in the current account of thestandard components should show gross debits andcredits. Most entries in the capital and financialaccount should be made on a net basis; that is, eachcomponent should be shown only as a credit or a debit.(Recommended treatments for specific items andexceptions are discussed in appropriate chapters.)Inflows of real resources, increases in financial assets,and decreases in liabilities should be shown as debits;outflows of real resources, decreases in financial assets,and increases in liabilities should be shown as credits.Transfers, both in sections 1.C and 2.A, should benumerically equal with opposite sign to the entries forwhich the transfers provide offsets.

Detailed Classifications

151. The following classifications of standardcomponents have been developed in accordance withthe criteria set out in paragraph 143. The structure andcharacteristics of the current account and the capitaland financial account and significant changes fromthe fourth to the fifth edition of the Manual arediscussed in chapters 9 and 16, respectively. Thestandard components of the current account aredescribed fully in chapters 10 through 15, and those ofthe capital and financial account are covered inchapters 17 through 21.

Current Account (1.)

152. Covered in the current account are alltransactions (other than those in financial items) thatinvolve economic values and occur between residentand nonresident entities. Also covered are offsets tocurrent economic values provided or acquired withouta quid pro quo. Specifically, the major classifications aregoods and services, income, and current transfers.

Goods and services (1.A.)

Goods (1.A.a.)

153. General merchandise covers most movable goodsthat residents export to, or import from, nonresidentsand that, with a few specified exceptions, undergochanges in ownership (actual or imputed).


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154. Goods for processing covers exports (or, in thecompiling economy, imports) of goods crossing thefrontier for processing abroad and subsequent re-import(or, in the compiling economy, export) of the goods,which are valued on a gross basis before and afterprocessing. The treatment of this item in the goodsaccount is an exception to the change of ownershipprinciple.

155. Repairs on goods covers repair activity on goodsprovided to or received from nonresidents on ships,aircraft, etc. Although the physical movement of thesegoods is similar to that described in paragraph 154, therepairs are valued at the prices (fees paid or received)of the repairs and not at the gross values of the goodsbefore and after repairs are made.

156. Goods procured in ports by carriers covers allgoods (such as fuels, provisions, stores, and supplies)that resident/nonresident carriers (air, shipping, etc.)procure abroad or in the compiling economy. Theclassification does not cover auxiliary services (towing,maintenance, etc.), which are covered undertransportation.

157. Nonmonetary gold covers exports and imports ofall gold not held as reserve assets (monetary gold) bythe authorities. Nonmonetary gold is treated the sameas any other commodity and, when feasible, issubdivided into gold held as a store of value and other(industrial) gold.

Services (1.A.b.)

158. Transportation covers most of the services thatare performed by residents for nonresidents (and viceversa) and that were included in shipment and othertransportation in the fourth edition of the Manual.However, freight insurance is now included withinsurance services rather than with transportation.Transportation includes freight and passengertransportation by all modes of transportation and otherdistributive and auxiliary services, including rentals oftransportation equipment with crew. Certain exceptionsare noted in chapters 10, 11, and 13.

159. Travel covers goods and services—including thoserelated to health and education—acquired from aneconomy by nonresident travelers (includingexcursionists) for business and personal purposes duringtheir visits (of less than one year) in that economy.Travel excludes international passenger services, whichare included in transportation. Students and medicalpatients are treated as travelers, regardless of the lengthof stay. Certain others—military and embassy personnel

and nonresident workers—are not regarded astravelers. However, expenditures by nonresident workersare included in travel, while those of military andembassy personnel are included in government servicesn.i.e. These cases are noted in chapters 12–13.

160. Communications services covers communicationstransactions between residents and nonresidents. Suchservices comprise postal, courier, and telecommuni-cations services (transmission of sound, images, andother information by various modes and associatedmaintenance provided by/for residents for/bynonresidents).

161. Construction services covers construction andinstallation project work that is, on a temporary basis,performed abroad/in the compiling economy or inextraterritorial enclaves by resident/nonresidententerprises and associated personnel. Such work doesnot include that undertaken by a foreign affiliate of aresident enterprise or by an unincorporated site officethat, if it meets certain criteria, is equivalent to aforeign affiliate. Such residency aspects are covered inchapters 4 and 13.

162. Insurance services covers the provision ofinsurance to nonresidents by resident insuranceenterprises and vice versa. This item comprises servicesprovided for freight insurance (on goods exported andimported), services provided for other types of directinsurance (including life and non-life), and servicesprovided for reinsurance. (For the method ofcalculating the value of insurance services, seeparagraphs 256 and 257.)

163. Financial services (other than those related toinsurance enterprises and pension funds) coversfinancial intermediation services and auxiliary servicesconducted between residents and nonresidents.Included are commissions and fees for letters of credit,lines of credit, financial leasing services, foreignexchange transactions, consumer and business creditservices, brokerage services, underwriting services,arrangements for various forms of hedging instruments,etc. Auxiliary services include financial marketoperational and regulatory services, security custodyservices, etc.

164. Computer and information services coversresident/nonresident transactions related to hardwareconsultancy, software implementation, informationservices (data processing, data base, news agency), and

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maintenance and repair of computers and relatedequipment.

165. Royalties and license fees covers receipts (exports)and payments (imports) of residents and nonresidentsfor (i) the authorized use of intangible nonproduced,nonfinancial assets and proprietary rights—such astrademarks, copyrights, patents, processes, techniques,designs, manufacturing rights, franchises, etc. and (ii) the use, through licensing agreements, of producedoriginals or prototypes—such as manuscripts, films, etc.

166. Other business services provided by residents tononresidents and vice versa covers merchanting andother trade-related services; operational leasing services;and miscellaneous business, professional, and technicalservices. (See the Selected SupplementaryInformation table at the end of this chapter andparagraphs 261 through 264 for details.)

167. Personal, cultural, and recreational servicescovers (i) audiovisual and related services and (ii) othercultural services provided by residents to nonresidentsand vice versa. Included under (i) are servicesassociated with the production of motion pictures onfilms or video tape, radio and television programs, andmusical recordings. (Examples of these services arerentals and fees received by actors, producers, etc. forproductions and for distribution rights sold to themedia.) Included under (ii) are other personal, cultural,and recreational services—such as those associatedwith libraries, museums—and other cultural andsporting activities.

168. Government services n.i.e. covers all services (suchas expenditures of embassies and consulates) associatedwith government sectors or international and regionalorganizations and not classified under other items.

Income (1.B.)

169. Compensation of employees covers wages, salaries,and other benefits, in cash or in kind, and includesthose of border, seasonal, and other nonresidentworkers (e.g., local staff of embassies).

170. Investment income covers receipts and paymentsof income associated, respectively, with residents’holdings of external financial assets and with residents’liabilities to nonresidents. Investment income consists ofdirect investment income, portfolio investment income,and other investment income. The direct investmentcomponent is divided into income on equity(dividends, branch profits, and reinvested earnings) andincome on debt (interest); portfolio investment income

is divided into income on equity (dividends) andincome on debt (interest); other investment incomecovers interest earned on other capital (loans, etc.) and,in principle, imputed income to households from netequity in life insurance reserves and in pension funds.

Current transfers (1.C.)

171. Current transfers are distinguished from capitaltransfers, which are included in the capital andfinancial account in concordance with the SNA treat-ment of transfers. Transfers are the offsets to changes,which take place between residents and nonresidents,in ownership of real resources or financial items and,whether the changes are voluntary or compulsory, donot involve a quid pro quo in economic value.Current transfers consist of all transfers that do notinvolve (i) transfers of ownership of fixed assets; (ii) transfers of funds linked to, or conditional upon,acquisition or disposal of fixed assets; (iii) forgiveness,without any counterparts being received in return, ofliabilities by creditors. All of these are capital transfers.Current transfers include those of generalgovernment (e.g., current international cooperationbetween different governments, payments of currenttaxes on income and wealth, etc.), and other transfers(e.g., workers’ remittances, premiums—less servicecharges, and claims on non-life insurance). A fulldiscussion of the distinction between currenttransfers and capital transfers appears in Chapter 15;see also paragraphs 175 and 344.

Capital and Financial Account (2.)

172. The capital and financial account has twomajor components—the capital account and thefinancial account—that are in concordance with thosesame accounts in the SNA. Assets represent claims onnonresidents, and liabilities represent indebtedness tononresidents. The two parties to a transaction in assetsor liabilities are usually a resident and a nonresidentbut, in some instances, both parties may both beresidents or nonresidents. (See paragraph 318.)

173. All valuation changes and all other changes thatdo not reflect transactions (see paragraph 310) inforeign assets and liabilities are excluded from thecapital and financial account but reflected in theinternational investment position. Supplementarystatements identify certain items that are of analyticalinterest and affect various accounts. Examples of suchitems are liabilities constituting foreign authorities’


40

reserves and exceptional financing transactions, whichare discussed in Chapter 22.

174. Classification of the financial account and theincome components of the current account areinterrelated and must be consistent to facilitate analysis,to form an effective link between the balance ofpayments and the international investment position,and to be compatible with the SNA and other IMFstatistical systems.

Capital account (2.A.)

175. The major components of the capital accountare capital transfers and acquisition/disposal ofnonproduced, nonfinancial assets. Capital transfersconsist of those involving transfers of ownership offixed assets; transfers of funds linked to, or conditionalupon, acquisition or disposal of fixed assets; orcancellation, without any counterparts being receivedin return, of liabilities by creditors. Capital transfersinclude two components: (i) general government,which is subdivided into debt forgiveness and other,and (ii) other, which is subdivided into migrants’transfers, debt forgiveness, and other transfers. (SeeChapter 15 for a discussion of the distinction betweencapital transfers and current transfers.)Acquisition/disposal of nonproduced, nonfinancialassets largely covers intangibles—such as patentedentities, leases or other transferable contracts,goodwill, etc. This item does not cover land in aspecific economic territory but may include thepurchase or sale of land by a foreign embassy. (Seeparagraph 312.)

Financial account (2.B.)

176. The classification of standard components in thefinancial account is based on these criteria:

All components are classified according to type ofinvestment or by functional subdivision (directinvestment, portfolio investment, other investment,reserve assets).

For the category of direct investment, there aredirectional distinctions (abroad or in the reportingeconomy) and, for the equity capital and othercapital components within this category, asset orliability distinctions.

For the categories of portfolio investment and otherinvestment, there are the customary asset or liabilitydistinctions.

Particularly significant for portfolio investment andother investment is the distinction by type ofinstrument (equity or debt securities, trade credits,loans, currency and deposits, other assets orliabilities). In this Manual, traditional and newmoney market and other financial instruments andderivatives are included in portfolio investment.

For portfolio investment and other investment, thereare distinctions by sector of the domestic creditor forassets and by sector of the domestic debtor forliabilities. These distinctions serve to facilitate linkswith the income accounts, the internationalinvestment position, the SNA, and other statisticalsystems.

The traditional distinction, which is based on originalcontractual maturity of more than one year or oneyear or less, between long- and short-term assets andliabilities applies only to other investment. In recentyears, the significance of this distinction has clearlydiminished for many domestic and internationaltransactions. Consequently, the long- and short-termdistinction is accorded less importance in the SNAand in this Manual than in previous editions.However, because the maturity factor remainsimportant for specific purposes—analysis of externaldebt, for example—it is retained in this Manual forother investment.

177 Direct investment—reflecting the lasting interest ofa resident entity in one economy (direct investor) in anentity resident in another economy (direct investmententerprise)—covers all transactions between directinvestors and direct investment enterprises. That is,direct investment covers the initial transaction betweenthe two and all subsequent transactions between themand among affiliated enterprises, both incorporated andunincorporated. Direct investment transactions occuringabroad and in the reporting economy are subclassifiedinto equity capital, reinvested earnings, and othercapital (intercompany transactions). For equity capitaland other capital, claims on and liabilities to affiliatedenterprises and to direct investors are distinguished.Transactions between affiliated banks and betweenother affiliated financial intermediaries are limited toequity and permanent debt capital. (See paragraph 372.)

178. Portfolio investment covers transactions in equitysecurities and debt securities; the latter are subsec-toredinto bonds and notes, money market instruments, andfinancial derivatives (such as options) when the deriva-tives generate financial claims and liabilities. Variousnew financial instruments are covered underappropriate instrument classifications. Transactions

CHAPTER VIII

41

covered under direct investment and reserve assets areexcluded.

179. Other investment covers short- and long-termtrade credits; loans (including use of Fund credit,loans from the Fund, and loans associated withfinancial leases); currency and deposits (transferableand other—such as savings and term deposits, savingsand loan shares, shares in credit unions, etc.); andother accounts receivable and payable. Transactionscovered under direct investment are excluded.

180. Reserve assets covers transactions in assets thatare considered by the monetary authorities of aneconomy to be available for use in funding paymentsimbalances and, in some instances, meeting otherfinancial needs. Such availability is not closely linkedin principle to formal criteria such as ownership or

currency of denomination. The items covered aremonetary gold, SDRs, reserve position in the Fund,foreign exchange assets (currency, deposits, andsecurities), and other claims.

181. Coverage and identification of reserve assetcomponents are linked to an analytic concept, are inpart judgmental, and are not always amenable toapplication of objective, formal criteria or clear rankingsas to conditionality and other considerations. In contrastto the treatment in the fourth edition of the Manual,valuation changes in reserve assets are excluded, alongwith counterparts to such changes, in the fifth edition.Also excluded are the allocation or cancellation ofSDRs, the monetization or demonetization of gold, andcounterpart entries. These changes, which do notconstitute transactions, are reflected in the internationalinvestment position.


42

Balance of Payments: Standard Components

Credit Debit

1. Current AccountA. Goods and services

a. Goods1. General merchandise2. Goods for processing3. Repairs on goods4. Goods procured in ports by carriers5. Nonmonetary gold

5.1 Held as a store of value5.2 Other

1. A. b. Services1. Transportation

1.1 Sea transport1.1.1 Passenger1.1.2 Freight1.1.3 Other

1.2 Air transport1.2.1 Passenger1.2.2 Freight1.2.3 Other

1.3 Other transport1.3.1 Passenger1.3.2 Freight1.3.3 Other

1. A. b. 2. Travel2.1 Business2.2 Personal*

1. A. b. 3. Communications services1. A. b. 4. Construction services1. A. b. 5. Insurance services**1. A. b. 6. Financial services1. A. b. 7. Computer and information services1. A. b. 8. Royalties and license fees1. A. b. 9. Other business services

9.1 Merchanting and other trade-related services9.2 Operational leasing services9.3 Miscellaneous business, professional, and technical services*

1. A. b. 10. Personal, cultural, and recreational services10.1 Audiovisual and related services10.2 Other personal, cultural, and recreational services

1. A. b. 11. Government services n.i.e.

43

** See Selected Supplementary Information table on page 50 for components.** Memorandum items: 5.1 Gross premiums

5.2 Gross claims

1. B. Income1. A. b. 1. Compensation of employees1. A. b. 2. Investment income

2.1 Direct investment2.1.1 Income on equity

2.1.1.1 Dividends and distributed branch profits***

1. A. b. 2. 2.1 2.1.1 2.1.1.2 Reinvested earnings and undistributed branch profits***

1. A. b. 2. 2.1 2.1.2 Income on debt (interest)1. A. b. 2. 2.2 Portfolio investment

2.2.1 Income on equity (dividends)2.2.2 Income on debt (interest)

2.2.2.1 Bonds and notes2.2.2.2 Money market instruments and

financial derivatives1. A. b. 2. 2.3 Other investment

1. C. Current transfers1. A. b. 1. General government1. A. b. 2. Other sectors

2.1 Workers’ remittances2.2 Other transfers

2. Capital and Financial Account1. A. Capital account1. A. b. 1. Capital transfers

1.1 General government1.1.1 Debt forgiveness1.1.2 Other

1. A. b. 2. 1.2 Other sectors1.2.1 Migrants’ transfers1.2.2 Debt forgiveness1.2.3 Other

1. A. b. 2. Acquisition/disposal of nonproduced, nonfinancial assets

1. B. Financial account1. A. b. 1. Direct investment

1.1 Abroad1.1.1 Equity capital

1.1.1.1 Claims on affiliated enterprises1.1.1.2 Liabilities to affiliated enterprises

1. A. b. 2. 2.3 1.1.2 Reinvested earnings1.1.3 Other capital

44


Credit Debit

***If distributed branch profits are not identified, all branch profits are considered to be distributed.

1. A. b. 2. 1.2 2.1.2 1.1.3.1 Claims on affiliated enterprises1.1.3.2 Liabilities to affiliated enterprises

1. A. b. 2. 1.2 In reporting economy1.2.1 Equity capital

1.2.1.1 Claims on direct investors1.2.1.2 Liabilities to direct investors

1. A. b. 2. 1.2 1.2.2 Reinvested earnings1.2.3 Other capital


1. A. b. 2. Portfolio investment2.1 Assets

2.1.1 Equity securities2.1.1.1 Monetary authorities2.1.1.2 General government2.1.1.3 Banks2.1.1.4 Other sectors

1. A. b. 2. 1.2 2.1.2 Debt securities2.1.2.1 Bonds and notes

2.1.2.1.1 Monetary authorities2.1.2.1.2 General government2.1.2.1.3 Banks2.1.2.1.4 Other sectors

1. A. b. 2. 1.2 2.1.2 2.1.2.2 Money market instruments2.1.2.2.1 Monetary authorities2.1.2.2.2 General government2.1.2.2.3 Banks2.1.2.2.4 Other sectors

1. A. b. 2. 1.2 2.1.2 2.1.2.3 Financial derivatives2.1.2.3.1 Monetary authorities2.1.2.3.2 General government2.1.2.3.3 Banks2.1.2.3.4 Other sectors

1. A. b. 2. 2.2 Liabilities2.2.1 Equity securities

2.2.1.1 Banks2.2.1.2 Other sectors

1. A. b. 2. 1.2 2.2.2 Debt securities2.2.2.1 Bonds and notes


45


Credit Debit

1. A. b. 2. 1.2 2.1.2 2.2.2.2 Money market instruments2.2.2.2.1 Monetary authorities2.2.2.2.2 General government2.2.2.2.3 Banks2.2.2.2.4 Other sectors

1. A. b. 2. 1.2 2.1.2 2.2.2.3 Financial derivatives2.2.2.3.1 Banks2.2.2.3.2 Other sectors

1. A. b. 3. Other investment3.1 Assets

3.1.1 Trade credits3.1.1.1 General government

3.1.1.1.1 Long-term3.1.1.1.2 Short-term

1. A. b. 2. 1.2 2.1.2 3.1.1.2 Other sectors3.1.1.2.1 Long-term3.1.1.2.2 Short-term

1. A. b. 2. 1.2 3.1.2 Loans3.1.2.1 Monetary authorities


1. A. b. 2. 1.2 2.1.2 3.1.2.2 General government3.1.2.2.1 Long-term3.1.2.2.2 Short-term

1. A. b. 2. 1.2 2.1.2 3.1.2.3 Banks3.1.2.3.1 Long-term3.1.2.3.2 Short -term


1. A. b. 2. 1.2 3.1.3 Currency and deposits3.1.3.1 Monetary authorities3.1.3.2 General government3.1.3.3 Banks3.1.3.4 Other sectors

1. A. b. 2. 1.2 3.1.4 Other assets3.1.4.1 Monetary authorities



46


Credit Debit

1. A. b. 2. 1.2 2.1.2 3.1.4.3 Banks3.1.4.3.1 Long-term3.1.4.3.2 Short-term


1. A. b. 2. 3.2 Liabilities3.2.1 Trade credits

3.2.1.1 General government3.2.1.1.1 Long-term3.2.1.1.2 Short-term


1. A. b. 2. 3.2 3.2.2 Loans3.2.2.1 Monetary authorities

3.2.2.1.1 Use of Fund credit and loans from the Fund

1. A. b. 2. 1.2 2.1.2 3.2.1.2 3.2.2.1.2 Other long-term3.2.2.1.3 Short-term




1. A. b. 2. 3.2 3.2.3 Currency and deposits3.2.3.1 Monetary authorities3.2.3.2 Banks

1. A. b. 2. 3.2 3.2.4 Other liabilities3.2.4.1 Monetary authorities





47


Credit Debit

1. A. b. 4. Reserve assets4.1 Monetary gold4.2 Special drawing rights4.3 Reserve position in the Fund4.4 Foreign exchange

4.4.1 Currency and deposits4.4.1.1 With monetary authorities4.4.1.2 With banks

1. A. b. 4. 4.5 4.4.2 Securities4.4.2.1 Equities4.4.2.2 Bonds and notes4.4.2.3 Money market instruments and financial derivatives

1. A. b. 4. 4.5 Other claims

48


Credit Debit

Selected Supplementary Information

1. Liabilities constituting foreign authorities’ reserves1.1 Bonds and other securities

1.1.1 Monetary authorities1.1.2 General government1.1.3 Banks1.1.4 Other sectors

1. 1.2 Deposits1.2.1 Monetary authorities1.2.2 Banks

1. 1.3 Other liabilities1.3.1 Monetary authorities1.3.2 General government1.3.3 Banks1.3.4 Other sectors

2. Exceptional financing transactions2.1 Transfers

2.1.1 Debt forgiveness2.1.2 Other intergovernmental grants2.1.3 Grants received from Fund subsidy accounts

1. 2.2 Direct investment2.2.1 Investment associated with debt reduction2.2.2 Other

1. 2.3 Portfolio investment: borrowing by authorities orby other sectors on behalf of authorities—liabilities*

1. 2.4 Other investment—liabilities*2.4.1 Drawings on new loans by authorities or

by other sectors on behalf of authorities1. 2.2 2.4.2 Rescheduling of existing debt

2.4.3 Accumulation of arrears2.4.3.1 Principal on short-term debt2.4.3.2 Principal on long-term debt2.4.3.3 Original interest2.4.3.4 Penalty interest

1. 2.2 2.4.4 Repayments of arrears2.4.4.1 Principal2.4.4.2 Interest

1. 2.2 2.4.5 Rescheduling of arrears2.4.5.1 Principal2.4.5.2 Interest

1. 2.2 2.4.6 Cancellation of arrears2.4.6.1 Principal2.4.6.2 Interest

49

*Specify sector involved and standard component in which the item is included.

3. Other transactions3.1 Portfolio investment income


3. 3.2 Other (than direct investment) income3.2.1 Monetary authorities3.2.2 General government3.2.3 Banks3.2.4 Other sectors

3. 3.3 Other investment (liabilities)3.3.1 Drawings on long-term trade credits3.3.2 Repayments of long-term trade credits3.3.3 Drawings on long-term loans3.3.4 Repayments of long-term loans

4. Services sub-items4.1 Travel (personal)

4.1.1 Health-related4.1.2 Education-related4.1.3 Other

3. 4.2 Miscellaneous business, professional, and technical services4.2.1 Legal, accounting, management consulting, and public relations4.2.2 Advertising, market research, and public opinion polling4.2.3 Research and development4.2.4 Architectural, engineering, and other technical services4.2.5 Agricultural, mining, and on-site processing4.2.6 Other

50


182. The standard components and coverage of thecurrent account and the capital and financialaccount are discussed in Chapter 8; coverage of thecurrent account is referred to in paragraphs 152through 171. As presented in this Manual, the currentaccount is in concordance with SNA coverage ofexternal accounts for goods and services, primaryincomes, and current transfers. (See Chapter 3.)Because the net balance on the current accountconstitutes an integral part of the measure of aneconomy’s saving, the net balance can be viewed asone meaningful indicator of an economy’s saving andspending behavior. To the extent that national savingexceeds or falls short of net domestic investment (netcapital formation), the net balance on currenttransactions (current external balance in the SNA), onnet capital transfers, and on acquisition or disposal ofnonproduced, nonfinancial assets represents theamount of an economy’s net foreign investment or netlending or borrowing vis-à-vis the rest of the world.

Characteristics and Classification

183. As presented in this Manual, the structure of thecurrent account contains most of the componentstraditionally included. The structure of the account has,however, significantly altered—with regard to majorclassifications and specific components—from thatpresented in the fourth edition. The structure remainsin accord with the considerations stated in Chapter 8,paragraph 143.

184. Goods usually comprises the largest category oftransactions that, for the most part, involve changes ofownership between residents and nonresidents. Thescope of this classification has been expanded fromthat in the fourth edition to include—in addition togeneral merchandise, which covers most movablegoods—(i) the movement of goods for processing(when no change of ownership occurs); (ii) the valueof repairs on goods (not the value of the movement ofgoods undergoing repair); and (iii) goods procured inports by nonresident carriers. In addition, nonmonetarygold is specified under goods as a sub-item to beidentified, if feasible, as gold to be held as a store of

value or as other (industrial) gold. Further detailedsubdivisions of goods (commodity end-use categories,for example) often are desirable for analytical purposesand are provided in the balance of paymentspublications of many countries.

185. Services is the second major category of thecurrent account. Both the production of, andinternational trade in, services differ from productionand trade related to goods. International trade in goodsis conducted separately from production. For example,goods may be produced in one economy andsubsequently delivered to residents, who may or maynot be known when production occurs, of anothereconomy. In contrast, the production of a service islinked to an arrangement made—between a particularproducer in one economy and a particular consumer orgroup of consumers in another—prior to the time thatproduction occurs. Thus, international trade in servicesis closely linked with international production ofservices, as the production process itself involves aresident and a nonresident. Nonetheless, the boundarybetween goods and services is sometimes blurred;items classified as goods may include some element ofservices and vice versa.

186. As presented in this Manual, services coverstraditional items (such as travel and transportation) thatwere included in the fourth edition presentation anditems (such as communications, financial and computerservices, royalties and license fees, and many types ofother business services) that are becoming increasinglyimportant in international transactions. In contrast tothe treatment in the fourth edition, in this Manual,transactions in services are clearly separated fromincome transactions. This treatment is in accordancewith the SNA; allows, to the extent practicable, forlinkage with the CPC; and better serves to facilitateinternational negotiations concerning issues pertainingto services.

187. Transportation (the first item listed amongservices) comprises freight services, together withsupporting and auxiliary services, by all modes oftransportation for the movement of goods and theinternational carriage of passengers. (Transportation

51

IX. Structure and Characteristics of the Current Account

does not cover the carriage, within an economy, ofnonresident passengers by resident carriers.) There is aclose interrelationship between freight services andgoods and, in some instances, such services may not besubject to clear distinctions from goods. There may beanalytical interest in both separate and inclusivetreatment of the two for purposes of various domesticand international comparisons. Passenger transportationis closely linked with travel, in which some relatedservices are included. Transportation subsumes, withthe exception of freight insurance, the shipment andother transportation items as presented in the fourthedition of the Manual. Freight insurance is nowincluded with insurance services. (See Chapter 13,paragraphs 255 through 257.) The new grouping shouldfacilitate international comparisons and is in accordwith other statistical systems.

188. Travel differs from other components of servicesin that it is a demand-oriented activity. The traveler(consumer) moves to the location of the economy thatprovides the goods and services desired. Travel issubdivided into two major components: business andpersonal.

189. Treated as part of a residual item in the fourthedition of the Manual, other services are accordedincreased prominence in the fifth edition. Both thestructure and classification of the specific other servicesare related to the importance attached to these items byinternational bodies [e.g. in the General Agreement onTariffs and Trade (GATT) ] as a basis for negotiationsand by analysts involved with domestic and interna-tional aspects of trade, production, and related issues.Although the significance of these services varies widelyin the international accounts of countries, the structureprovides a ready reference for items likely to assumeincreasing importance in international transactions.

190. Income comprises compensation of employeesand investment income (covering direct investmentincome and other dividends and interest). Thistreatment of income as a separate component of thecurrent account accords with that in the SNA;tightens the links between income and financialaccount flows and between the balance of paymentsand the international investment position; andincreases the analytical usefulness of the internationalaccounts.

191. Current transfers are grouped separately fromgoods, services, and income because the former aregenerally conceived as showing distinctive character-istics. The distinction between real resources andtransfers, however, may sometimes be rather arbitrary.

For example, receipts by an economy from certainindividuals working abroad are classified either ascurrent transfers or as compensation of employees;the classification depends on how long the individualshave stayed in the countries where they are working.The Manual and the SNA define a current transfer inthe same way, and the disaggregation of transfers intocurrent transfers and capital transfers—a departurefrom previous editions—aligns with SNA treatment andwith various analytical presentations. This changeremoves inconsistencies in the use and meaning of theterm current as it concerns transactions and balancingitems in the Manual and the SNA. (The distinctionbetween current transfers and capital transfers isdiscussed in Chapter 15.)

Gross Recording, Valuation, and Time of Recording

192. In the current account, gross outflows from andgross inflows to the economy should, in principle, berecorded as credits and debits, respectively. Individualcomponents are defined in such a way that entrieswould be made on a gross basis. This emphasis ongross recording in the current account stems from the fact that credit and debit entries for many specifictypes of current transactions are seldom related in acausal way. For example, even though provision andacquisition of travel services are included in the single component for travel, provision of travel serviceshas, from an economic standpoint, little connectionwith the acquisition by the same economy of suchservices. Moreover, gross figures are utilized in contextsother than the analysis of balance of paymentsdevelopments. In general, gross transactions recordedin the current account are often indicators of therelative importance of particular items within aneconomy and of the relative importance of variouseconomies in international transactions. Grosstransactions recorded in the current account aretherefore used to compare economies and to provideweights for aggregation. Also, gross figures provide abetter basis for analysis of changes in net balances.Two specific applications important for the IMFrepresent the use of gross figures: (i) Valuation of theSDR is based on a basket of currencies selected inconsideration of the issuing countries’ shares in worldexports of goods and services and weighted in broadproportion to those shares. (ii) The relative size of anIMF member’s gross transactions in the currentaccount is one factor used to determine the relativequota of a Fund member.


52

193. Exceptions to the general rule of gross recordingare sometimes made because of the practical difficultyof collecting certain information on a gross basis (e.g.,some transportation services) or because of nettingprocedures used to derive certain estimates. Theseconsiderations are discussed in appropriate chapters.Nonetheless, gross recording remains the principle for

recording transactions in the current account and, ingeneral, is more useful than net recording for balanceof payments and other analyses.

194. Principles and practices dealing with valuation andtime of recording for current account transactions arediscussed in chapters 5 and 6, respectively, and inchapters 10 through 15.

CHAPTER IX

53

Coverage and Principles

195. As subsequently defined in this Manual, goodscovers general merchandise, goods for processing,repairs on goods, goods procured in ports by carriers,and nonmonetary gold. In accordance with generalbalance of payments principles, change of ownership isthe principle determining the coverage and time ofrecording of international transactions in goods.Certain exceptions are applied to the principle; theseare discussed in subsequent sections. Exports andimports of goods are recorded at market values atpoints of uniform valuation, that is, the customsfrontiers of exporting economies.

Definitions

196. General merchandise refers, with someexceptions specified later in this chapter, to movablegoods for which changes in ownership—actual orimputed—occur between residents and nonresidents.

197. Goods for processing covers goods that areexported or imported for processing and that involvetwo transactions: (i) the export of a good (e.g., crudeoil, vehicle parts, fabric) and (ii) the re-import of thegood (refining of crude oil into petroleum, transfor-mation of fabric into clothing) on the basis of acontract and for a fee. Symmetrically, processingperformed (for nonresidents) in the partner economyconsists of an import followed by an export. Theinclusion, on a gross basis, of these transactions undergoods is an exception to the change of ownershipprinciple.

198. Processing can consist of any activity performedunder contract: oil refining, metal processing, vehicleassembly, clothing manufacture, etc. In this Manual,there is concordance with the SNA concept ofdistinguishing between processing in which goodsundergo substantial physical change and otherprocessing. The former is included under goods andthe latter, under services, in the SNA. However, becauseit is difficult to make such a distinction and becausemost international processing involves substantialphysical change, it is recommended, for practical

reasons, that all processing be included under goods.The basis of the conceptual distinction is that goodsoriginally exported or imported essentially lose identityby being transformed or incorporated into other goods.The goods subsequently re-imported or re-exportedessentially become new goods produced abroad or inthe compiling economy and classified in a differentgroup (three-digit level) of the CPC than the goodsoriginally exported abroad or originally imported intothe partner economy. The value of the goods beforeand after processing should be recorded when thegoods are exported and then imported, or vice versa.(Corresponding entries in the financial account arerequired when goods remain in the processingeconomy after the end of a recording period.)

199. Excluded from the category of goods forprocessing are goods subject to on-site processinginvolving an import not followed by an export (or viceversa). These goods are included under generalmerchandise. Two particular cases warrant mention.The first concerns the treatment of goods that are sentabroad for processing and subsequently sold to aresident of the processing economy. Such goods areincluded under exports of general merchandise. Thepayment for processing is entered as a debit underservices, and an adjustment is made to themerchandise export figure to include the value ofprocessing. The second case concerns the treatment ofgoods that are sent abroad for processing in oneeconomy and then sold to another economy. A servicepayment from the original economy to the processingeconomy is entered under merchanting and other trade-related services, and an export (including the value ofprocessing) from the original economy to the (third)purchasing economy is recorded under generalmerchandise. Included under processing (on practicalgrounds, as noted in paragraph 198) are goods towhich some value (e.g., packaging, labeling, etc.) isadded. (This added value would be recorded in theSNA as a transaction in services.)

200. The category of repairs on goods covers repairactivity that involves work performed by residents onmovable goods owned by nonresidents (or vice versa).Examples of such goods are ships, aircraft, and other

54

X. Goods

transportation equipment. In contrast to the valuerecorded for goods for processing, the value recordedfor repairs on goods reflects the value of the repairs(the fee paid or received) rather than the gross value ofthe goods before and after repairs. The SNA distinctionbetween repairs performed on investment goods andthose performed on other goods is recognized as avalid one. (The latter are included under services in theSNA.) Nonetheless, it is recommended that the value ofall repairs be included under goods. This recommen-dation is made because of the practical difficultyinvolved in making distinctions between the two typesof goods and the fact that the bulk of internationalrepairs are performed on investment goods. Excludedare construction repairs (recorded under constructionservices), computer repairs (recorded under computerand information services), and maintenance performedin ports and airports on transportation equipment(recorded under other transportation services).

201. Goods procured in ports covers goods (e.g., fuels,provisions, stores, and supplies) procured by residentor nonresident carriers abroad or in the compilingeconomy. Related services (e.g., towing, storage,maintenance, etc.) are excluded; these are recordedunder other transportation services.

202. Nonmonetary gold covers exports and imports ofall gold not held as reserve assets (monetary gold) bythe authorities. Nonmonetary gold is treated as anyother commodity and, when feasible, is subdivided intogold held as a store of value and other (industrial) gold.

Change of Ownership

203. With specified exceptions, application of thechange of ownership (between a resident andnonresident) concept to goods ensures, in principle,that the goods component is consistent in coverageand timing with other items, particularly financial items,in the balance of payments. However, internationalstandards for trade statistics (see the Guide), as well ascustoms returns in most countries, are based instead onphysical movements of goods across national orcustoms frontiers. Although the goods that changeownership internationally are for the most part thesame goods that move across frontiers, the changes andmovements often do not occur at exactly the same time.

Convention for recording

204. Goods for export are generally considered tochange ownership at the time the exporter ceases tocarry the goods on his books as a real asset (i.e., when

he records a sale and makes a corresponding entry inhis financial items). Goods for import are considered tochange ownership when the importer enters them onhis books as a real asset (i.e., when he records apurchase and makes a corresponding entry in hisfinancial items). This convention is designed topromote consistency between the goods componentand the financial account in the balance of paymentsof the compiling country, as well as consistencybetween the compilation of goods by the exportingand importing countries. In practice, however,exporters and importers may not enter the transactionsin their books as of the same date, so significantdifferences in timing may result even when thisconvention is followed.

Other exceptions to change of ownership rule

205. The definition of residence presented in thisManual has implications for the coverage of goodsbecause of the change of ownership rule. Althoughenterprises are always considered residents of theeconomies in which the enterprises operate, enterprisesin different economies may be under the samemanagement. Affiliated enterprises may thereforeengage in transactions that are not subject to the legalchanges of ownership that would occur if theenterprises were independently managed. In fact,transactions between a parent company and a directinvestment branch (an unincorporated enterprise) couldnever involve legal changes of ownership in the literalsense because both parties are part of the same legalentity. Moreover, while a parent company and a directinvestment subsidiary (an incorporated enterprise)constitute separate legal entities, a different balance ofpayments treatment for transactions that take the formof legal changes of ownership and those that do notwould seem neither feasible nor desirable. Therefore, itis recommended that transactions involving goods andtaking place between direct investment enterprises andparent companies or other related enterprises shouldbe recorded as if changes of ownership have occurred.(Exceptions are transactions in goods specified inparagraph 209.)

206. There are also important instances in which thepossession of goods passes, without the defined changeof ownership, between residents and nonresidents whoare not affiliated. The effect of a legal change ofownership between independent parties can beachieved by other means. A significant example isfinancial leasing or lease arrangements (made for acapital good for most or all of its expected economic

CHAPTER X

55

life) under which the lessor expects to recover most orall of the cost of the goods and the carrying charges. Itis recommended that the economic nature of thesetransactions be given precedence over the legal form.Therefore, a financial lease arrangement is to be takenas presumptive evidence that a change of ownership isintended. A change of ownership is imputed because inpractice, the lessee assumes the rights, risks, rewards,and responsibilities of ownership and, from an eco-nomic point of view, can be regarded as the de factoowner. A financial lease is a means by which the lesseefinances the purchase (as opposed to taking out a loanfor the purchase) of the good. The full equivalent ofthe market value of the goods (not the cumulative totalof expected lease payments) should be recorded undergoods, and an offsetting entry should be made in thefinancial account to record the credit extended to thelessee.

207. In contrast, a change, between a resident and anonresident, in ownership of goods may occur whengoods do not physically cross the frontier of theeconomy of the resident who acquires or relinquishesownership. When goods are acquired from oneeconomy, relinquished again to that or some othereconomy, and do not cross the frontier of the economyin which the temporary owner is a resident, the activityis considered a merchanting transaction rather than animport and re-export of the goods. It is recommendedthat the country of the temporary owner exclude suchgoods from the goods component unless the recordingperiods in which the goods are acquired andrelinquished are not the same. If the recording periodsdiffer, increases or decreases in stocks abroad from onereporting period to another should be shown asimports of goods or reductions in imports. (For a fullerexplanation of the treatment of these transactions, seeparagraphs 213 and 262.)

Inclusion, in exports or imports, of goods notcrossing frontiers

208. Goods not crossing frontiers should be includedin exports or imports if changes of ownership occur.Exceptions are changes of ownership that aretemporary (see preceding paragraph) or not related tosignificant economic activity. Such changes are to bedisregarded. Examples of goods that do not crossfrontiers but should nonetheless be included in exportsor imports are

ships, aircraft, railway rolling stock, gas and oildrilling rigs and production platforms, and othermovable equipment not tied to a fixed location

nonmonetary gold

goods consumed in resident-owned, offshoreinstallations (e.g., gas and oil drilling rigs andproduction platforms, ships, or aircraft that areoperating in international waters or airspace and arepurchased from nonresidents)

goods salvaged and fish and other marine productscaught by ships of the compiling economy and solddirectly abroad

goods purchased in one foreign country by thegovernment of the compiling economy for its ownuse in a foreign country

goods lost or destroyed after ownership has beenacquired by the importer but before the goods havecrossed a frontier.

Exclusion, from exports or imports, of goods crossing frontiers but not changingownership

209. Goods that cross frontiers without changingownership should not be covered under goods, exceptas noted in paragraphs 197 and 198 and in the previoussection on other exceptions to the change of ownershiprule. The principal types of goods that may crossfrontiers without changes of ownership are

direct transit trade (i.e., goods in transit through aneconomy)

returned exports and imports (see paragraph 210)

goods shipped under operational, that is, nonfinancialleasing arrangements (see paragraph 263)

transportation equipment, fishing vessels, gas and oildrilling rigs, and other mobile equipment that leavesor enters an economy without changes of ownership

shipments by a specific economy to that economy’smilitary and diplomatic establishments locatedoutside the territory of the economy

goods that cross frontiers and are lost or destroyedbefore being delivered by exporters

temporary exports and imports of goods that are notfor sale (e.g., display equipment for trade fairs andexhibitions; art exhibits; animals for breeding, show,or racing; stage and circus equipment)

samples of no commercial value.

The recommendation that transactions between directinvestment affiliates be recorded as if changes of


56

ownership have occurred (see paragraph 205) does notextend to these goods.

210. When the execution of a contract for the sale ofgoods is not completed after the goods have beenshipped out of the exporting economy and the goodsare later returned to the original owner, such goodshave not changed ownership. In concept, revisedentries should be made to exports for the period whenthe goods were initially (and incorrectly) recorded.However, in many instances, it will not be possible toanticipate, at the time goods originally cross a frontier,whether or not such goods will be returned in thefuture. Therefore, purely for statistical convenience, it issuggested that deductions, which are later foundnecessary, from exports and imports should be made inthe periods when the goods are returned.

Goods Classified Under Other Categories

211. Almost all movable goods for which changes ofownership occur between residents and nonresidentsare classified under goods. However, a few specifiedgoods are classified elsewhere.

Goods classified under services

212. Some goods are classified under servicesbecause the relevant data include these goodsindistinguishably or because the goods respond toeconomic factors differently than most goods do. Theprimary types of goods classified under services andthe items under which the goods are recorded are

goods acquired by travelers (travel) for their ownuse, by diplomatic and military missions or agenciesor by official personnel (government services n.i.e.),and by nonresident workers (travel)

newspapers and periodicals (not in bulk) sent on thebasis of direct subscription (computer andinformation services)

goods that do not cross frontiers and are acquiredand relinquished within the same recording period(other business services).

213. If goods are acquired in one recording periodand relinquished in a later period, however, the goodsshould be recorded in the balance of payments of thetemporary owner’s economy as imports in the periodin which the goods are acquired and deducted fromimports in the period in which the goods arerelinquished. In this case, changes from one recordingperiod to another in stocks of goods located abroad

and valued at acquisition cost constitute part of goodsfor the economy of the owner. In either situation, anydifference between the value of the goods whenacquired and relinquished is entered as merchantingunder other business services.

Goods treated as financial items

214. Certain physical items are regarded as financialitems and should not be included under goods.Examples are

evidences of financial claims, even though suchclaims have material form and are movable(Examples of such goods are paper money and coinin current circulation and securities that have beenissued.)

monetary gold treated as a financial asset (Monetarygold transactions between authorities of differenteconomies should be included in the financialaccount.)

nonfinancial assets—including land, structures,equipment, and inventories—that belong to anenterprise and are considered financial assets for theowner of that enterprise when the owner is not aresident of the economy in which the enterpriseoperates (A change of ownership resulting from theacquisition of these assets by an existing enterpriseis thus treated as a financial transaction and is notincluded in goods, except to the extent that such achange of ownership is actually accompanied by aphysical movement of goods.)

Special Types of Goods

215. Classification of certain physical items as goods issometimes questioned, most often because the goodsmay be accorded exceptional treatment under customsregulations or in trade returns. Examples of such goods,all of which should be recorded under goods if theitems qualify according to the definition and rules inthis Manual, are

commodity gold (i.e., nonmonetary gold), silverbullion, diamonds, and other precious metals andstones

paper money and coin not in current circulation andunissued securities, all of which should be valued ascommodities rather than at face value

electricity, gas, and water

livestock driven across frontiers

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parcel post

government exports and imports of goods, includinggoods financed by grants and loans (other thanthose exported and imported to and fromgovernment agencies and personnel)

goods transferred to or from the ownership of abuffer stock organization

migrants’ effects

smuggled goods, whether or not detected bycustoms

other unrecorded shipments of goods such as giftsand goods of less than stated minimum value.

Time of Recording

216. In principle, exports and imports of goods shouldbe recorded when ownership of the goods passes froma resident to a nonresident, or vice versa. In practice, achange of ownership is recognized (or is proxied) whenthe two parties to the transaction record it in theirbooks or accounts. (See paragraphs 114 through 118and paragraph 204.)

217. Neither physical movement, on which tradereturns are largely based, nor payment, which isreflected in exchange records, will necessarily coincidein timing with changes in the ownership of goods. TheGuide contains details on adjustments that wouldtheoretically be necessary for statistics derived fromthose two sources. Except for large, discretetransactions (such as deliveries of ships or aircraft), theappropriate adjustments are often quite difficult tomake. Information, especially in a form that can berelated to the time of physical movement or the time ofpayment for the same goods, is seldom available on theactual time that a change of ownership occurs. If theoverall value of trade, the regional pattern of trade, orthe terms of payment for trade change substantiallyfrom the beginning to the end of the recording period,however, failure to adjust for timing is likely to be animportant source of error in the balance of paymentsstatement and an important cause of asymmetrybetween the goods components for different countries.

218. Goods on consignment (i.e., goods intended forsale but not actually sold at the time of crossing afrontier) should, in principle, be included inmerchandise only at the time ownership changes. Inpractice, such goods are sometimes recorded at thetime the goods cross a frontier. The assumption in suchinstances is that a change of ownership has occurred or

will shortly occur. If this treatment is followed andthere is no change of ownership, the goods mustsubsequently be recorded again, in the same manner asreturned exports and imports (see paragraph 210), as adeduction from exports and imports.

Valuation

219. The value at which goods should be recorded inthe balance of payments is the market value of thegoods at the point of uniform valuation—the customsfrontier of the economy from which the goods areexported. That is, the goods are valued free on board(f.o.b.) at that frontier. At least two aspects of thisgeneral statement require elaboration.

Market valuation

220. The concept of market value and the specificapplication of the concept to internationally tradedgoods are discussed in Chapter 5. The United Nations(UN) deals at length with the valuation of exports andimports according to the UN standard for such statistics.The General Agreement on Tariffs and Trade alsoprovides an extensive treatment of the standard to beapplied for the customs valuation of imports. (See theGuide.)

Point of valuation

221. Delivery of goods by the exporter to the importerinvariably signifies a change of ownership and mayoccur at any time and place from the point at which thegoods are produced to the point of final use. A cleardistinction between (i) items regarded as goods and (ii) any additional distributive services that might beincluded in the final value of those goods is made inthis Manual. This distinction is made whether thedistributive services are performed before or after thechange of ownership occurs. Thus, goods will beuniformly valued in the limited sense that a borderlinebetween goods and distributive services can beestablished in accordance with one standard rule.

222. The standard, or rule, is that goods shall cover, inprinciple, the value of goods and related distributiveservices at the time the goods reach the customsfrontier of the economy from which the goods are tobe exported. The value of the goods includes the valueof any loading of the goods on board the carrier at thatfrontier. That is, exports and imports of goods arevalued f.o.b. at the customs frontier of the exportingeconomy. In the application of this rule, customs


58

bonded warehouses, customs bonded manufacturingplants, and free areas are included within the customsfrontier of the controlling and supervising economy.The customs frontier need not coincide physically withthe national boundary and could be located in theinterior of the economy.

223. Uniformity of this kind means that differingpractices for delivery of goods by exporters toimporters, as well as changes in those practices fromone period to another, have no effect on thedetermination of services included in the value ofgoods. No rule can be formulated, however, to producewhat could be considered, in a basic economic sense, auniform point of valuation for goods. Indeed, this kindof uniform valuation could more appropriately beviewed as uniform classification. The objective is toinclude in goods only a standard partial list of relateddistributive services; the principle that both the goodsand the services should be valued at market prices isnot in question in this context.

224. While adoption of any of several uniform pointsof valuation may be analytically useful, problems of astatistical nature arise. A principal difficulty is thatshipping practices are not standard, and the documents on which the compiler must usually rely asthe basis for estimates of goods and transportationservices will often cover shipping services performedon both sides of the customs frontier (or of any otheruniform point) without a detailed subdivision of thetotal shipping costs. For example, shipment by truckfrom door to door may be provided, or goods incontainers may be moved between central warehousesthat are distant from the customs frontiers in theexporting and importing economies. A primaryconsideration for specifying the customs frontier of theexporting economy, rather than some other location, asthe point of valuation is that the frontier is the point atwhich customs officials place valuations on exportsand, for a significant group of countries, on imports aswell. It is thus the point most likely to be reflected intrade statistics.

225. As a practical matter, the service of loading goodson board the carrier at the customs frontier is frequentlyperformed by or for the account of the carrier. In sucha case, trade statistics are likely to exclude the cost ofsuch services, but data on freight charges will almostcertainly include them. It is not suggested in thisManual that an attempt be made to reallocate suchcharges from transportation to goods. Instead, it isrecognized that the recommended f.o.b. basis for

recording goods may, in practice, be a free alongsideship (f.a.s.) basis rather than a strict f.o.b. basis.

226. Goods delivered to an importer at some pointwithin the exporting economy might not be shipped tothe customs frontier of that economy during the samerecording period. When this is the situation, an entryshould be made in one period for the value of thegoods at the point of delivery and, in a subsequentperiod, an entry should be made for the cost ofshipment from that point to the customs frontier. Bothof these entries are included in goods.

227. Application of the uniform valuation rule mayresult in the inclusion, under goods, of some serviceflows between nonresidents or between residents ofthe same economy. An exporter may deliver goodsbefore the goods reach the customs frontier of hiseconomy, and the importer may then employ asupplier of distributive services, who is not a residentof the exporting economy, to ship the goods to thecustoms frontier. An offset to such a flow of servicesbetween nonresidents is required in the balance ofpayments of the exporting country. To preserve auniform valuation in the goods component, theoffsetting entry should be made in transportation.Similarly, if the supplier of the services is the importerhimself or a resident of the importer’s economy, theservices will not have been provided to or fromresidents of different economies and an offset intransportation is also required in the balance ofpayments of the importing country.

228. Treatment of services performed by agents inconnection with transactions in goods also requiresconsideration. Some of these services apply onlygenerally to transactions and cannot realistically beattributed to the value of goods at any particular pointor date. As a practical way of dealing with the problem,it is recommended that, upon actual payment of anagent’s fee by the exporter, the fee should be includedin the f.o.b. value of the goods, regardless of whetherthe agent is a resident of the exporter’s country oranother country. When an agent’s fee is paid by animporter, the fee should only be included in the f.o.b.value of the goods if the agent is a resident of theexporting country. Agents’ fees paid by importers toresidents of their own countries and to residents ofcountries other than the exporting country are excludedfrom the f.o.b. value of the goods. In all cases, when afee is paid by a resident of one country to an agent inanother, an entry should be made in other businessservices-merchanting and other trade-related services

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(except when a fee is paid by an importer to an agentin the exporting country.)

229. In some instances, fees are paid by exporters toconsulates of importing economies. Such fees should

not be included when goods are valued at the frontierof the exporting economy. A consular fee is thus treatedas a cost incurred beyond the customs frontier of theexporting economy; that is, a consular fee is incurred inthe importing economy.


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Definition and Coverage

230. Transportation covers all transportation (sea, air,and other—including land, internal waterway, space,and pipeline) services that are performed by residentsof one economy for those of another and that involvethe carriage of passengers, the movement of goods(freight), rentals (charters) of carriers with crew, andrelated supporting and auxiliary services. Some relatedactivities are excluded: freight insurance, which isincluded in insurance services, Chapter 13; goodsprocured in ports by nonresident carriers and repairs oftransportation equipment, which are included ingoods, Chapter 10; repairs of railway facilities, harbors,and airfield facilities, which are included inconstruction services, Chapter 13; and rentals (charters)of carriers without crew, which are included in otherbusiness services, Chapter 13.

231. Most transportation services, for both passengersand freight, often are provided by enterprises throughthe operation of carriers and similar equipment.Questions arise as to the residence of such enterprisesor operators because the carrier may operate outsidethe economic territory, either in international waters orairspace or in one or more other economies in whichthe enterprise is resident. The residence of enterprisesis discussed in Chapter 4, and paragraphs 80 through82 are particularly relevant in this context.

Passenger Services

232. This component covers all services provided,between the compiling economy and abroad orbetween two foreign economies, in the internationaltransportation of nonresidents by resident carriers(credit) and that of residents by nonresident carriers(debit). Also included are passenger services performedwithin an economy by nonresident carriers. Excludedare passenger services provided to nonresidents byresident carriers within the resident economies; theseare included in travel, Chapter 12. In addition to theservices covered by passenger fares—including faresthat are a part of package tours but excluding cruisefares, which are included in travel—passenger services

include such items as charges for excess baggage,vehicles, or other personal accompanying effects andexpenditures for food, drink, or other items for whichpassengers make expenditures while on board carriers.

Freight Services and Conventions forRecording

233. Freight services include the loading on board orthe unloading of goods from carriers if contractsbetween owners of goods and carriers require that thelatter provide that service. When such a service isperformed at the customs frontier of the country fromwhich goods are exported, the loading charge isclassified as freight if the service is provided by, or forthe account of, the carrier; otherwise, the service isclassified as part of goods. This treatment is usedbecause, in practice, the statistics that can be collectedon freight will usually cover indistinguishably allservices that are performed by, or for the account of,the carriers, whereas the statistics on goods are unlikelyto include the loading charge if loading is provided by,or for the account of, the carrier.

234. The measurement of freight services is affected bythe convention noted in Chapter 10—that goods arevalued f.o.b. at the customs frontier of the exportingeconomy—and by the assumption that freight chargesare borne by the importing economy. Measurement offreight services is also affected by other factors relatedto this convention and assumption. Included in thef.o.b. value of goods are transportation servicesassociated with goods and performed prior to thearrival of goods at the customs frontier of the economyfrom which the goods are exported. Included intransportation are services associated with goods andperformed beyond the customs frontier of theexporting economy. These services cover transportationof goods to the customs frontier of the importingeconomy and, within that economy, to the point ofdelivery. These transportation services are treated asservices performed (by residents of the importingeconomy or by residents of other economies) forresidents of the importing economy.

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XI. Transportation

235. Thus, debit (payments) entries should be made inthe accounts of a compiling economy for all transpor-tation services performed (inside or outside theimporting economy) in relation to imports of thecompiling economy when (i) these services areperformed by nonresidents and (ii) when these servicesare performed after the imports are loaded on board acarrier at the customs frontier of the exportingeconomy. Conversely, credit (receipts) entries shouldbe made in a compiling economy’s accounts for alltransportation services performed by residents of thecompiling economy in relation to exports of thateconomy when such services are performed after theexports have been loaded on board a carrier at thecustoms frontier. Also entered as credits are servicesprovided by residents in relation to transport of goodsbetween other countries. Required entries representidentifiable services performed by residents ornonresidents without regard to the ownership of goodsby residents or nonresidents at the precise times whensuch services are performed. (This matter is difficult—ifnot impossible—to ascertain.) Offsetting debit andcredit entries for services performed by residents of acompiling economy in relation to imports of thecompiling economy (and by nonresidents in relation toexports) are not made under the convention describedin paragraph 234 because the recording is consistentwith a uniform f.o.b. valuation basis for merchandise.However, for other purposes (such as trade negotia-tions or cross-checking individual country data and theglobal consistency of transportation accounts), grossfreight compilations that are linked to an ex-worksvaluation of goods and include resident-residenttransactions may be useful.

236. Use of the convention admittedly does notobviate all the statistical problems that may arise incompiling data for goods and transportation. Whenthese two items are derived from collection forms thatshow imports valued at the frontier of the importingeconomy (c.i.f. valuation), a separate estimate must bemade for the value of the transportation servicesperformed beyond the customs frontier of the economyfrom which the goods are exported. This treatment,however, essentially reallocates the element for trans-portation services in the c.i.f. value of imports betweengoods and transportation, so any error in estimationdoes not affect the two items combined. Furthermore, ifthe compiling economy performs any of thetransportation services in connection with imports, theamount of such services must be estimated separatelyfrom a total that includes similar services performed bythe compiling economy in connection with exports or

other goods in transit trade. This dissagregation may beconsiderably more difficult to obtain than data on totalreceipts. In this case, any error in estimation produces,without affecting the net amount of the item, an equaloverstatement or understatement of the credit and debitsides of transportation.

237. Gross flows between residents and nonresidentsare recorded for transportation services (other thanthose previously covered) pertaining to goods. Theseservices include transit trade through a compilingeconomy, coastal transportation or other transportationof goods between points within an economy, move-ments of goods to or from entities located outsideterritories where the entities are residents (for example,government agencies with personnel stationed abroad),and goods lost or destroyed after crossing a customsfrontier but before delivery is made by the exporter.

238. In addition, offsets are made under transportationto certain flows that may occur between residents andbetween nonresidents and that may be included ingoods when such goods are valued uniformly at thecustoms frontier of the economy from which the goodsare exported. Specifically, credits are included by theimporting economy for services performed within thecustoms frontier of the exporting economy, and debitsare included by the exporting economy for services thatnonresidents perform within the customs frontier ofthat economy.

Rentals of Transportation Equipment withCrew

239. This category covers rentals or operational leasesmade by residents to nonresidents and vice-versa ofvessels, aircraft, freight cars, or other commercialvehicles with crews for limited periods (such as asingle voyage) for the carriage of freight and/orpassengers. Also included are towing and servicesrelated to the transportation of oil platforms, floatingcranes, and dredges. These rentals are included, asappropriate, in passenger services or freight services.Excluded are financial leases (equivalent to changes ofownership with related payments recorded, asappropriate, under income and amortization) or timecharters (for longer periods) for which paragraph 80 isparticularly relevant.

Supporting and Auxiliary Services

240. This category covers a range of services providedin ports, airports, and other terminal facilities. Among


62

such services are cargo handling (loading and unloadingof containers.); storage and warehousing; packing andrepacking; other towing, pilotage, and navigational aidfor carriers; maintenance and cleaning of transportation

equipment; and salvage operations. Also included arecommissions and agents’ fees associated with passengerand freight transportation. These services are recorded asother transportation services.

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Nature of Travel Services

241. Travel 3 differs from other components ofinternational services in that it is a demand-orientedactivity. The consumer (traveler)4 moves to the locationof the provider (residents of the economy visited) forthe goods and services desired by the traveler. Thus,unlike other services, travel is not a specific type ofservice but an assortment of services consumed bytravelers. Travel is not identified as a service in theCPC.

Definition

242. Travel covers primarily the goods and servicesacquired from an economy by travelers (defined inparagraph 243) during visits of less than one year inthat economy. The goods and services are purchasedby, or on behalf of, the traveler or provided, without aquid pro quo, for the traveler to use or give away.Excluded is the international carriage of travelers,which is covered in passenger services undertransportation. (See paragraph 232.)

243 A traveler is an individual staying, for less thanone year, in an economy of which he is not a residentfor any purpose other than (i) being stationed on amilitary base or being an employee (includingdiplomats and other embassy personnel) of an agencyof his or her government, (ii) being an accompanyingdependent of an individual mentioned under (i), or(iii) undertaking a productive activity directly for anentity that is a resident of that economy. (Seeparagraphs 67 through 70.) Expenditures made byindividuals covered in (i) and (ii) are recorded undergovernment services n.i.e. (See Chapter 13.) Expendi-tures made by individuals (including seasonal andborder workers) covered in (iii) are included undertravel. Travelers include tourists, who spend at leastone night in the country visited, and same-day travelersor excursionists, who stay less than twenty-four hours

and do not remain overnight. The latter group may beshown as a separate category, or as a memorandumitem, by economies in which same-day travelersaccount for significant transactions.

244. The one-year rule does not apply to students andmedical patients, who remain residents of theireconomies of origin even if the length of stay inanother economy is one year or more. Allexpenditures, including those for educational andhealth-related purposes (such as tuition, room andboard paid for or provided by educational institutions,hospital charges, treatments, physicians’ fees, etc.),made by students and medical patients are recordedunder travel and separately identified, if possible, underSelected Supplementary Information. (See the tablefollowing Chapter 8.) Fees for services rendered abroad(including provision of correspondence courses) byteachers or doctors are recorded under personal,cultural, and recreational services.

Types of Travel

245. Although the list of standard componentscontained in this Manual includes only two items fortravel (business and personal), there are distinctionswithin both categories. (See subsequent sections, whichmay be of significance for various analytical purposes,on business travel and personal travel.)

Business travel

246. The business travel category covers travelersgoing abroad for all types of business activities: carriercrews stopping off or lying over; governmentemployees on official travel; employees of internationalorganizations on official business; and employees doingwork for enterprises that are not resident in theeconomies in which the work occurs.

247. Business travelers are those who visit an economyfor sales campaigns, market exploration, commercialnegotiations, missions, meetings, production orinstallation work, or other business purposes on behalfof an enterprise resident in another economy. Travel

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XII. Travel

3As used in this Manual, the term travel is synonymous with the term tourismused in the SNA and by the World Tourism Organization (WTO).

4The term traveler is broadly synonymous with the term visitor used by theWTO.

refers to personal acquisitions of goods and services(including those for which the business travelers arereimbursed by employers) but not the sales orpurchases that the business travelers may conclude onbehalf of the enterprises they represent. Personalexpenditures on goods and services by seasonal,border, and other nonresident workers in theeconomies in which they are employed also arerecorded under travel. (See paragraphs 246 and 271.)These expenditures are not included under tourism bythe WTO.

248. Government employees and employees ofinternational organizations on official travel (paragraph246) are distinguished from employees stationed orliving, respectively, in the country. (Purchases for thelatter are included in government services n.i.e.)

Personal travel

249. This category covers travelers going abroad forpurposes other than business (e.g., for leisure activitiessuch as holidays, participation in sports and otherrecreational and cultural activities, visits with relativesand friends, pilgrimage and religious observances,studies, and health-related purposes). Also included inthis category are government employees on leave in

economies other than those in which they are residents(or those in which they are stationed) and transittravelers visiting countries en route to otherdestinations.

Goods and Services Covered

250. All goods and services acquired by travelers (asdefined previously) from the economies in which theyare traveling and for their own use are recorded undertravel. These goods and services may be paid for bythe traveler, paid for on his or her behalf, or providedto him or her without a quid pro quo (e.g., free roomand board received by official visitors or by friends andrelatives). In practice, information on goods andservices provided without a quid pro quo will notusually be available. If information is available, a contraentry is included under transfers.

251. The most common goods and services entered intravel are lodging, food and beverages, entertainment,and transportation within the economy visited—all ofwhich are consumed in the providing economy—andgifts, souvenirs, and articles (irrespective of value)purchased for travelers’ own uses and taken out of theeconomies visited.

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Coverage

252. Other services comprise those international servicetransactions not covered under transportation andtravel. The significance and data constraints limiting therecording of classifications of international services varywidely among countries. The classifications reflect theincreasing global importance of items such ascommunications services and financial services; betterlinkage between classifications of balance of paymentsservices and the Central Product Classification;5 theanalytic value of classifications to compilers and users; ahigh degree of compatibility with similar classificationsof other international organizations; and the statisticalrequirements for multilateral negotiations oninternational services. The classifications also establish aframework to encompass transactions anticipated to beof growing importance in the future.

Definitions

253. Communications services covers two primarycategories of transactions between residents andnonresidents in international communications. Theseare (i) telecommunications, which encompass thetransmission of sound, images, or other information bytelephone, telex, telegram, cable, broadcasting, satellite,electronic mail, facsimile services, etc. and includebusiness network services, teleconferencing, andsupport services; and (ii) postal and courier services,which encompass the pickup, transport, and delivery ofletters, newspapers, periodicals, brochures, otherprinted matter, parcels, and packages by national postaladministrations and other operators. Also included arepost office counter and mailbox rental services.

254. Construction services covers work performed onconstruction projects and installations by employees ofan enterprise in locations outside the economic territoryof the enterprise. (The work is generally performed fora short time period; the one-year rule is to be appliedflexibly.) Goods imported by the enterprise for use inthe projects are included in the value of these services

rather than being recorded under goods; expendituresfor local supplies, etc. are included under otherbusiness services. Projects carried out by foreignsubsidiaries or branches of enterprises (direct investors)and certain site offices are excluded because suchprojects are part of the production of the hosteconomy. For aspects of residency concerning majorprojects (such as bridges, dams, etc.) carried out overseveral years and for factors that determine theattribution of production and are particularly relevantfor construction site offices, see paragraph 78.

255. Insurance services covers the provision of varioustypes of insurance to nonresidents by resident insuranceenterprises, and vice versa. Such services cover freightinsurance (i.e., insurance on goods that are in theprocess of being exported or imported); other types ofdirect insurance (i.e., life—including pension andannuity services, other casualty or accident, health,general liability, fire, marine, aviation, etc. insurance);and reinsurance. The specific classification of varioustypes of insurance is determined by individual countriesaccording to particular requirements. Also recorded asinsurance services are agent commissions related toinsurance transactions.

256. Treatment of freight insurance is consistent withthe f.o.b. valuation of merchandise exports andimports. Insurance cost up to the customs frontier ofthe exporting economy is included in the f.o.b. value ofthe goods exported. If that insurance is paid for by theimporter (e.g., through an enterprise resident in theimporter’s economy), the exporter is deemed topurchase the insurance and simultaneously recover thecost from the f.o.b. value recorded in the accounts.Insurance services provided for goods after the goodshave crossed the customs frontier of the exportingeconomy are recorded as imports of insurance servicesby the importer when the insurance is provided by anenterprise nonresident in the importing economy. If theinsurance is provided by an enterprise resident in theimporting economy, no entry is made in balance ofpayments accounts.

257. International insurance services are estimated orvalued by service charges included in total premiums

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XIII. Other Services

5The relationship of the classifications of balance of payments services to theCPC is detailed in Appendix 3.

earned rather than by total premiums. In principle, themeasurement of transactions in international insuranceservices is consistent with that described in the SNA forinsurance services for resident sectors. However, inpractice, both the Manual and the SNA allow resident-nonresident flows associated with investmentincome on technical reserves to be ignored because ofestimation problems, particularly for imports.6 Thus, forgoods, the insurance service charges for resident issuersproviding insurance services to nonresidents (credit) arethe difference between premiums earned and claimspayable on goods lost or destroyed in transit. Theservice charges for nonresident issuers providingservices to residents (debit) can be estimated by takingthe ratio of estimated service charges to total premiumsfor exports of insurance services and applying the ratioto total premiums paid to nonresident issuers. The ratioshould be based on a medium- to long-term period. Forother types of direct insurance (and pension andannuity services), the service charges for nonresidentinsurers providing services to residents can be estimatedby applying the ratio of estimated service charges tototal premiums for resident insurers or to contributionsreceived by resident pension funds. Again, the ratioshould be based on a medium- to long-term period. Fornon-life insurance, total premiums minus the estimatedservice charge and claims payable should be recordedunder current transfers. For life insurance, premiumsminus the service charges and claims payable should berecorded in the financial account under otherinvestment. (For some purposes—e.g., for use in tradenegotiations—total premiums and claims are relevantand are shown as memorandum items under insuranceservices.) For reinsurance, exports of services (credits)are, in principle, estimated as the balance of all flowsoccurring between resident reinsurers and nonresidentinsurers. Imports (debits) are, in principle, estimated asthe balance of all flows occurring between residentinsurers and nonresident reinsurers.

258. Financial services covers financial intermediaryand auxiliary services (except those of insuranceenterprises and pension funds) conducted betweenresidents and nonresidents. Included are intermediaryservice fees, such as those associated with letters ofcredit, bankers’ acceptances, lines of credit, financialleasing, and foreign exchange transactions. (For thelatter, the spread between the midpoint rate and thebuying or selling rate is the service charge.) Alsoincluded are commissions and other fees related to

transactions in securities—brokerage, placements ofissues, underwritings, redemptions, and arrangementsof swaps, options, and other hedging instruments;commissions of commodity futures traders; and servicesrelated to asset management, financial marketoperational and regulatory services, security custodyservices, etc. Service charges on purchases ofInternational Monetary Fund resources are includedamong an economy’s financial service payments, as arecharges (similar to commitment fees) associated withundrawn balances under stand-by or extendedarrangements with the IMF.7

259. Computer and information services covers compu-ter data and news-related service transactions betweenresidents and nonresidents. Included are data bases,such as development, storage, and on-line time series;data processing—including tabulation, provision ofprocessing services on a time-share or specific (hourly)basis, and management of facilities of others on acontinuing basis; hardware consultancy; softwareimplementation—including design, development, andprogramming of customized systems; maintenance andrepair of computers and peripheral equipment; newsagency services—including provision of news, photo-graphs, and feature articles to the media; and direct,non-bulk subscriptions to newspapers and periodicals.

260. Royalties and license fees covers the exchange ofpayments and receipts between residents andnonresidents for the authorized use of intangible,nonproduced, nonfinancial assets and proprietary rights(such as patents, copyrights, trademarks, industrialprocesses, franchises, etc.) and with the use, throughlicensing agreements, of produced originals orprototypes (such as manuscripts and films). Inclusion ofthis item under services, rather than under income, isin accordance with the SNA treatment of such items aspayments for production of services for intermediateconsumption or receipts from sales of output used asintermediate inputs.

261. Other business services covers various categories,other than those previously defined, of service transac-tions between residents and nonresidents. Thegrouping of these services is not indicative of the

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6 Insurance technical reserves cover actuarial reserves against outstanding risksand reserves for with-profits insurance, prepayments of premiums, and reservesagainst unsettled claims.

7 In the SNA, in addition to the explicit commissions and fees noted previously,there is an item for financial intermediation services indirectly measured. Thesereflect financial service charges that, while not explicit, may be imputed orderived from the differences between appropriate reference interest rates andrates actually applied to loans, debt securities, or deposits. Such imputationsare equivalent to reclassifying a portion of interest as financial services. As areflection of the views of national balance of payments compilers, thisprocedure is not recommended in this Manual. As a result, these implicitservices are reported indistinguishably under investment income (interest).

relative importance of the services, either to each otheror to previously mentioned services. For instance,merchanting and other trade-related services are veryimportant for a number of countries, and otherparticular categories may be equally important for othercountries. The grouping generally reflects harmoni-zation efforts on the part of the IMF and otherinternational organizations involved with the expansionand improvement of data on international servicetransactions.

262. Merchanting and other trade-related servicescovers commissions on goods and service transactionsbetween (i) resident merchants, commodity brokers,dealers, and commission agents and (ii) nonresidents.(See paragraph 228.) This category includes transactionsin ships, aircraft, and auction sales as well.Merchanting is defined as the purchase of a good by aresident (of the compiling economy) from anonresident and the subsequent resale of the good toanother nonresident; during the process, the good doesnot enter or leave the compiling economy. (Changes instocks held abroad by merchants are excluded.) Thedifference between the value of goods when acquiredand the value when sold is recorded as the value ofmerchanting services provided. If the commodities arenot resold by the merchant in the same accountingperiod, an import of goods is recorded in the firstperiod, and a negative import entry is recorded in thelater period. (See paragraph 213.) Although merchant-ing is recorded on a net basis, separate data recordedon a gross basis may be useful for analytical purposes.

263. Operational leasing (rental) without operatorscovers resident-nonresident leasing (other than financialleasing) and charters of ships, aircraft, and transporta-tion equipment such as railway cars, containers, rigs,etc. without crew.

264. Miscellaneous business, professional, andtechnical services covers the following services:

Legal, accounting, management consulting, andpublic relations services cover the provision (by orfor residents for or by nonresidents) of legal advice,representation, and documentation; accounting,auditing, bookkeeping, and tax consultant services;and management consulting related to the provisionof advice, guidance, or operational assistance tobusiness.

Advertising and market research services transactedbetween residents and nonresidents cover thedesign, creation, and marketing of advertisements byadvertising agencies; media placement, including the

purchase and sale of advertising space; exhibitionservices provided by trade fairs; the promotion ofproducts abroad; market research; and publicopinion polling abroad on various issues.

Research and development services cover thoseservices that are transacted between residents andnonresidents and associated with basic research,applied research, and experimental development ofnew products and processes. In principle, suchactivities in the sciences, social sciences, andhumanities are covered; included is the developmentof operating systems that represent technologicaladvances.

Architectural, engineering and other technicalservices cover resident-nonresident transactionsrelated to architectural design of urban and otherdevelopment projects; planning and project designand supervision of dams, bridges, airports, turnkeyprojects, etc.; surveying, cartography, product testingand certification, and technical inspection services.

Agricultural, mining, and on-site processing servicesprovided by or to residents to or by nonresidentscover services associated with agricultural crops(e.g., protection against insects and disease,increasing of harvest yields, etc.); forestry services;mining-related services (e.g., analysis of ores, etc.);and on-site processing of, or work on, goods thathave been imported but not re-exported (e.g.,nuclear waste processing) or vice versa. (Seeparagraph 199.)

Other services transacted between residents andnonresidents cover items such as placement ofpersonnel, security and investigative services;translation and interpretation; photographic services;building cleaning, etc. Also included are paymentsfor local supplies, utility payments, etc. by non-resident enterprises engaged in construction services.

These services are listed as sub-items in the SelectedSupplementary Information table at the end ofChapter 8.

265. Personal, cultural, and recreational servicesinvolving transactions between residents andnonresidents are subdivided into two categories: (i) audiovisual and related services and (ii) othercultural and recreational services. The first categorycomprises services and associated fees related to theproduction of motion pictures (on film or video tape),radio and television programs (live or on tape), andmusical recordings. Included are receipts or paymentsfor rentals; fees received by resident actors, directors,


68

producers, etc. (or by nonresidents in the compilingeconomy) for productions abroad; and fees for distri-bution rights sold to the media for a limited number ofshowings in specified areas. Fees to actors, producers,etc. involved with theatrical and musical productions,sporting events, circuses, etc. and fees for distributionrights (for television, radio, etc.) for these activities areincluded. The second category comprises otherpersonal, cultural, and recreational services such asthose associated with museums, libraries, archives, andother cultural, sporting, and recreational activities. Alsoincluded are fees for services, including provision ofcorrespondence courses, rendered abroad by teachersor doctors.

266. Government services n.i.e. is a residual categorycovering government service transactions (includingthose of international organizations) not contained inprevious classifications. Included are all transactionsby embassies, consulates, military units, and defenseagencies with residents of economies in which theembassies, etc. are located and all transactions withother economies. (Excluded are transactions withresidents of the home countries represented by the

embassies, consulates, etc. and transactions in thecommissaries, post exchanges, etc. of the embassies,consulates, etc.) Transactions in this category comprisethose for goods and services (such as office supplies,furnishings, utilities, official vehicles and the operationand maintenance thereof, and official entertainment)and personal expenditures incurred by diplomats andconsular staff and their dependents in the economiesin which they are located. Also recorded in thiscategory are transactions, subject to the sameconsiderations as those in the preceding item, byother official entities (such as aid missions andgovernment tourist, information, and promotionoffices) located in economies abroad. Included, aswell, are transactions associated with generaladministrative expenditures, etc. and not classifiedelsewhere. In addition, transactions associated with aidservices that are provided by non-military agencies, donot give rise to any payments, and have offsets intransfers are recorded in this category. Last,transactions associated with the provision of jointmilitary arrangements and peacekeeping forces, suchas those of the United Nations, are recorded ingovernment services n.i.e.

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Coverage

267. Income covers two types of transactions betweenresidents and nonresidents: (i) those involvingcompensation of employees, which is paid tononresident workers (e.g., border, seasonal, and othershort-term workers), and (ii) those involving investmentincome receipts and payments on external financialassets and liabilities. Included in the latter are receiptsand payments on direct investment, portfolioinvestment, other investment, and receipts on reserveassets. Income derived from the use of tangible assetsis excluded from income and classified, as appropriate,under leasing or rentals, under other business services,or under transportation. Financial leasing arrangementsare considered evidence that a change of ownership isintended (see paragraph 206), and part of the leasepayments is construed as income on a financial asset.

268. Holding (capital) gains and losses are notclassified as income on investments but as part of thevalue of the investments. All realized holding gains andlosses arising from transactions are included in thefinancial account; unrealized valuation changes arenot included. However, some debt securities (such asbonds, notes, and bills) are originally issued at valuesthat differ from the stated fixed sums that holders havethe unconditional right to receive when the obligationsmature. These premiums or discounts should beregarded as negative interest or interest, respectively,rather than as holding losses or gains. The values ofsecurities entered in the financial account are theamounts for which the securities were actually issued.The fixed sums paid at maturity comprise bothrepayments of original principal amounts and (negativeor positive) interest; the interest should be shown asinvestment income.

Definition and Classification

269. Compensation of employees comprises wages,salaries, and other benefits (in cash or in kind) earnedby individuals—in economies other than those in whichthey are residents—for work performed for and paidfor by residents of those economies. Included are

contributions paid by employers, on behalf ofemployees, to social security schemes or to privateinsurance or pension funds (whether funded orunfunded) to secure benefits for employees.Employees, in this context, include seasonal or othershort-term workers (less than one year) and borderworkers who have centers of economic interest in theirown economies. Because embassies and consulates areconsidered extraterritorial to the economies in whichthey are located, the compensation received by local(host country) staff of these institutional entities isclassified as that paid to resident entities by nonresidententities.

270. Compensation paid to employees by internationalorganizations, which are treated as extraterritorialentities, represents payments to residents fromnonresident entities if the employees are residents ofthe economies of location. Also, if the employees arefrom other economies but are employed for one yearor more, they are treated as residents of the economiesof location, and their compensation is classified in thesame manner. Thus, in the case of employees fromother economies who are employed for less than oneyear, no payments to residents are involved. (Fortreatment of technical assistance personnel workingabroad on assignments of one year or more, seeparagraph 69.)

271. Personal expenditures made by nonresidentseasonal and border workers in the economies inwhich they are employed and personal expendituresmade by those working on installation projects arerecorded under travel. Taxes paid, contributions madeto pension funds, etc. in those economies are recordedas current transfer payments. Gross recording ofcompensation and expenditures is recommended in thisManual, although recording may, on practical grounds,be limited to estimates of net income in someinstances.

272. In practice, it is often difficult to make thedistinction between persons whose earnings areclassified as compensation of employees, even thoughthey are not residents of the economies in which theywork, and migrants who have become residents of

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XIV. Income

economies by virtue of being expected to live therefor a year or more. (See paragraphs 352 through 355.)The activities of an individual—whether he or she isregarded as a resident or a migrant—do not affect theaggregate transactions of the compiling economy withthe rest of the world. Therefore, difficulties on thisscore will not, in principle, be a source of net errorsand omissions in the balance of payments. Even so,efforts should be made to observe the distinctionbetween nonresident workers and migrants. Other-wise, the comparability of balance of payments statementsfor the two compiling economies will suffer fromdissimilar statistical treatment of the same individuals.

273. Nonresidents of an economy may engage intransactions associated with the use of land for non-commercial purposes. Such transactions are usuallyincluded indistinguishably under components otherthan income (for example., travel or governmentservices n.i.e.).

274. Investment income (property income in the SNA)covers income derived from a resident entity’sownership of foreign financial assets. The mostcommon types of investment income are income onequity (dividends) and income on debt (interest).Dividends, including stock dividends, are thedistributed earnings allocated to shares and otherforms of participation in the equity of incorporatedprivate enterprises, cooperatives, and publiccorporations. Dividends represent income that ispayable without a binding agreement between thecreditor and the debtor. Among other types of incomeon equity are (i) earnings of branches and otherunincorporated direct investment enterprises and (ii) direct investors’ shares of earnings of incorporateddirect investment enterprises. (The latter type ofearnings, which are not formally distributed, areearnings other than dividends.) Shares of reinvestedearnings attributed to direct investors areproportionate to the participation of the directinvestors in the equity of the enterprise. Also, inprinciple, income is imputed to households from netequity in life insurance reserves and pension fundsand included indistinguishably under other investment.Interest, including discounts in lieu of interest,comprises income on loans and debt securities (i.e.,bank deposits, bills, bonds, notes, and tradeadvances). Net interest flows arising from interest rateswaps also are included. (See paragraph 406.) Interestis payable in accordance with a binding agreementbetween the creditor and the debtor.

275. The components of investment income areclassified as direct investment, portfolio investment, andother investment income.

Direct investment income

276. The two categories under this heading—incomeon equity and income on debt—cover income accruingto a direct investor resident in one economy from theownership of direct investment capital in an enterprisein another economy. (See paragraphs 330 and 368 forthe definition of direct investment capital.) Income ondirect investment is presented on a net basis for directinvestment made abroad and in the reporting economy(i.e., receipts of income on equity and income on debtless payments on income on equity and income ondebt for each).

277. Income on equity is subdivided into (i) distributedincome (dividends and distributed branch profits) and(ii) reinvested earnings and undistributed branchprofits. Distributed income may consist of dividends oncommon or preferred shares owned by direct investorsin associated enterprises abroad, or vice versa.

278. Reinvested earnings comprise direct investors’shares—in proportion to equity held—of (i) earningsthat foreign subsidiaries and associated enterprises donot distribute as dividends and (ii) earnings thatbranches and other unincorporated enterprises do notremit to direct investors. (If that part of earnings is notidentified, all branch earnings are considered, byconvention, to be distributed.) Thus, reinvestedearnings may be calculated as the entrepreneurialincome (net operating surplus) of the direct investmententerprise, plus any income or current transfersreceivable, minus any income or current transferspayable. The latter include any current taxes payableon income, wealth, etc.

279. Income on debt consists of interest payable—onintercompany debt—to or from direct investors from orto associated enterprises abroad. Income onnonparticipating preference shares is treated as interestincome, rather than dividend income, and is recordedin income on debt.

Portfolio investment income

280. Portfolio investment income comprises incometransactions between residents and nonresidents and isderived from holdings of shares, bonds, notes, andmoney market instruments and associated with financialderivatives. This category is subdivided into income on

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equity (dividends) and income on debt (interest). SeeChapter 19 for details on new financial instruments andtreatment of financial derivatives, such as options. Thefinancial instrument classification scheme for portfolioinvestment income is consistent with that in thefinancial account and with that in the internationalinvestment position. Subsectoring into domesticinstitutional sectors (monetary authorities, generalgovernment, banks, and other) is shown underSelected Supplementary Information. (See the tableat the end of Chapter 8.) A variety of othersupplementary disaggregations by foreign sector, etc.may be desirable for specific analytical purposes.

Other investment income

281. Other investment income covers interest receiptsand payments on all other resident claims (assets) onand liabilities to nonresidents, respectively. Thiscategory also includes, in principle, imputed income tohouseholds from net equity in life insurance reservesand in pension funds. Other investment income isclassified by the domestic sectors previously noted.Interest on assets comprises interest on long- andshort-term loans, on deposits, on other commercial andfinancial claims, and on an economy’s creditor positionin the Fund, SDR holdings, and loans to the Fund.Interest on liabilities covers interest on loans, ondeposits, and on other claims and interest related to theuse of Fund credit and loans from the Fund. Alsoincluded is interest paid to the IMF on the Fund’s SDRholdings in the General Resources Account. Borderlinedistinctions may arise between interest income andcertain commissions and fees, such as commitmentcharges on undrawn funds. These are included infinancial services. (See Chapter 13.)

Time of Recording of Investment Income

282. Dividends are recorded as of the date payable.Interest income is recorded on an accrual basis. If theinterest is not actually paid, an income entry isrecorded under the appropriate instrument and acounterpart entry is made in the financial account toreflect an increase in the claim associated withnonpayment. (See paragraph 121.)

283. For zero coupon and other deep discountedbonds, the substantial difference between thediscounted issue price and the value at maturity istreated as interest. That difference is recorded asaccruing over the life of the bond as a series of interestpayments rather than being recorded when the interest

is due for payment. If these securities are traded—priorto maturity—in the secondary market, prevailing ratesthat reflect the difference between the new owner’scost and the value at maturity should be used for thesubsequent recording of interest on these securities.Implementation of this treatment may be difficult. (Seeparagraph 396.) Reinvested earnings of directinvestment enterprises are recorded in the balance ofpayments in the periods in which the income is earned.Distributed (remitted) earnings of branches and otherunincorporated enterprises are recorded as of the timesthe earnings are transferred.

284. This difference in times of recording for earningsthat are formally distributed and for other earnings isattributable to the fact that reinvested earningsrepresent the net income accruing during a specificperiod. In contrast, dividends and remitted earnings ofbranches are discretionary distributions that can bemade at any time—even in a period when a net loss issustained. Therefore, these dividends and remittedearnings are not attributable to the earnings of aparticular period. To determine the period in whichthose reinvested earnings are earned or otherinvestment income becomes payable, it may be helpfulto refer to balance sheets, annual reports, and similardocuments of the direct investor or the enterprise.

Measurement and Recording of DirectInvestment Earnings

285. Direct investment earnings are measured on thebasis of current operating performance. Operationalearnings represent income from normal operations ofthe enterprise and do not include any realized orunrealized holding (capital) gains or losses arising fromvaluation changes, such as inventory write-offs; gains orlosses on plant and equipment from the closure of partor all of a business; write-offs of intangibles, includinggoodwill, because of unusual events or developmentsduring the period; write-offs of research and develop-ment expenditures; losses on the write-offs of baddebts or on expropriation without compensation;abnormal provisions for losses on long-term contracts;and exchange-rate-related gains and losses. Unrealizedgains or losses resulting from the revaluation of fixedassets, investments, and liabilities and any realizedgains or losses resulting from the disposal of assets orliabilities should be excluded from direct investmentearnings; that is, gains should not be added in andlosses should not be deducted. In addition, valuationchanges resulting from unforeseen obsolescence,catastrophes, and depletion of natural resources are


72

treated as holding losses at the times that the decreasesin values actually occur. Because data for manycountries are available only on an all-inclusive basis,when holding gains and losses and other extraordinaryincome are included in reported earnings, thosecountries that report earnings on either an operatingbasis or all-inclusive basis should collect and publishsupplementary information on holding gains and lossesand other extraordinary items. This practice wouldenhance international comparability for both flows andstock positions.

286. Earnings of a direct investment enterprise aremeasured net of income or corporation taxes payablewithout penalty during the recording period by theenterprise to the economy in which that enterpriseoperates. This practice is followed because such taxesare considered payable by the enterprise and not by itsowners. Furthermore, earnings should be calculated netof any provision for depreciation of fixed capital.Depreciation is measured by the value, at currentreplacement cost, of the reproducible fixed assets usedup (as a result of normal wear and tear, foreseenobsolescence, and accidental damage not made goodby repair) during an accounting period. In thecalculation of depreciation, the expected economic lifeof an individual asset should be taken into account.Although depreciation should, in principle, becalculated at current replacement cost, often the onlydata available may be based on historical cost.

287. Dividends payable to direct investors, remittedbranch earnings, and interest payable by directinvestment enterprises are recorded gross of anywithholding taxes. These taxes are deemed paid by therecipient and are transferred to the country of the directinvestment enterprise and recorded under transfers.

288. Reinvested (undistributed) earnings of branchesand other unincorporated direct investment enterprisesand direct investors’ shares of earnings, which are notformally distributed, of incorporated direct investmententerprises are deemed to provide additional capital tothe enterprises and to increase the value of aneconomy’s stock of foreign assets and liabilities. Whensuch earnings are recorded in the balance of payments,therefore, entries should be made both for directinvestment income and for direct investment capital.For example, reinvested earnings attributable to aresident direct investor of a direct investment

subsidiary or of a branch should be entered as acredit in the current account under directinvestment income (income on equity) and as a debitin the financial account under direct investment-abroad (reinvested earnings). Portfolio investors’shares in earnings, which are not formally distributed,of incorporated direct investment enterprises shouldnot be entered in the balance of payments.

289. Direct investors’ shares in net losses, other thanholding (capital) losses of enterprises, should berecorded as negative income in the direct investmentincome component of the balance of payments. Thus,the economy recording losses on residents’ directinvestments made abroad should enter the losses asnegative credits, while the economy in which thedirect investment is made should record the losses asnegative debits. This method of recording losses isused so that the credit side of the component willreflect the compiling economy’s net earnings ondirect investments made abroad, while the debit sidewill refer to nonresident direct investors’ net earningson direct investments in the compiling economy.

Stock Dividends, Bonus Shares, andLiquidating Dividends

290. The distribution of earnings, in the form ofstock dividends, to nonresident shareholders isconstrued as a capitalization of current earnings andan alternative to distributing cash dividends. Suchearnings distributions are recorded in the balance ofpayments in the same manner as reinvested earnings(i.e., as investment income in the current accountand as offsetting equity investment in the financialaccount). General bonus shares, on the other hand,represent the substitution of one type of equity (paid-up capital or capital stock) for another (reinvestedearnings) and thus should not be recorded in thebalance of payments. (In some countries,accumulated reserves from reinvested earnings arecredited to a reserve account that is converted tobonus shares when the account reaches a certainlevel.) Liquidating dividends are excluded frominvestment income because such dividends representreturns of capital contributions rather than remittance(distribution) of earnings. Therefore, liquidatingdividends should be recorded in the financialaccount as withdrawals of capital.

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Definition and Coverage

291. When an entry in the balance of paymentsrecords that a resident entity in one economy hasprovided a nonresident entity with a real resource or afinancial item (e.g., goods, the provision of a service, ora financial or nonfinancial asset), the double-entrysystem requires that an offsetting entry be made. If theoffsetting entry does not consist of the provision of areal resource or a financial item, the offset is designatedas a transfer. The coverage of transfers in the balanceof payments is determined by decisions regarding twoissues.

292. The first issue is whether or not the provision ofan economic value should be recorded even when noquid pro quo is received. If such a provision is notrecorded, no offsetting entry showing a transfer isrequired. The recommendation in this Manual,however, is that the balance of payments statementshould show all economic values, including thosewithout a quid pro quo, provided by residents of oneeconomy to residents of another economy. Thestatement should also show changes in real resourcesand financial items whenever such changes result fromchanges of residence (migration) on the part ofindividuals and whenever the changes affect a specificeconomy and the rest of the world. The statementshould exclude similar changes that come aboutthrough changes in the territory of an economy.

293. The second issue concerns the separation ofbenefits provided or received into (i) those regarded aseconomic values (i.e., those that constitute realresources or financial items) and (ii) those on which noeconomic value is placed (i.e., those that do notprovide a quid pro quo and thus constitute transfers).The intended distinction between intangible realresources (services and income) and transfers that offerno quid pro quo cannot be precisely defined. (Seeparagraph 191.) In contrast to real resources, transfers,which may be voluntary or obligatory, often reflectbenefits that cannot be quantified (e.g., improvedpolitical or economic relationships between parties;nonspecific amounts of services, such as administrative,protective, and defense services made available by

governments to taxpayers; or intangibles, such as thoseinvolved in carrier registration, provided on acompulsory basis).

294. In a departure from all previous editions of theManual, the fifth edition identifies transfers as currentand capital. As a result of this change in treatment, onlycurrent transfers are included in the currentaccount; capital transfers are included in the capitalaccount component of the capital and financialaccount. The new treatment reflects international effortsto harmonize the Manual with the SNA and eliminates amajor discordance between the two systems.

Distinction Between Current and CapitalTransfers

295. To distinguish current transfers from capitaltransfers, the reader may find it helpful to focus onthe special characteristics of capital transfers. First, atransfer in kind is a capital transfer when it consists of(i) the transfer of ownership of a fixed asset or (ii) the forgiveness of a liability by a creditor when nocounterpart is received in return. Second, a transfer ofcash is a capital transfer when it is linked to, orconditional on, the acquisition or disposal of a fixedasset (for example, an investment grant) by one orboth parties to the transaction. A capital transfershould result in a commensurate change in the stocksof assets of one or both parties to the transaction.Capital transfers also may be distinguished by beinglarge and infrequent, but capital transfers cannot bedefined in terms of size or frequency.

296. Current transfers consist of all transfers that arenot transfers of capital. Current transfers directlyaffect the level of disposable income and shouldinfluence the consumption of goods or services. Thatis, current transfers reduce the income and con-sumption possibilities of the donor and increase theincome and consumption possibilities of the recipient.

297. A cash transfer could be regarded as a capitaltransfer by one party to a transaction and as a currenttransfer by the other party. So that a donor and arecipient do not treat the same transaction differently, it

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XV. Current Transfers

is recommended that a transfer be classified as a capitaltransfer by both parties—even if the transfer is linkedto the acquisition or disposal of a fixed asset by onlyone of the parties. On the other hand, if availableevidence creates serious doubt that a cash transfershould be classified as a capital transfer, the transfershould be classified as a current transfer. (TheManual and the SNA contain consistent criteria fordistinguishing between the two types of transfers.)

Classification

298. Current transfers are classified, according to thesector of the compiling economy, into two maincategories: general government and other sectors.General government transfers comprise currentinternational cooperation, which covers currenttransfers—in cash or in kind—between governments ofdifferent economies or between governments andinternational organizations. Included are

cash transfers effected between governments for thepurpose of financing current expenditures by therecipient government

gifts of food, clothing, other consumer goods,medical supplies, etc. associated with relief efforts inthe wake of famine, earthquakes, other naturaldisasters, war, or other actions (Administrative costsdirectly associated with aid are included.)

gifts of certain military equipment, that is, weaponsand the equipment to support and deliver weapons,which—by convention—are not treated as fixedassets in the Manual or in the SNA (Other durableequipment—such as most structures—and transport,hospital, and communications equipment are treatedas fixed assets and are included under capitaltransfers. See paragraph 349.)

annual or other regular contributions paid bymember governments to international organizationsand regular transfers made as a matter of policy bythe international organizations to governments

payments by governments or internationalorganizations to governments for salaries of technicalassistance staff and for related costs and expenses.

299. Other transfers of general government coveroffsets to transactions between governments ofcompiling economies and nonresidents other thangovernments and international organizations. Includedon the credit side are current taxes on income, wealth,etc. and other transfers, such as social security schemecontributions. Social benefits, refunds of taxes,

indemnity payments, and pension payments fromunfunded plans are included on the debit side. Othertaxes and subsidies on production, including thoseimplicit under a multiple official exchange rate system,are covered when appropriate. (See paragraph 134.)

300. Any fines, penalties, or interest charges on thelate payment of taxes are included in the value oftaxes. Other fines are treated separately as currenttransfers. By convention, payments (fees) for carrierregistrations or for licenses to fish, hunt, etc. are treatedas taxes and included in transfers; other fees, such asthose for passports and airport fees, to governments aretreated as payments for government services rather thanas transfers.

301. Current transfers between other sectors of aneconomy and nonresidents comprise those occurringbetween individuals, between nongovernmental institu-tions or organizations (or between the two groups), orbetween nonresident governmental institutions andindividuals or nongovernmental institutions. The samebasic items (described in paragraphs 298 through 300)for the government sector are generally applicable toother sectors, although there are some differenceswithin components. In addition, there is the category ofworkers’ remittances.

302. Workers’ remittances covers current transfersby migrants who are employed in new economies andconsidered residents there. (A migrant is a person whocomes to an economy and stays, or is expected to stay,for a year or more.) Workers’ remittances often involverelated persons. Persons who work for and stay in neweconomies for less than a year are considered non-residents; their transactions are appropriate mainly tothe component for compensation of employees. (Seeparagraphs 269 through 272.)

303. Other current transfers, in cash or in kind,between resident and nonresident entities include those(such as food, clothing, other consumer goods, medicalsupplies, etc.) for distribution to relieve hardshipscaused by famine, other natural disasters, war, etc. andregular contributions (including membership dues) tocharitable, religious, scientific, and cultural organiza-tions. Also covered are gifts, dowries, and inheritances;alimony and other support remittances; tickets sold by,and prizes won from, lotteries; and payments fromunfunded pension plans by nongovernmentalorganizations.

304. Included among other transfers are entries made,on the debit side, for private parties for taxes onincome, wealth, etc. and social security contributions

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paid to governments. (These transfers are the counter-part entries to be made, on the credit side, for generalgovernment. See paragraph 299.) Conversely, entriesmade, on the credit side, for social benefits and refundsof taxes to private transactors are the counterparts tosuch entries on the debit side for government.Premiums (minus service charges) and claims fornon-life insurance also are included among currenttransfers.

305. A remittance from a resident of a specificeconomy to finance another resident staying abroadonly temporarily is a transaction between residents ofthe same economy rather than a transfer. The goodsand services procured abroad by the traveler or otherresident to whom the remittance is made are recordedin the balance of payments under travel.

Valuation and Timing

306. Often, the value of transfers may not be readilydetermined because transfers are not perceived asarising directly from the productive process. Transfervalues should be the same as the market values of thereal and financial resources to which the transfers are

offsets. If no actual market values are in evidence,those resources should be valued on the basis ofexplicit costs incurred in providing the resources or onthe basis of amounts that would be received if theresources were sold. In some cases, the donor and therecipient may view the value quite differently. So thatthe same values are reflected in the balance ofpayments statements of both the recipient and thedonor, the value assigned by the donor is used as thebasis for recording.

307. Various taxes, fines, and other transfers imposedby one party on another are recorded as of the date ofoccurrence of the underlying transactions or otherflows that give rise to the liability to pay. Thus, withregard to taxes on income, all deductions at sourceand regular prepayments of income taxes are recordedin the periods in which the deductions andprepayments occur. However, any final tax liability onincome may be recorded in the accounting period inwhich the liability is assessed. In a number ofcountries, the assessment period occurs subsequent tothe period when the income is earned. Other transfersare recorded when the resources offset by the transferschange ownership.


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Coverage

308. The standard components of both the currentaccount and the capital and financial account arediscussed in Chapter 8. Coverage of the capital andfinancial account is described in paragraphs 172through 181, and the classification of componentsappears at the end of the chapter. Capital and financialaccount transactions presented in this Manual are thesame as those reflected in the capital and financialaccounts of the SNA external accumulation accounts.However, in the balance of payments, the primary basisfor classification of the financial account is functionalcategory (i.e., direct investment, portfolio investment,other investment, and reserve assets) while the SNAclassification is primarily by type of instrument:monetary gold, currency and deposits, loans, etc. (SeeChapter 3 for details of the relationship between thetwo sets of accounts.) The structure of the capital andfinancial account also is generally compatible withother statistical systems of the IMF and is consistentwith the classification of related income components ofthe current account and with the internationalinvestment position.

309. The capital and financial account of thebalance of payments is divided into two maincategories: the capital account and the financialaccount. The capital account covers all transactionsthat involve the receipt or payment of capital transfersand acquisition or disposal of nonproduced,nonfinancial assets. The financial account covers alltransactions associated with changes of ownership inthe foreign financial assets and liabilities of aneconomy. Such changes include the creation andliquidation of claims on, or by, the rest of the world.

310. All changes that do not reflect transactions areexcluded from the capital and financial account.The following changes are among those specificallyexcluded: valuation changes in, or reclassifications of,reserves; changes resulting from territorial or otherchanges in classification of existing assets (for example,portfolio investment to direct investment); allocation orcancellation of SDRs; monetization or demonetizationof gold; write-offs (that is, changes resulting from the

unwillingness or inability of a debtor who resides inone economy to make full or partial repaymentincluding expropriation without compensation—insettlement of a claim to a creditor who resides inanother economy and regards part or all of the claimas unrecoverable); and valuation changes, which reflectexchange rate or price changes, in assets for whichthere are no changes in ownership. When there is achange in ownership and an asset acquired at oneprice is disposed of at a different price, both assets arerecorded at respective market values and the differencein value—holding (capital) gain or loss—is included inthe balance of payments.

Capital Account

311. The capital account consists of two categories:(i) capital transfers and (ii) acquisition or disposal ofnonproduced, nonfinancial assets. In previous editionsof the Manual, capital transfers were includedindistinguishably with current transfers in thecurrent account. (The distinction between currenttransfers and capital transfers is fully discussed inChapter 15, and capital transfers are covered in detailin Chapter 17). Capital transfers are classified primarilyby sector (i.e., general government and other sectors).Within each, debt forgiveness is specified as category,while migrants’ transfers comprises a category underother sectors.

312. In concept, acquisition or disposal ofnonproduced, nonfinancial assets comprisestransactions associated with tangible assets that may beused or necessary for production of goods and servicesbut are not actually produced (e.g., land and subsoilassets) and transactions associated with nonproduced,intangible assets (e.g., patents, copyrights, trademarks,franchises, etc. and leases or other transferablecontracts). However, in the case of resident-nonresidenttransactions in land (including subsoil assets), allacquisition or disposal is deemed to occur betweenresident units, and the nonresident acquires a financialclaim on a notional resident unit. The only exceptionconcerns land purchased or sold by a foreign embassywhen the purchase or sale involves a shift of the land

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from one economic territory to another. In suchinstances, a transaction in land between residents andnonresidents is recorded under acquisition or disposalof nonproduced, nonfinancial assets. The changesrecorded for all of the assets described in thisparagraph consist of the total values of assets acquiredduring the accounting period by residents of thereporting economy less the total values of the assetsdisposed of by residents to nonresidents.

Financial Account

Coverage

313. The foreign financial assets of an economyconsist of holdings of monetary gold, SDRs, andclaims on nonresidents. The foreign liabilities of aneconomy consist of indebtedness to nonresidents.

314. To determine whether financial items constituteclaims on, or liabilities to, nonresidents, the creditorand debtor must be identified as residents of differenteconomies. The unit in which the claim or liability isdenominated—whether the national currency, aforeign currency, or a unit such as the SDR—is notrelevant. Furthermore, assets must represent actualclaims that are legally in existence. The authorization,commitment, or extension of an unutilized line ofcredit or the incurrence of a contingent obligationdoes not establish such a claim, and the pledging orsetting aside of an asset (as in a sinking fund) doesnot settle a claim or alter the ownership of the asset.

315. However, options and other financial derivativesare included among financial items, in accordancewith the treatment of these items in the SNA. Theseinstruments can be valued by reference to the marketprices of the derivatives or to the market prices of thecommitments underlying the derivatives. Thus, bothparties to a derivative contract recognize a financialinstrument; one party recognizes a liability and theother recognizes a claim. Alternatively, this valuecould be viewed as the amount that one party mustpay to the other party in order to extinguish thecontract. As a result, derivatives satisfy the definition(see paragraph 314) of foreign financial assets andliabilities. A full discussion of derivative instrumentsappears in Chapter 19.

316. The conventions stated in this Manual result inownership of some nonfinancial assets beingconstrued as ownership of financial assets (claims).

The following specific cases are examples.

The ownership of immovable assets, such as landand structures, is always attributed to residents of theeconomies in which the assets are located. (Seeparagraph 64.) Therefore, when the owner of suchassets is a nonresident, he has, in effect, a financialclaim on a resident entity that is considered theowner.

An unincorporated enterprise operating in a differenteconomy from the one in which the owner of theenterprise resides is considered a separate entity;that entity is a resident of the economy in which itoperates rather than a resident of the economy ofthe owner. All nonfinancial as well as financial assetsattributed to such an enterprise are regarded asforeign financial assets for the owner of theenterprise. (See paragraph 205.)

Any goods transferred under a financial leasingarrangement are presumed to have changedownership. This change in ownership is financed bya financial claim (i.e., an asset of the lessor and aliability of the lessee). At the time the imputedchange in ownership occurs, the market value of thegood is recorded under goods in the currentaccount, and an offsetting entry is made in thefinancial account. In subsequent periods, theactual leasing payment must be divided intointerest, which is recorded in the current accountas investment income payable or receivable, anddebt repayment, which is recorded in the financialaccount and reduces the value of the lessor‘s assetand the lessee’s liability. The financial asset shouldbe classified as a loan. (See paragraph 206.)

Transactions in assets

317. Transactions in assets (specifically, changes ofownership, including the creation and liquidation ofclaims) most often reflect exchanges of economicvalues. Financial items may be exchanged for otherfinancial items or for real resources. However, oneparty to a transaction may provide a financial item andnot receive any economic value in exchange. The offsetto this latter type of provision of an asset is a transfer.

318. To establish whether a transaction involving aforeign asset is a transaction between a resident and anonresident, the compiler must know the identities ofboth parties. The information available on transferableclaims constituting foreign assets may not, however,permit identification of the two parties to thetransaction. That is, a compiler may not be able to


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ascertain whether a resident, who acquired orrelinquished a transferable claim on a nonresident,conducted the transaction with another resident orwith a nonresident, or whether a nonresident dealtwith another nonresident or with a resident. Thus, arecommendation that the balance of payments beconfined solely to asset transactions between residentsand nonresidents would be difficult or impossible toimplement. Also, the introduction, in this Manual, ofa domestic sectoral breakdown for the portfolioinvestment and other investment components of thefinancial account makes it necessary to recordcertain transactions between resident sectors withinthe economy—although such transactions cancel eachother for the total economy. As a result, recordedtransactions may include not only those that involveassets and liabilities and take place between residentsand nonresidents but also those that involve trans-ferable assets of economies and take place betweentwo residents and, to a lesser extent, transactions thattake place between nonresidents. (See paragraph 334.)

319. Because the credit and debit entries for mostcomponents of the financial account are—accordingto the rules of this Manual (see paragraphs 324through 327)—generally net, many transactionsbetween residents and between nonresidents willoffset each other and thus will not actually appear asentries in the balance of payments statement. Themost prevalent types of transactions that do not canceleach other are, for assets, those transactions betweenresident creditors classified in different functionalcategories or domestic sectors. For liabilities, theidentity of the nonresident creditor is a factor only ina few instances (for example, in differentiatingbetween direct investment and other types of capitaland in determining regional allocation).

320. Net recording can also result in a transactionbetween a resident and a nonresident being offset bya transaction between residents or by a transactionbetween nonresidents. For instance, a resident mayacquire a claim against a nonresident and, during thesame recording period, transfer the claim to anotherresident classified in a different sector. The firstresident’s transaction with a nonresident is canceledby the same resident’s subsequent transaction withanother resident (if the value of the claim does notchange). So, in the balance of payments, only theincrease in the second resident’s holdings, which areactually acquired through a transaction with the firstresident, are recorded. The effect is the same as if thesecond resident dealt directly with the nonresident.

Reinvested earnings

321. The reinvested earnings of a direct investmententerprise (which accrue to a direct investor in propor-tion to participation in the equity of the enterprise) arerecorded in the current account of the balance ofpayments as being paid to the direct investor asinvestment income-income on equity and in thefinancial account as being reinvested in theenterprise. Thus, these reinvested earnings increase thevalue of the stock of foreign assets of the directinvestor’s economy. In a similar way, the distribution todirect investors of earnings (in the form of stockdividends) included in investment income-income onequity results in an increase, shown in the financialaccount, in the investors’ equity.

Borderline cases

322. In some cases, questions may arise as to whethertransactions have taken place; for example—when thematurity of a debt instrument is extended (and therebychanged from a nominally short-term claim to anominally long-term claim) or when a governmenttakes over an obligation for liabilities incurred by theprivate sector and the sector of the domestic debtor isaltered. As a change in the original terms of a contractrequires the assent of both parties, the existing claim isconsidered to be satisfied by the creation of a new one.(That is, a pair of transactions between a resident and anonresident has occurred.) Changes in contractualterms for existing assets are thus construed asconstituting transactions to be included in the balanceof payments statement.

323. Another borderline case arises when a transactorintends to dispose of a certain asset at virtually thesame moment that ownership of the asset is acquired.(Examples are arbitrage and certain other dealings infinancial assets.) The issue may be viewed two ways.(i) If two changes of asset ownership have occurred,any profit or loss could be regarded as the realizationof a holding (capital) gain or loss and could beentered, like any other realization of a holding gain orloss, in the appropriate component of the financialaccount. (ii) If no change of ownership has effectivelytaken place, the profit or loss could be seen as a feefor a service. It is recommended that the treatmentdescribed in (i) be used because entries in thefinancial account may reflect, without regard to thefact that some items may have been owned onlybriefly, the holding gain or loss realized on thepurchase and sale of financial items at different marketprices.

Net recording

324. Two or more changes in a specific asset, orchanges in two or more different assets classified in thesame standard component, are consolidated in a singleentry. This entry reflects the net effect of all theincreases and decreases that occur during the recordingperiod in holdings of that type of asset. For example,purchases (by nonresidents) of securities issued byresident enterprises of an economy are consolidatedwith sales (by nonresidents) of such securities, and thenet change is recorded for that item. Net decreases inclaims or other assets and net increases in liabilities arerecorded as credits; net increases in assets and netdecreases in liabilities are recorded as debits.

325. Net recording for standard componentsdistinguished in the capital and financial account isspecified partly because gross data for transactionsoften are not available. Changes derived from recordsshowing amounts outstanding at the beginnings andends of reporting periods, for example, always repre-sent net changes. In addition, net recording generally isof more interest than gross recording, which wouldgive added prominence to the transactions—betweenresidents and between nonresidents—that are coveredin the statement. Nonetheless, gross entries may be arelevant factor in analyzing aspects of the paymentspositions or financial markets (e.g., securities transac-tions) of economies, and such data can be utilized insupplementary presentations when appropriate.

326. For direct investment, particularly for reasons ofanalytic usefulness, it is suggested in this Manual thatseparate totals for liabilities to, and claims on, directinvestors on the part of affiliated enterprises (and viceversa) be recorded for the appropriate components ofdirect investment (i.e., equity capital and other capital)in addition to the net figures for each.

327. In the totaling of net credits and debits for two ormore separate components, the net approach is alwaysfavored. For instance, if equity securities and debtsecurities are combined to show a net figure for thesetwo components, the net for each should be totaled—not net credits and debits separately.

Classification

328. The primary purpose of the classification of itemsin the financial account is to facilitate analysis bydistinguishing categories that exhibit different patternsof behavior. Changes in financial items recorded in thebalance of payments occur for a wide variety of

reasons. Such changes may occur to settle actualimbalances or to deal with prospective imbalances; toinfluence or react to exchange rate movements; tomake holding (capital) gains (or avoid losses) on pastor future valuation changes, including those resultingfrom exchange rate changes; to take advantage ofinterest rate differentials; to establish, acquire, orexpand enterprises; to obtain or provide additional realresources in connection with commercial and financialactivities; and to diversify investments. In the collectionof data, it is usually not feasible to inquire into theunderlying causes and motivations for changes inholdings. However, behavior is also associated to aconsiderable degree with such attributes as type ofasset and sector of holder. Characteristics of this kindare readily observable and can thus be used as a basisfor developing a classification scheme.

329. In this Manual, several bases are utilized forclassifying financial items: functional type; assets andliabilities; type of instrument; domestic sector; originalcontractual maturity; and, in the case of directinvestment, direction of investment (i.e., inward oroutward). The primary basis for the classification ofcomponents of the financial account is functionaltype. Further classification levels in these categories arebased upon factors relating to general analyticalusefulness and compatibility with other statisticalsystems. The components can, of course, be rearrangedto meet specific analytic requuirements and to include,when appropriate, subordinate and supplementaryclassification.

Functional types of investment

330. Four broad categories of investment, each ofwhich is dealt with in a subsequent chapter, aredistinguished.

Direct investment

The direct investor seeks a significant voice in themanagement of an enterprise operating outside his orher resident economy. To achieve this position, theinvestor must almost invariably provide a certain, oftensubstantial, amount of the equity capital of theenterprise. The direct investor may also decide tosupply other capital to further enterprise operations.Because of the direct investor’s special relationship tothe enterprise, his motives in supplying capital will besomewhat different from those of other investors. Thus,the capital supplied by a direct investor will probablyexhibit characteristic behavior. Direct investment is


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classified primarily on a directional basis—residentdirect investment abroad and nonresident investmentin the reporting economy—and is subdivided intoequity capital, reinvested earnings, and other capital.Equity capital and other capital, in turn, are subdividedinto asset and liability transactions. (Related income,however, is shown on a net basis in the currentaccount.)

Portfolio investment

Cross-border investment in equity and debt securities(other than direct investment) is both quantitatively andanalytically significant. Such cross-border investmenttherefore warrants separate recording and coverage,particularly in view of the trend towards free interna-tional movement of capital and the growth of newfinancial instruments and new market participants.Coverage of this category is expanded to reflect thesedevelopments and to include money market debtinstruments and financial derivatives, as well aslonger-term debt and equity securities.

Other investment

This residual group comprises many different kinds ofinvestments. In practice, it is not feasible to draw anyfurther functional distinctions among the various typesbecause the reasons underlying the flows are toonumerous and varied. Other breakdowns are thereforeused to distinguish behavioral differences amongcomponents of this category (i.e., trade credits, loans,currency and deposits, use of Fund credit, loans fromthe Fund, etc.).

Reserve assets

These are foreign financial assets available to, andcontrolled by, the monetary authorities for financingor regulating payments imbalances or for otherpurposes. Reserve assets consist of monetary gold, SDRs,reserve position in the Fund, foreign exchange, andother claims. Changes in the holdings of reserves mayreflect payments imbalances or responses to them,official exchange market intervention to influence theexchange rate, and/or other actions or influences.

Assets and liabilities

331. The distinction between assets and liabilities isalways of interest. Even for financial intermediaries,which in effect borrow and relend abroad the samefunds, the terms of the borrowing and lending are

usually different. Thus, the two offsetting flows mayhave different implications for the balance ofpayments.

Type of instrument

332. For portfolio investment, the type of instrument isthe primary classification (i.e., equity and debtsecurities). Debt securities are subdivded into bondsand notes, money market instruments, and financialderivatives. Although the sectoral subdivision forportfolio investment is secondary, there is no implica-tion that, in certain instances, it may not be of equalinterest to the compiling economy. The same holds truefor other investment.

Domestic sector

333. For assets, the institutional sector of the domestic(resident) creditor and, for liabilities, that of thedomestic debtor often are factors that influencetransactions in financial items. The sectoring alsoimproves links with the IMF and other statisticalsystems, including the SNA. This Manual distinguishesfour sectors—monetary authorities, general government,banks, and other sectors8—for both portfolio investmentand other investment.

334. Because the domestic creditor is always theowner of the asset, the creditor is invariably one partyto any change of ownership of the asset. Therefore, forassets, sector attribution by creditor and by transactorcoincide. A claim on a domestic debtor, however, maychange ownership between a domestic creditor and aforeign creditor so that the domestic sector of thedebtor may not coincide with that of the transactor.Nevertheless, the sector of the debtor is the one thatdetermines the classification of the change of owner-ship that has occurred because the original nature ofthe liability is generally considered more significantthan the identity of the present holder of the claim.However, in those instances in which the nonresidentcreditor or transactor may be of particular interest(e.g., in the context of international banking andexternal debt statistics), a supplementary breakdown bynonresident sector would be most useful for thecompiling economy.

335. For determination of the domestic sector to whicha transaction is attributed, guarantees and financialintermediation in which the intermediary is not actually

8See Appendix 2.


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the legal creditor or debtor are not taken into account.Although these aspects undoubtedly have an influence onthe behavior of investment, they seem unlikely toconstitute the main motivation of the financial flow inquestion. For instance, while the availability of govern-ment credit insurance could be a factor in the exten-sionof a trade credit, the private exporter’s decision toundertake the underlying transaction in goods and toarrange the financing for it is presumably a more basicconsideration. Government-insured trade credits are thustreated as private trade credits rather than as governmentlending.

Long- and short-term investment

336. For assets and liabilities in the category of otherinvestment, this Manual retains the traditional distinc-tion,which is based on the formal criterion of originalcontractual maturity, between long- and short-terminvestment. Long-term investment is defined as invest-ment with an original contractual maturity of more thanone year or with no stated maturity (e.g., equitysecurities). Short-term investment, which includescurrency, is investment payable on demand or with anoriginal contractual maturity of one year or less. Thesedefinitions are consistent with those in the SNA.

337. Although the traditional maturity distinction hasbeen retained, it is widely recognized that innovations infinancial markets (e.g., floating rate notes, rollovers, etc.)have diminished the usefulness of such a distinction formany purposes. In fact, a creditor and a debtor could, forexample, have different views as to whether a particularinstrument represents access to medium-term financingeven though it is nominally a short-term instrument. Also,in many instances, original maturity may have no bearingon the length of time that an investment will be held.(Original maturity does appear to be one factor taken intoaccount by investors and may tend to influence thebehavior of the invest-ment concerned.) In any event, thedistinction is one that is still widely employed and can beapplied without posing major problems of compilation.How-ever, in the Manual and the SNA, maturitydistinction is accorded lesser importance as a classificationcriterion.

338. Nonetheless, there are examples of the significancethat continues to be assigned to the original maturity (e.g., for the analysis of external liabilities, particularly inrelation to those of heavily indebted economies). In otherinstances, such as analyses of banks’ liquidity positions, aresidual maturity basis may be appropriate and can beaccommodated in supplementary disaggregations.

339. In the categories of direct investment, portfolioinvestment, and reserve assets, long- and short-terminvestment are not formally distinguished. For directinvestment, such a distinction is not made because it isessentially determined by arbitrary enterprise decisionsand because of the fact that there is no meaningfulanalytic distinction between the two maturities forintercompany flows. For portfolio investment andreserve assets, formal maturity is not likely to be asignificant factor affecting the behavior of thecomponents of the categories.

Liabilities Constituting Foreign Authorities’Reserves (LCFARs)

340. LCFARs are no longer identified among thefinancial items of the portfolio investment and otherinvestment categories of the financial account.Rather, LCFARs are subdivided by instrument andsector in a supplementary presentation and discussed,along with exceptional financing transactions, inChapter 22.

Valuation and Timing

341. Resources included under capital transfers shouldbe valued at the prices that would have been receivedif the resources had been sold. The value assigned bythe donor should be used as the basis for recording.The forgiveness of debts agreed to by the parties con-cerned are valued in the same way as other changes infinancial assets and liabilities. Acquisition or disposal ofnonproduced, nonfinancial assets is recorded at theactual transaction value of assets acquired less assetsdisposed of. Changes in financial assets and liabilitiesthat stem from transactions between two parties arevalued to reflect the market values of the assetsunderlying the acquisition or disposition. The conceptof market value and the specific application of marketvalue to financial items are discussed in Chapter 5.

342. Acquisition or disposal of nonproduced,nonfinancial assets and transactions in financial itemsare recorded on a change-of-ownership basis. Whenchange of ownership is not obvious, the time at whicha transaction is considered to take place is when theparties to the transaction enter the transaction (or, forfinancial items, the claim and liability) on their books.For many financial transactions, a date (the value date)is actually specified for the very purpose of ensuringthat the timing agrees in the books of both parties.(See Chapter 6.) If no precise date can be fixed, thedate on which the creditor receives payment or someother financial claim is decisive.

Coverage

343. The capital account, as constituted in thisedition of the Manual, differs markedly from thecapital account in previous editions. (See chapters 8and 16.) The former capital account has beenexpanded and redesignated as the capital andfinancial account, which is comprised of those twomajor categories. This chapter encompasses thefirst—the capital account, the components of whichare capital transfers and acquisition or disposal ofnonproduced, nonfinancial assets.

Capital Transfers

344. The distinction between capital transfers andcurrent transfers is discussed in Chapter 15. Acapital transfer may be in cash or in kind. If in cash,the transfer is linked to, or conditional on, theacquisition or disposal of a fixed asset by one orboth parties to the transaction (e.g., an investmentgrant). Although one party may regard particulartransfers as current rather than capital, a transfershould be classified as a capital transfer for bothparties even if it is linked to the acquisition ordisposal of a fixed asset by only one of the parties.However, if there is serious doubt as to theclassification of a cash transfer as current or capital,the transfer should be classified as a currenttransfer.

345. If in kind, the capital transfer consists of (i) the transfer of ownership of a fixed asset or (ii) the forgiveness, by mutual agreement betweencreditor and debtor, of the debtor’s financial liabilitywhen no counterpart is received in return by thecreditor. Criteria (referred to in previous paragraphsand in Chapter 15) for classification of transfers ascurrent or capital are fully consistent with criteria inthe SNA.

Classification

346. Capital transfers are classified into two sectoralcomponents: (i) general government and (ii) other

sectors. Within each of these components, debtforgiveness is separately identified. In other sectors,migrants’ transfers also are separately identified.

General government

347. Under general government, the followingcategories of transfers are to be distinguished forpurposes of balance of payments recording.

Debt forgiveness

348. When a government creditor entity in oneeconomy formally agrees—via a contractualarrangement—with a debtor entity in another toforgive (extinguish) all, or part, of the obligations ofthe debtor entity to that creditor, the amount forgivenis treated as a capital transfer from the creditor to thedebtor. That is, the balance of payments reflects areduction of the liability offset by the transfer. Similartreatment is applicable when a government entity’sdebt is forgiven by agreement with a creditor entity inanother economy. (The detailed accounting treatmentsof debt forgiveness under varying circumstances, ofarrears and other aspects of debt reorganization, andof exceptional financing are covered in Chapter 22.)

Other general government

349. Among other capital transfers of generalgovernment, investment grants are significant.Investment grants consist of capital transfers, in cashor in kind, made by governments to nonresident units,or vice versa, to finance all or part of the costs ofacquiring fixed assets. The recipients are obliged touse investment grants in cash for purposes of grossfixed capital formation, and the grants are often tied tospecific investment projects, such as large constructionprojects. If the investment project continues over along period of time, an investment grant in cash maybe paid in installments. Installment payments continueto be classified as capital transfers even though suchpayments may be recorded in a succession of differentaccounting periods. Investment grants in kind consist

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XVII.Capital Transfers and Acquisition or Disposalof Nonproduced, Nonfinancial Assets

of transfers of transport equipment, machinery, otherequipment, and the direct provision of buildings or otherstructures by governments to nonresident units. Moststructures (such as airfields, docks, roads, hospi-tals, andother buildings) used by military establishments also aretreated as capital transfers. These structures may beconstructed by enterprises owned by the donorgovernment or by other enterprises that are paid directlyby the donor government. Investment grants do notinclude transfers of military equipment in the form ofweapons or equipment with the sole function of beingfired. Such weapons and equipment are not classified asfixed assets but, by convention, are included undercurrent transfers. (See Chapter 15.)

350. Also included under governmental capital transfersare taxes on capital transfers; that is, taxes levied, atirregular and infrequent intervals, on the values of assetstransferred to nonresidents. These consist largely ofinheritance taxes, death duties, and gift taxes.Compensation payments by government to nonresidentsfor extensive damages to capital assets or serious injuriesnot covered by insurance policies represent anotherform of capital transfers. These include payments fordamages caused by oil spills, major explosions, the sideeffects of drugs, etc.

Other sectors

351. Among capital transfers of sectors other thangeneral government, migrants’ transfers, debtforgiveness, and other transfers are distinguished asbalance of payments reporting categories.

Migrants’ transfers

352. In the strictest sense, these transfers are nottransactions between two parties but contra-entries toflows of goods and changes in financial items that arisefrom the migration (change of residence for at least ayear) of individuals from one economy to another. Thetransfers to be recorded are thus equal to the net worthof the migrants.

353. All the household and personal effects of migrants,together with any movable capital goods actuallytransferred from the old to the new economy, areincluded under goods-general merchandise. Thoseflows of goods and corresponding offsets should, inprinciple, be recorded at the time of migration. If theflows are not derived from the trade returns, no timingcorrection of the figures is suggested, but offsets arerecorded in the same period in which exports andimports are recorded.

354. Enterprises (including those that utilize land,structures, and movable capital goods not actuallytransferred) in which migrants retain ownership afterdeparture become foreign claims of the migrants and,consequently, of the economies to which they havemigrated. Migrants’ claims on or liabilities to otherresidents of their former economies or claims on orliabilities to residents of a third economy also becomeforeign claims or liabilities of the economies to whichthey have migrated. Migrants’ claims on or liabilities tothe latter economies become claims between residents ofthese economies. Changes in the net financial assets ofthe relevant economies and the offsets thereto arerecorded at the times of migration.

355. In practice, it is recognized that few countries are ina position to record all assets (other than possessions andfunds accompanying migrants upon entry to neweconomies) in the balance of payments. Also, somecountries treat those possessions and funds as transfersand record the remaining net worth of migrants aschanges in the stock of claims in the internationalinvestment position. In such cases, the changes shouldbe separately identified in reports made to the IMF.

Debt forgiveness

356. Paragraph 348, with references to “governmententity” replaced by “nongovernment entity,” is relevant.

Other transfers

357. With references to “government entities” replacedby “nongovernment entities,” the discussion oninvestment grants in paragraph 349 is relevant.Compensation payments detailed in paragraph 350 arerelevant, but the payments are made by nongovernmententities. The same applies, for nongovernment entities, todebit-side entries for taxes (i.e., inheritance taxes, deathduties, and gift taxes levied at irregular and infrequentintervals) referred to on the credit side for generalgovernment. Also recorded under the investment grantportion of other transfers are legacies or large gifts—including legacies to nonresident, nonprofit institutions(NPIs)—and exceptionally large donations made byhouseholds or enterprises to nonresident NPIs forfinancing gross fixed capital formation. (Examples aregifts to universities to cover costs of building newresidential quarters, libraries, laboratories, etc.)

Acquisition or Disposal of Nonproduced,Nonfinancial Assets

358. This category of the capital account isdescribed in Chapter 16. Acquisition or disposal of


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nonproduced, nonfinancial assets comprises, inconcept, acquisition or disposal of nonproduced,tangible assets (land and subsoil assets) and acquisitionor disposal of nonproduced, intangible assets, such aspatents, copyrights, trademarks, franchises, etc. andleases or other transferable contracts. (See paragraph312 for the treatment of such resident/nonresidenttransactions.) In the balance of payments accounts, it isthe intangible assets category that generally would

be most applicable. It is necessary to distinguishbetween the use of such assets (recorded underservices-royalties and license fees) and the purchaseor sale of assets (recorded in the intangible assetscategory of the capital account) if data are available.(Valuation and timing of capital transfers andacquisition or disposal of nonproduced, nonfinancialassets are discussed in Chapter 16, paragraphs 341 and342.)

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Concept and Characteristics

359. Direct investment is the category of internationalinvestment that reflects the objective of a resident entityin one economy obtaining a lasting interest in anenterprise resident in another economy. (The residententity is the direct investor and the enterprise is thedirect investment enterprise.) The lasting interestimplies the existence of a long-term relationshipbetween the direct investor and the enterprise and asignificant degree of influence by the investor on themanagement of the enterprise. Direct investmentcomprises not only the initial transaction establishingthe relationship between the investor and the enterprisebut also all subsequent transactions between them andamong affiliated enterprises, both incorporated andunincorporated.

360. The concept of direct investment presented in thisManual is the basis for that adopted in the secondedition of the OECD Detailed Benchmark Definition ofForeign Direct Investment. The concept described inthis Manual is broader than the SNA concept offoreign-controlled, as distinguished from domesticallycontrolled, resident enterprises. In the SNA, that distinc-tion (as well as the one between public and privateenterprises) is made in the compilation of variousaccounts because of the distinction’s potential analyticusefulness in the examination of differences(characteristics such as value added, investment,employment, etc.) between enterprise subsectors. Thus,linkage of the direct investment component of thefinancial account with the foreign-controlled sector isby no means a complete one, primarily because thetwo serve different purposes. As presented in thisManual, the primary distinguishing feature of directinvestment is the significant influence that gives theinvestor an effective voice in management. For theforeign-controlled sector, the primary distinguishingfeature is control.

361. The benefits that direct investors expect to derivefrom a voice in management are different from thoseanticipated by portfolio investors having no significantinfluence over the operations of enterprises. From theviewpoint of direct investors, enterprises often

represent units in a multinational operation, the overallprofitability of which depends on the advantages to begained by deploying the various resources available tothe investors in units located in different economies.Direct investors are thereby in a position to derivebenefits in addition to the investment income that mayaccrue on the capital that they invest (e.g., the oppor-tunity to earn management fees or other sorts ofincome). Such extra benefits are likely to be derivedfrom the investors’ associations with the enterprisesover considerable periods of time. In contrast, portfolioinvestors are primarily concerned about the safety oftheir capital, the likelihood of appreciation in value,and the return generated. Portfolio investors willevaluate, on a separate basis, the prospects of eachindependent unit in which they might invest and mayoften shift their capital with changes in theseprospects, which may be affected by short-termdevelopments in financial markets.

Direct Investment Enterprises

362. Reflecting the difference noted previously, adirect investment enterprise is defined in this Manualas an incorporated or unincorporated enterprise inwhich a direct investor, who is resident in anothereconomy, owns 10 percent or more of the ordinaryshares or voting power (for an incorporated enterprise)or the equivalent (for an unincorporated enterprise).Direct investment enterprises comprise those entitiesthat are subsidiaries (a nonresident investor ownsmore than 50 percent), associates (an investor owns 50 percent or less) and branches (wholly or jointlyowned unincorporated enterprises) either directly orindirectly owned by the direct investor. (See the Guidefor examples of chains of ownership.) Subsidiaries inthis connotation also may be identified as majorityowned affiliates. As defined in the SNA,foreign-controlled enterprises include subsidiaries andbranches, but associates may be included or excludedby individual countries according to their qualitativeassessments of foreign control. Also, a publicenterprise, as defined in the SNA, may in some

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instances be a direct investment enterprise, as definedin this paragraph.

363. Although the 10 percent criterion is specified inthe Manual, some countries may choose to allow fortwo qualifications that involve a degree of subjectivejudgment. First, if the direct investor owns less than10 percent (or none) of the ordinary shares or votingpower of the enterprise but has an effective voice inmanagement, the enterprise may be included. Second, ifthe investor owns 10 percent or more but does nothave an effective voice in management, the enterprisemay be excluded. Although the application of these twoqualifications is not recommended in this Manual,countries that apply such qualifications should identifythe aggregate value of transactions in order to facilitateinternational comparability.

364. Most direct investment enterprises are either (i) branches or (ii) subsidiaries that are wholly ormajority owned by nonresidents or in which a clearmajority of the voting stock is held by a single directinvestor or group. The borderline cases are thus likelyto form a rather small proportion of the universe.

365. In this Manual, it is recommended that so-calledspecial purpose entities (SPEs) be included as directinvestment enterprises if the entities meet the criteriastated in previous paragraphs. Whatever the structure(e.g., holding company, base company, regional head-quarters) or purpose (e.g., administration, managementof foreign exchange risk, facilitation of financing ofinvestments), SPEs are an integral part of the structureof the direct investment network as are, for the mostpart, SPE transactions with other members of thegroup. However, for SPEs with a sole purpose ofserving in a financial intermediary capacity (as is thecase for banks and other financial intermediaries suchas security dealers), transactions recorded under directinvestment are limited to those associated withpermanent debt and equity. (See paragraph 372.) Forcountries employing other treatments of SPEs andcountries employing the recommended treatment (if itis feasible to do so), the value of SPE transactions as agroup should be separately identified in terms ofstandard components to permit consistent internationalcomparisons.

366. Special relationships may exist between oramong enterprises operating in different economies.These relationships may involve a common board ofdirectors, a high degree of policy coordination,and/or—in the absence of any ownership of equityinterest that signifies direct investment—a pooling of

resources. If transactions between or among suchenterprises are treated by individual countries as directinvestment, these transactions should be identified asspecified in paragraph 365.

Direct Investors

367. Direct investors may be individuals; incorporatedor unincorporated private or public enterprises;associated groups of individuals or enterprises;governments or government agencies; or estates, trusts,or other organizations that own (as describedpreviously) direct investment enterprises in economiesother than those in which the direct investors reside.The members of an associated group of individuals orenterprises are, through their combined ownership of10 percent or more, deemed to have an influence onmanagement that is similar to the influence of anindividual with the same degree of ownership.

Direct Investment Capital

368. Direct investment capital is (i) capital provided(either directly or through other related enterprises) bya direct investor to a direct investment enterprise or(ii) capital received from a direct investment enterpriseby a direct investor. For the economy in which theinvestment is located, such capital includes fundsprovided directly by the direct investor and fundsprovided by other direct investment enterprisesassociated with the same direct investor. For theeconomy of the direct investor, such capital includesonly funds provided by the resident investor. Directinvestment capital does not include funds provided by,or received from, any other sources—including sourcesof funds for which the direct investor merely makesthe arrangements or guarantees repayment (e.g., loansfrom outside parties to an incorporated directinvestment enterprise).

369. The components of direct investment capitaltransactions, which—as noted in paragraph 330—arerecorded on a directional basis (i.e., resident directinvestment abroad and nonresident direct investment inthe recording economy), are equity capital, reinvestedearnings, and other capital associated with variousintercompany debt transactions. Equity capitalcomprises equity in branches, all shares in subsidiariesand associates (except nonparticipating, preferredshares that are treated as debt securities and includedunder direct investment-other capital—see paragraph370), and other capital contributions. Reinvestedearnings consist of the direct investor’s share (in

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proportion to direct equity participation) of earningsnot distributed as dividends by subsidiaries orassociates and earnings of branches not remitted to thedirect investor. If such earnings are not identified, allbranch earnings are considered, by convention, to bedistributed. Because undistributed (reinvested) earningsresult in additions to direct investors’ equity insubsidiaries and branches, these earnings are includedas direct investment capital transactions in amountsequal to (and with opposite sign) the correspondingentries recorded under direct investment income. (Seeparagraphs 278, 288, and 321.)

370. Other direct investment capital (or intercompanydebt transactions) covers the borrowing and lending offunds—including debt securities and suppliers’ credits—between direct investors and subsidiaries, branches,and associates. The borrowing and lending arereflected in intercompany claims and liabilities(receivables and payables), respectively. Both loans tosubsidiaries from direct investors and loans fromsubsidiaries to direct investors are included. In contrastto the treatment of other investment, no distinction ismade between short- and long-term investment.

371. Instances of reverse investment or crossparticipation may arise. A direct investment enterprisecan have an interest in its direct investor. That interestis regarded as an offset to capital invested by the directinvestor (i.e., as disinvestment). For the economy of thedirect investment enterprise, such reverse investment inthe form of equity is recorded under direct investmentin reporting economy-equity capital-claims on directinvestors. For the economy of the direct investor,reverse investment in the form of equity is recordedunder direct investment abroad-equity capital-liabilitiesto affiliated enterprises. Reverse investment in the formof other instruments should be recorded, under direct investment in reporting economy-other capital or direct investment-abroad-other capital. Incases in which the equity participation is at least 10percent in both directions, two direct investmentrelationships are established. Such transactions arerecorded as direct investment claims and liabilities inboth directions; that is, as direct investment-in reportingeconomy and as direct investment-abroad, for eacheconomy as appropriate.

372. Intercompany transactions between affiliatedbanks (depository institutions) and affiliated financialintermediaries (e.g., security dealers)—including SPEswith the sole purpose of serving as financialintermediaries—recorded under direct investmentcapital transactions are limited to those transactions

associated with permanent debt (loan capitalrepresenting a permanent interest) and equity (sharecapital) investment or, in the case of branches, fixedassets. Deposits and other claims and liabilities relatedto usual banking transactions of depository institutionsand claims and liabilities of other financialintermediaries are classified, as appropriate, underportfolio investment or other investment. The stock offoreign assets and liabilities of banks and otherfinancial intermediaries (international investmentposition) should be treated in a parallel manner.

373. Transactions through SPEs (with the exceptionsnoted in paragraphs 365 and 372) are included in directinvestment capital transactions, and the related stocksof assets and liabilities are covered in the directinvestment position.

374. Direct investment capital transactions includethose that create or dissolve investments as well asthose that serve to maintain, expand, or reduceinvestments. Thus, when a nonresident who previouslyhad no equity in an existing resident enterprisepurchases 10 percent or more of the shares or votingpower of that enterprise from a resident, the marketvalue of equity holdings acquired and any other capitalinvested should be recorded as direct investment.When a nonresident holds less than 10 percent of theshares of an enterprise as a portfolio investment andsubsequently acquires additional shares resulting in adirect investment interest (10 percent or more), onlythe purchase of additional shares is recorded as a directinvestment transaction. The holdings that were acquiredpreviously are not recorded in the balance of paymentsbut are reflected in a reclassification, from portfolioinvestment to direct investment, in the internationalinvestment position.

Extent of Net Recording

375. Direct investment is often referred to as an assetfor the economy of the direct investor and as a liabilityfor the economy in which the direct investment enter-prise operates. Actually, investor and enterprise haveclaims on, or liabilities to, each other—although theinvestor could be expected to have net foreign claimsand the enterprise to have net foreign liabilities. It isrecommended in this Manual that direct transactions inequity capital and other capital (intercompany debt) berecorded for assets (claims) and liabilities. Thus, inaddition to a net investment transaction for each ofthese components, separate entries are made for thechange in claims of direct investors on, and the changein liabilities to, affiliated enterprises. These entries are


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made under direct investment-abroad and vice versa fordirect investment-in reporting economy. For recordingof direct investment in the international investmentposition, the same entries are made. See the tablepresenting the standard components of the internationalinvestment position at the end of Chapter 23. However,as noted in Chapter 23, the related direct investmentincome on equity and debt is shown on a net basis foreach direction.

Valuation of Flows and Stocks

376. In concept, market price is the basis for valuationof flows and stocks, including those for directinvestment, in the international accounts. (See Chapter5, particularly paragraphs 97 through 103, for a fulldiscussion covering transfer prices of affiliatedenterprises and Chapter 5, paragraphs 107 through 108,together with Chapter 23, for discussions on valuationof stocks.)

377. Although this Manual, in concordance with theSNA, affirms the principle of using market price as thebasis for valuation, it is recognized that, in practice,book values from the balance sheets of directinvestment enterprises (or investors) often are used todetermine the value of the stock of direct investment.This practice reflects the fact that enterprise balancesheet values—whether or not regularly revalued tocurrent market value or recorded on the basis ofhistorical cost or based on some interim but not currentrevaluation—represent the only source readily availablein most countries. (In the first case, the balance sheetvalue is, in fact, the market value.) Compliers areencouraged to collect data from enterprises on acurrent market value basis to narrow the gap betweenprinciple and practice. To facilitate internationalcomparisons, countries that publish data based onmarket values derived indirectly should, when it isfeasible, also publish data collected on a balance sheet(book value) basis if the two types of data differ. (Seeparagraph 467.)

Other Special Cases of Direct InvestmentEnterprises

378. In addition to the SPEs referred to in paragraphs365 and 372, other types of enterprises—some of whichare referred to in earlier chapters—warrant additionaldiscussion.

379. Because of the rather complex operations ofinsurance enterprises, there may be some difficultieswith the availability of data from direct investment

branches and subsidiaries. Nonetheless, the transactionsof insurance companies are treated in the same manneras transactions of industrial and commercial enterprises,except that the technical reserves (e.g., actuarialreserves against outstanding risks, prepayments ofpremiums, reserves for with-profits insurance, andreserves against unsettled claims) of insuranceenterprises are excluded from the stock of directinvestment.

380. Construction enterprises involved in workundertaken in other economies may be classified aseither direct investment activity or as export of services.The criteria to determine the classification and theattribution of production are linked to the question ofresidency and are fully discussed in Chapter 4,paragraph 78.

381. The residency of offshore enterprises—includingthose engaged in the assembly of componentsmanufactured elsewhere, those engaged in trade andfinancial operations, and those located in special zones—is attributed to the economies in which theenterprises are located. (See paragraph 79.)

382. Private, nonbusiness real estate investment (e.g.,holiday and other residences owned by nonresidentsfor personal use or leased to others) is, in principle,included in direct investment.

383. Expenditures of direct investment enterprisesestablished for exploration of minerals and othernatural resources in an economy are treated as capitalexpenditures (fixed capital formation), according to theSNA. Inward investment flows from the direct investorabroad for such expenditures are, of course, recordedin the balance of payments. If the exploration provesunsuccessful and results in a shutdown of theenterprise, no further balance of payments entries arerecorded. Rather, a negative stock adjustment is madein the direct investment position of the direct investorin the host economy, and an equal reduction is madein the liability position of that economy. (Both adjust-ments fall under the heading Other Adjustments in theinternational investment position. (See the table at theend of Chapter 23.)


384. There are aspects of direct investment—otherthan those directly related to balance of payments andinternational investment position data—that may,particularly in the host economy, be of interest fromanalytical and policy-making points of view. Among such

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aspects are those pertaining to the financial structure andoperations of subsidiaries, associates, branches, anddirect investors. Examples are the values of total assets ofenterprises, complete balance sheets and incomestatements, the composition of sales and of externalfinancing, employment, industry activity of directinvestment enterprises and of direct investors, geographic

allocation of activities (see Chapter 24), the valueadded or the gross product of subsidiaries in relation tothe total GDP of the economies involved, and thecountry of the ultimate beneficial owner. Information ofthis type, along with balance of payments andinternational investment position data, may be collectedin enterprise surveys. (See the Guide.)


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Coverage

385. Portfolio investment includes, in addition to equitysecurities and debt securities in the form of bonds andnotes, money market instruments and financialderivatives such as options. Excluded are any of theaforementioned instruments included in the categories ofdirect investment and reserve assets. The expandedcoverage in transactions reflects changes in internationalfinancial markets in recent years and includes theintroduction of many new financial instruments withinthe framework of continuous innovation.

386. Thus, both the coverage and classification ofportfolio investment are significantly revised in thisManual. The formal distinction between long- and short-term investment—the former referring to originalmaturity of more than one year or no stated maturityand the latter referring to original maturity of one yearor less or on demand—is not made for portfolioinvestment for reasons noted previously. (See paragraphs336 through 339.) The fact that original maturity is nowless important for many market participants in invest-ment and lending activities resulted in the inclusion ofadditional instruments within portfolio investment. (Inprevious editions of the Manual, short-term instrumentswere excluded and treated as other capital.) Theclassification scheme reflects financial market develop-ments and efforts to improve links with the SNA andother statistical systems of the IMF.

Classification and Definitions

387. The categories of financial instruments classifiedand defined in the Manual are generally consistent withthose in the SNA. The major components of portfolioinvestment, which are classified under assets andliabilities, are equity securities and debt securities. Bothare usually traded (or tradable) in organized and otherfinancial markets. Debt securities are subdivided intobonds and notes, money market instruments, andfinancial derivatives that include a variety of newfinancial instruments.

388. Equity securities covers all instruments andrecords acknowledging, after the claims of all creditors

have been met, claims to the residual values ofincorporated enterprises. Shares, stocks, participation,or similar documents (such as American DepositaryReceipts) usually denote ownership of equity. Preferredstock or shares, which also provide for participation inthe distribution of the residual value on dissolution ofan incorporated enterprise, are included. (For preferredshares that do not provide for such participation, seeparagraph 390.) Mutual funds and investment trusts alsoare included.

389. Debt securities cover (i) bonds, debentures, notes,etc.; (ii) money market or negotiable debt instruments;and (iii) financial derivatives or secondary instruments,such as options, that usually do not extend to actualdelivery and are utilized for hedging of risks,investment, and trading purposes.

390. Bonds, debentures, notes, etc. usually give theholder the unconditional right to a fixed money incomeor contractually determined variable money income.(Payment of interest is not dependent upon the earn-ings of the debtor.) With the exception of perpetualbonds, bonds and debentures also provide the holderwith the unconditional right to a fixed sum as a repay-ment of principal on a specified date or dates. Includedare nonparticipating preferred stocks or shares, conver-tible bonds, and bonds with optional maturity dates, thelatest of which is more than one year after issue.9 Thiscategory also includes negotiable certificates of depositwith maturities of more than one year; dual currencybonds; zero coupon and other deep discounted bonds;floating rate bonds; indexed bonds; and asset-backedsecurities, such as collateralized mortgage obligationsand participation certificates. (Mortgages are notclassified as bonds but are included under loans.)

391. Money market securities generally give the holderthe unconditional right to receive a stated, fixed sum ofmoney on a specified date. These instruments usuallyare traded, at a discount, in organized markets; the

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9The conversion (into equities) option may be considered a tradable derivative(i.e., an asset separate from the underlying security). See paragraph 392.Separation of the value of a transaction into the value of the bond and thevalue of the option may be effected by reference to transactions in similarbonds traded without options.

discount is dependent upon the interest rate and thetime remaining to maturity. Included are such instru-ments as treasury bills, commercial and financial paper,bankers’ acceptances, negotiable certificates of deposit(with original maturities of one year or less), and short-term notes issued under note issuance facilities(NIFs)—even though the facility (itself contingent)provided by banks typically is a longer-termarrangement. (Repurchase agreements, which arenonnegotiable and of different character, are classifiedunder loans in other investment.)

392. Certain financial instruments give the holder thequalified right to receive an economic benefit in theform of cash, a primary financial instrument, etc. atsome future date. These instruments are referred to asderivatives or secondary instruments because of thelinkage to specific financial instruments or to indicators(foreign currencies, government bonds, share priceindices, interest rates, etc.) or to particular commodities(gold, sugar, coffee, etc.) that may be purchased orsold at a future date. Derivatives also may be linked toa future exchange, according to a contractualarrangement, of one asset for another. The instrument,which is a contract, may be tradable and have a marketvalue. In that case, the characteristics of the instrumentas a contingent asset or liability (not to be recorded inthe balance of payments or in SNA sectoral balancesheets) change and give rise to treatment of theinstrument as an actual financial asset or liability in thefinancial account. Among derivative instruments areoptions on currencies, interest rates, commodities,indices, etc.; traded financial futures; warrants; andarrangements such as currency and interest rate swaps.

393. Transactions in derivatives are treated as separate(mainly financial) transactions rather than included asintegral parts of underlying transactions to which thederivatives may be linked as hedges. There are severalreasons for this treatment, which is consistent with thatin the SNA. The counter party to a derivative transactionwill be a different transactor than the transactor for theunderlying transaction being hedged. Also, the twoparties to the derivative transaction may have differentmotives—hedging, dealing in the instrument involved,or acquiring the derivative as an investment. Even ifboth parties are hedging, the hedging may be associatedwith different financial or other assets. If derivativetransactions were included as integral parts ofunderlying transactions, such treatment would lead toasymmetries of measurement in the balance ofpayments accounts. For example, the counter party to aderivative contract that hedges an underlying positionwith a resident may also be a resident. In such an

instance, the inclusion of the derivative as part of theunderlying transaction would result in the incorrectinclusion of transactions in the balance of payments.

394. Equity and debt securities are further subdividedby institutional sector—of the resident creditor forassets and the resident debtor for liabilities. Supplemen-tary subdivisions by nonresident sector also may be ofanalytical interest, as would subdivisions of securitiesinto new issues, transactions in outstanding issues,redemptions of debt securities, and distinctionsbetween components denominated in domestic andforeign currencies.

Selected Recording Issues

395. The expanded coverage, which includes traditional and new money market and derivativeinstruments and innovative long-term securities, ofportfolio investment raises issues concerning therecording of balance of payments entries associatedwith these instruments. Such issues are discussed, forselected instuments, in subsequent paragraphs.

396. Zero coupon (and other deep discounted) bondsare single payment, long-term securities that do notinvolve periodic interest payments (or pay little interest)during the life of the bond. Instead, such a bond is soldat a discount from par value and the full return is paidat maturity. Thus, the difference between the discountedissue price and the price at maturity is substantial. Thisdifference is treated as interest income and is recordedas accruing (i.e., converted into a series of monthlyquaterly or annual payments) over the life of the bond.The difference (interest income) is not recorded whendue for payment. (The offset to the interest income isentered under debt securities in the financial accountand has the effect of the interest being reinvested.)Thus, the cost of providing the capital is matched to theperiods for which the capital is provided. If, prior tomaturity, a zero coupon or deep discounted bond istraded in the secondary market, the transaction pricemay include a realized holding gain or loss in additionto accrued interest. That change is included in entries tothe financial account for the purchase and sale of thebond at market prices. Prevailing interest rates reflectingthe difference between the new owner’s cost and thevalue of the bond at maturity should be used for thesubsequent recording of interest on the bond. (Seeparagraph 283.)

397. Index-linked securities are instruments for whicheither the coupon payments or the principal are linkedto a specific price index, to the price of a commodity,


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to an exchange rate index, or the like. The objective,in addition to earning interest income, is to conservepurchasing power during a period of inflation. Whencoupon payments are index-linked, the payments aretreated as interest income, as is the case with anyfinancial asset that has a variable interest rate. Whenthe value of the principal is indexed, the issue price ofthe security is recorded as the principal, and thechange in value resulting from indexation—periodicallyand at maturity—is treated as interest income. Thechange in value related to indexation should beestimated and recorded as interest income over the lifeof the security, and the offset should be recordedunder debt securities in the financial account.

398. Among money market and derivative instrumentsand arrangements, the treatment of short-term notesissued under NIFs, options, warrants, swaps, tradedfinancial futures, and forward rate agreements arenoted subsequently.

399. A note issued under an NIF (usually a medium-term arrangement of five to seven years) is ashort-term instrument (e.g., three to six months) issuedby a borrower in its own name under a contractualcommitment with a bank or group of banks either tounderwrite the notes and purchase any unsold notes atparticular borrowing or roll-over dates or to providestand-by credits. The facility is a form of revolvingcredit, and the paper issued often is referred to as aEuronote or promissory note. If the borrower is abank, the paper is, in effect, a certificate of deposit.(At times, a facility is arranged to issue short-termnotes without an underwriting commitment, butusually there is a separate stand-by credit commitment.The notes so issued are referred to as Eurocommercialpaper.)

400. As for balance of payments recording, thecreation of NIFs does not require entries in thefinancial account because the NIFs are contingent.When notes are issued and sold under an NIF, thattransaction is recorded with the sale entered as aliability for the borrower and as an asset for the buyer(the bank or other investor). Repayments are enteredaccordingly. However, any fees associated with thecreation and operation of NIFs or bank placements ofnotes with other investors are entered in financialservices in the current account. As is recommendedfor other debt securities, the discounts or premiums onthe notes purchased by banks or other investors (apartfrom the fees paid by the latter to banks) are treatedas interest income, or negative interest income,respectively, at the times of purchase.

401. Options are contracts that give the purchaser ofthe option the right, but not the obligation, to buy (acall option) or to sell (a put option) a particularfinancial instrument or commodity at a predeterminedprice (strike price) within a specific time span or on aspecified date. Some leading types of options are thoseon foreign currencies, interest rates, equities,commodities, specified indexes, etc. The buyer of theoption pays a premium (the option price) to the seller(writer or issuer) for the latter’s commitment to sell orpurchase the specified amount of the underlyinginstrument or commodity or to provide, on demand ofthe buyer, appropriate remuneration. By convention—in this Manual and in the SNA—that commitment istreated as a liability of the seller and represents thecurrent cost to the seller of buying out his contingentliability.

402. Conceptually, the payment of the premiumreferred to previously includes two elements: thepurchase price of a financial asset and a service charge.In practice, it often is not possible to identify theservice element separately. If the latter can bedistinguished, it is entered under financial services. Ifnot, it is recommended that the full premium berecorded in the balance of payments as the acquisitionof a financial asset by the buyer and as an incurrenceof a liability by the seller. Subsequent trading (sales) ofoptions is recorded in the financial account, as is theexercise or purchase or sale of the underlying financialinstrument. If an option actually proceeds to delivery,which is not the usual case, the acquisition or sale ofthe underlying asset (real or financial) is recorded atthe prevailing market price in the appropriate balanceof payments component. Offsetting that entry is theactual amount payable or receivable; the differencebetween that amount and the prevailing market price isreflected in an entry that extinguishes the optioncontract. If an option contract is closed out prior todelivery, the actual amount payable or receivable isoffset by the entry extinguishing the option contract.When initial margin payments and subsequent increasesor decreases are payable by the parties to options, thepayments are recorded, both as assets and liabilities,under others investment-currency and deposits in thefinancial account. Payments into, and withdrawalsfrom, these accounts sometimes may be reflected intransactions in the traded options to which theaccounts relate and, if so, are recorded under optiontransactions in the financial account.

403. Warrants (a particular form of option) are tradableinstruments giving the holder the right to buy from theissuer of the warrant (usually a corporation) a certain

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number of shares or bonds under specified conditionsfor a designated period of time. Warrants can be tradedapart from the underlying securities to which thewarrants are linked and thus have a market value. Thetreatment of warrants is the same as that for otheroptions, and the issuer of the warrant is considered, byconvention, to have incurred a liability, which is thecounterpart of the asset held by the buyer and reflectsthe current cost of buying out the issuer’s contingentliability.

404. Another variety of tradable warrant (usuallyissued by investment intermediaries) is a currencywarrant, the value of which is based on the amount ofone currency required to purchase another currency ator before the expiration date of the warrant. Currencywarrants and cross-currency warrants with paymentsdenominated in third currencies are treated in a mannersimilar to the treatment of other warrants.

405. A swap is a contractual arrangement involvingtwo parties who agree to exchange, over time andaccording to predetermined rules, streams of paymenton the same amount of indebtedness. The two mostprevalent varieties of swaps are interest rate swaps andcurrency swaps. An interest rate swap involves anexchange of interest payments of different character(e.g., fixed rate and floating rate, two different floatingrates, fixed rate in one currency and floating rate inanother, etc.). A currency swap involves an exchangeof specified amounts denominated in two differentcurrencies and subsequent repayments reflectingprincipal and/or interest. (Central bank currency swaparrangements usually undertaken for exchange ratepolicy purposes and involving the temporary exchangeof deposits as of a particular date and the reversal ofthe transaction at a future date are referred to inparagraph 434.)

406. Balance of payments entries for streams ofinterest payments associated with swap transactionsare recorded, on a net basis, in the current account,and streams of principal repayments are recorded inthe financial account. Although neither party to aswap arrangement is considered to be the provider of aservice to the other, any payment to a third partyinvolved in arranging the swap is recorded underfinancial services.

407. A futures contract is an agreement between twoparties to exchange a real asset for a financial asset orto exchange, on a specified date at a predeterminedrate, two financial assets. Traded financial futures,

including those for interest rates, currencies,commodities, equities, or other indices, are recorded inthe financial account in a manner similar to therecording of options. Transactions associated withnontraded financial futures are likely to occurinfrequently and are recorded under the other assets orother liabilities components of other investment.

408. A forward rate agreement (FRA) is anarrangement according to which two parties agree onan interest rate to be paid, on a specified settlementdate, on a notional amount of principal that is neverexchanged. At that time, the settlement payment (i.e.,the difference between the rate agreed upon and theprevailing market rate at the time of settlement) isrecorded as a transaction in the balance of payments.The buyer of the FRA receives payment from the sellerif the prevailing rate exceeds the rate agreed upon; theseller receives payment from the buyer if the prevailingrate is lower than the rate agreed upon. Thesepayments are recorded as interest income in thecurrent account of the balance of payments. Becausethere is only a notional (not an actual) underlyingasset, there are no entries in the financial account.

Valuation

409. Transactions in items classified as portfolioinvestment are entered at market prices; any changes inmarket value while securities are still in the holder’spossession (valuation changes) are omitted.Transactions in securities generally take place under theconditions necessary to establish actual market prices(e.g., in an organized market), so the valuation oftransactions is not likely to prove very troublesome inpractice. However, the elimination of valuation changesfrom series derived from amounts outstanding may wellbe difficult to accomplish in practice. The differencebetween the market values of assets outstanding at thebeginning and at the end of a period may include (i) transactions valued at market price during theperiod and (ii) valuation changes, including those inassets acquired or disposed of (or both), during theperiod.

410. Changes in holdings classified as portfolioinvestment and reported by transactors or their agents(banks, security dealers, brokers, etc.) may includeamounts for service charges on the transactions.Adjustments for such charges are made in entries toportfolio investment and the charges are included infinancial services.


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Coverage

411. Other investment is a residual category thatincludes all financial transactions not covered in directinvestment, portfolio investment, or reserve assets(discussed in Chapter 21).

Classification

412. As is the case with portfolio investment, assets andliabilities for other investment are classified primarily onan instrument basis. The sectors of domestic creditor ordebtor—the secondary basis for the classification—aremonetary authorities, general government, banks, andother sectors. (For the definitions of sectors, seeAppendix 2.) In contrast to direct investment andportfolio investment, the maturity distinction(long- termand short-term) is a third-level basis of classification.

413. The instrument subclassification for otherinvestment (as is that for portfolio investment) is closelylinked to the SNA categories for financial assets. (SeeChapter 3.) While the relative importance of types ofinvestment differs considerably among economies, thetypes reflect most of the financial instruments andchannels utilized for the acquisition of assets andincurrence of liabilities—other than for directinvestment, portfolio investment, and reserve assets. Theinstrument classification comprises trade credits, loans(including the use of Fund credit and loans from theFund), currency and deposits (both transferable andother), and other assets and liabilities (for example,miscellaneous accounts receivable and payable).

Definitions and Recording

414. Trade credits consist of claims and liabilitiesarising from the direct extension of credit by suppliersand buyers for transactions in goods and services andadvance payments for work in progress (or to beundertaken) that is associated with such transactions.(Loans to finance trade are not included as these areclassified under loans. See paragraph 415.) In theabsence of actual data, trade credits may be measuredby the difference between entries for the underlying

transactions in goods and services, which are recordedas of the dates when ownership changes, and theentries for payments related to these transactions.Although frequently short-term in nature, trade creditsand advances are subdivided into short- and long-termcategories.

415. Loans comprise those financial assets createdthrough the direct lending of funds by a creditor(lender) to a debtor (borrower) through an arrangementin which the lender either receives no securityevidencing the transaction or receives a non-negotiabledocument or instrument. Included are loans to financetrade, other loans and advances (including mortgages),use of Fund credit and loans from the Fund, etc. Inaddition, financial leases and repurchase agreements(see paragraphs 417 through 418) are covered underloans—even though, from a legal standpoint, these maynot be considered loans. Loans are subdivided intolong- and short-term categories, which reflect theretention of the maturity structure referred to previously.

416. Long-term loans and trade credits are recorded ona net basis. It is recommended, however, that therecording of gross flows in respect of drawings andrepayments on these instruments be provided assupplementary information. Such information is usefulfor the analysis of debt transactions and for reconcilingbalance of payments data on debt with other sources ofsuch information.

417. Financial leases are included under loans becausesuch arrangements are taken as presumptive evidencethat a change in the ownership of goods has occurred.(See paragraph 206.) The financial lease essentially is amethod by which the lessee finances the purchase ofgoods. The financial lease entails a financial claim,which is the asset of the lessor and the liability of thelessee. At the time the imputed change in ownershipoccurs, the market value of the goods is recorded andcounterpart entries, as assets or liabilities, are made inthe financial account. In subsequent periods, theactual lease payment is divided into interest, which isrecorded in the current account as income payable orreceivable, and principal (debt) repayment, which isrecorded in the financial account and reduces the

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value of the asset of the lessor and the liability of thelessee.

418. A repurchase agreement (repo) is an arrangementinvolving the sale of securities at a specified price witha commitment to repurchase the same or similarsecurities at a fixed price on a specified future date(usually very short-term, e.g., overnight or one day) oron a date subject to the discretion of the purchaser.The economic nature of a repo is similar to that of acollateralized loan in that the purchaser of the securitiesis providing funds backed by the securities to the sellerfor the period of the agreement and is receiving areturn from the fixed price when the repurchaseagreement is reversed. The securities often do notchange hands, and the buyer does not have the right tosell them. So, even in a legal sense, it is questionablewhether or not a change of ownership occurs. As aresult, in this Manual (and in the SNA and IMF moneyand banking statistics), a repo is treated as a newlycreated financial asset that is a collateralized loan ratherthan an asset related to the underlying securities usedas collateral. Reflecting that interpretation, repos areclassified under loans—unless the repos involve bankliabilities and are classified under national measures ofbroad money, in which case the repos are classifiedunder currency and deposits. In some instances,because of legal, institutional, and other considerations,national compilers may find it necessary to use analternative treatment of repos; in such instances, thisinformation should, if it is feasible to do so, beseparately identified and reported to the IMF.

419. Use of Fund credit and loans from the Fundcomprises a member country’s drawings on the Fund—other than those drawn against the country’s reservetranche position. (See paragraph 441.) Use of Fundcredit and loans includes purchases and borrowingsunder stand-by, extended, structural adjustment,enhanced structural adjustment, and SystemicTransformation Facility arrangements, together withTrust Fund loans. A reduction in the Fund’s holdings of

a member’s currency in excess of the member’s quotain the Fund minus the member’s reserve trancheposition reflects a repayment of the use of Fund credit.

420. Currency and deposits are summed as onecomponent, although separate data may be compiledby countries desiring to do so for analytic and otherpurposes. Currency consists of notes and coin that arein circulation and commonly used to make payments.(Commemorative coins and uncirculated banknotes areexcluded.) If both domestic currency (liability) held bynonresidents and foreign currency (asset) held byresidents serve that purpose, it would be useful toidentify each separately as supplementary information.

421. Deposits comprise both transferable and otherdeposits. Transferable deposits consist of deposits thatare exchangeable on demand at par without restrictionor penalty, freely transferable by check or giro order,and otherwise commonly used to make payments.Deposits may be denominated in domestic or foreigncurrencies. Other deposits include all claims (other thantransferable deposits) reflecting evidence of deposit.Typical examples are non-transferable savings deposits;time deposits; and shares (evidence of deposit)—whichare legally (or practically) redeemable on demand oron short notice—in savings and loan associations, creditunions, building societies, etc.

422. Other assets and liabilities cover any items otherthan loans and currency and deposits. For example,capital subscriptions to international nonmonetaryorganizations are classified under this category, as aremiscellaneous accounts receivable and payable.

423. As noted in paragraph 372, transactions, otherthan those associated with permanent debt and equityinvestment, of banks and other financial intermediariesthat are in a direct investment relationship are includedin portfolio investment or other investment. Thus, loansand deposits of such institutions are included, asdescribed in paragraphs 415 and 421, under thosecomponents.


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Concept and Coverage

424. Reserve assets, the fourth major functionalcategory of the financial account, is an importantcomponent of balance of payments statistics and anessential element in the analysis of an economy’sexternal position. Reserve assets consist of thoseexternal assets that are readily available to andcontrolled by monetary authorities for direct financingof payments imbalances, for indirectly regulating themagnitude of such imbalances through intervention inexchange markets to affect the currency exchange rate,and/or for other purposes. (See paragraphs 425 and432.) The category of reserve assets, as defined in thisManual, comprises monetary gold, SDRs, reserveposition in the Fund, foreign exchange assets(consisting of currency and deposits and securities),and other claims. (See paragraph 443.) Securities thatdo not satisfy the requirements of reserve assets areincluded in direct investment and portfolio investment.

425. Supplementing reserve assets are other substituteexternal resources, credits, and/or a variety ofconditional items—all of which incur liabilities. Theseare virtually second-line reserves that can be readilymobilized by monetary authorities. As a result, whilethe significance of reserve assets within the totalinternational liquidity framework may have narrowed,such assets still play a key role. On the other hand,authorities may utilize other means to deal withimbalances. For example, authorities may make use ofFund credit and loans from the Fund, encourage othersectors of the economy to engage in foreign borrowing,and/or alter the exchange rate or allow it to floatfreely, etc. The use or acquisition of reserve assets,therefore, does not necessarily reflect the degree or sizeof the payments imbalance of concern to theauthorities. The authorities also may hold reserves forother motives—such as to maintain confidence in thecurrency and the economy, to satisfy domestic legalrequirements, or to serve as a basis for foreignborrowing. In any event, resources that may beavailable in terms of external liquidity reflect a broaderrange of items than the components of reserve assetslisted in this Manual.

Identification of Reserve Assets

426. The financial assets comprising reserves cannotunambiguously be identified in a meaningful waysimply through the application of objective criteria. Thereadily observable characteristics of a claim—legalownership, marketability, currency of denomination,original contractual maturity, etc.—are not sufficient toestablish whether a claim is actually available to themonetary authorities to use for the indicated purposes.However, reserve assets always refer to assets thatactually exist. Claims that could be created underagreements that are in force (e.g., foreign exchangethat could be obtained under swap agreements andother lines of credit or through the use of Fund creditunder stand-by arrangements) do not constitute existing claims. Conversely, assets that are pledged,committed, earmarked, set aside in sinking funds, soldforward, or otherwise encumbered by the holders arenonetheless existing assets and are not precluded onthose grounds alone from being included in reserveassets. However, because such arrangements may affectthe availability and usability of the assets involved,supplementary information concerning thearrangements would be useful.

427. Two issues must be considered in the identifica-tion of reserve assets. First, in addition to assets actuallyowned, which other assets are at the effective disposalof monetary authorities? Second, of the assetscontrolled by the monetary authorities, which areavailable for use—should the necessity arise? Decisionson these matters will depend, at least in part, on theexercise of judgment.

Effective control

428. The aspect of control can be appraised only withreference to the institutional framework in individualeconomies. In the narrowest sense, monetaryauthorities control absolutely only those assets to whichthey legally hold title. In the broadest sense, almost anyasset owned by a resident of the economy mayultimately be subject to the control of the authorities.Neither of these extreme views is useful for the balance

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of payments. Instead, the concept of reserve assetsshould encompass those assets over which authoritiesexercise direct and effective control.

429. The test of such control is to be applied quitestrictly. In general, only foreign claims actually ownedby monetary authorities would be included as reserves.For example, the acquisition of assets through anystatutory power that is maintained solely on a stand-bybasis would not be considered an effective exercise ofcontrol. Also, the potential for transferring assets to orfrom the authorities through a change in monetarypolicy—and thereby inducing banks to change theirholdings of foreign assets—would be deemed tooindirect. Nevertheless, ownership is not a necessarycondition for control. For instance, if banks hold legaltitle to foreign assets but are permitted to deal in suchassets only on the terms specified by monetaryauthorities or only with their express approval, suchassets would be considered subject to the authorities’direct and effective control.

430. Except in unusual circumstances, direct andeffective control is not to be construed as extendingbeyond the assets owned by depository institutions.That is, while certain bank-owned claims onnonresidents could be classified as reserve assets, thosesame claims would cease to be reserve assets if thebanks sold the claims to private residents other thandepository institutions—whatever the institutionalarrangements in the economy might be. Authoritiesshould be able to provide data on assets that theycontrol (but do not own) because that informationwould be prerequisite to effective control.

Availability for use

431. Whether an asset controlled by monetaryauthorities is available for use is partly dependent onany conditionality that affects the asset—including, asone main aspect, the liquidity or marketability of theasset. Owned assets (such as monetary gold, SDRs, andreserve positions in the Fund) that are immediatelyavailable can be viewed as assets in the mostunconditional form. Foreign exchange holdings andother claims, in many instances, are equally available.However, a ranking of all available assets according toconditionality is not a feasible undertaking. Further-more, such a ranking—if made—would be based ontwo types of judgments: (i) the precise degree ofconditionality required for assets to be consideredunavailable for use (in accordance with the concept ofreserve assets) and (ii) the point at which the borderlinebetween reserve assets and other assets should be

drawn. A more pragmatic approach is to consider, ineach case, whether there is an expectation, backed bya reasonable degree of assurance, that the conditionscould be satisfied if and when it became necessary touse the asset.

Selected cases

432. Monetary authorities presumably hold or exercisecontrol over foreign assets in order to have such assetsavailable as reserve assets or for some other purpose.These objectives may not be mutually exclusive. Forexample, reserve assets in excess of immediate require-ments can be invested in World Bank obligations andthus provide development aid. Assets held for bothreasons are generally classified as reserve assets. Incontrast, assets in the form of direct, long-term loans fordevelopment and other purposes are not classified asreserve assets. Net creditor positions in regionalpayments arrangements that involve reciprocal lines ofcredit and that require prompt settlement of outstandingdrawings (e.g., monthly or quarterly) are construed asreserve assets. However, net asset balances in bilateralpayments agreements have much in common with othertypes of tied loans that authorities make to stimulateexports, provide aid, or further other aspects ofgovernment policy. Such payments agreement balancesare therefore conventionally excluded from reserveassets. Subscriptions to international nonmonetaryorganizations, assets redeemable only in inconvertiblecurrencies, and assets with uses blocked or otherwiseeffectively restricted by issuers are examples of assetsthat are not considered reserve assets.

433. Most other foreign assets held by monetaryauthorities are likely to be appropriate for inclusion inreserve assets. Working balances of the governmentqualify fully as reserve assets because, by definition,such balances are available for immediate use.Committed assets cannot be excluded because, like allother reserve assets, committed assets exist to meetrequirements. An asset is no less a reserve asset simplybecause the specific use to which the asset is to be putis a foreseeable one. A readily repayable loan to theFund comprises a reserve asset. Bank transfers of foreignclaims to authorities just prior to certain accountingdates can result in a portion of the assets held by theauthorities being committed, in effect, to the reversal ofthe transfer soon after those dates—whether or not thecommitment is a formal one. While such operationsundoubtedly distort the statistics on reserve assets as of aspecified date, the distortion should be interpreted asthe result of a seasonal influence, and the omission of


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such holdings from reserve assets may be justified onlyas a seasonal adjustment.

434. Assets created under reciprocal facilities (swaparrangements) for the temporary exchange of depositsbetween the central banks of two economies warrantmention. Deposits (in foreign exchange) acquired bythe central bank initiating the arrangement are treatedas reserve assets because the purpose of the exchangeis to provide the central bank with assets that can beused to meet the country’s balance of payments needs.Reciprocal deposits acquired by the partner centralbank also are considered reserve assets. Arrangements(gold swaps) involving the temporary exchange of goldfor foreign exchange deposits should be treated in asimilar manner. When a central bank acquires foreignexchange from a domestic bank in exchange for adeposit (in national currency) at the central bank andthere is a commitment to reverse the transaction at asubsequent date, the transaction is treated and recordedas an increase in reserve assets of the central bank andan increase in the central bank’s liabilities (in nationalcurrency) to the domestic bank.

435. Assets not actually owned by monetary authoritiesdo not usually qualify as reserve assets under a strictapplication of the criteria discussed in paragraph 429.Nevertheless, the possibility that such assets may qualifycannot be entirely precluded. Qualification should beapparent to the balance of payments compiler; ifmonetary authorities are presumed to be exercisingeffective control over such assets, the assets mustpossess quite distinctive characteristics. An examplewould be assets that monetary authorities temporarilytransfer to private deposit money banks; the transferswould be accompanied by some special inducements tohold the assets, such as agreements to repurchase theassets at prices that assure the banks of realizing profits.

Exclusion of Valuation Changes and OtherAdjustments

436. This fifth edition of the Manual, in contrast to thefourth, excludes all changes in reserve assets that arenot attributable to transactions. Thus, value changesresulting from fluctuations in the prices of reserveassets, changes associated with the creation of reserveassets (the monetization or demonetization of gold andthe allocation or cancellation of SDRs), and counter-parts offseting such changes are not recorded inbalance of payments statements. Changes resulting fromreclassification also are excluded. All these adjustmentsare reflected in the international investment position.(See Chapter 23.)

Classification

437. Although individual elements of reserve assets arelargely interchangeable from a functional standpoint,changes in components discussed subsequently mayhave somewhat differing implications for analyses ofglobal liquidity and the balance of payments adjustmentprocess.

438. Monetary gold is gold owned by the authorities(or by others who are subject to the effective control ofthe authorities) and held as a reserve asset.10 Other gold(nonmonetary gold, possibly including commercialstocks held for trading purposes by authorities whoalso own monetary gold) owned by any entity istreated in this Manual as any other commodity. Trans-actions in monetary gold occur only between monetaryauthorities and their counterparts in other economies orbetween monetary authorities and internationalmonetary organizations. Like SDRs (see paragraph 440),monetary gold is a reserve asset for which there is nooutstanding financial liability.

439. Authorities who add to their holdings of monetarygold by acquiring commodity gold (i.e., newly minedgold or existing gold offered on the private market) orrelease monetary gold from their holdings fornonmonetary purposes (i.e., for sale to private holdersor users) have monetized or demonetized the gold,respectively. Any increase or decrease in monetary goldholdings resulting from monetization or demonetizationis treated as a reclassification of gold; such an increaseor decrease is not shown in the balance of paymentsbut is reflected in the international investment position.If the gold being monetized or demonetized is acquiredfrom or sold to a nonresident, that transaction shouldbe recorded as an import or export under goods in thecurrent account and, in the financial account, as acredit or debit under the financial item that was used orreceived to finance that import or export.

440. SDRs are international reserve assets created bythe International Monetary Fund to supplement otherreserve assets that are periodically allocated to IMFmembers in proportion to their respective quotas. SDRsare not considered liabilities of the Fund, and IMFmembers to whom SDRs are allocated do not incuractual (unconditional) liabilities to repay SDRallocations. The Fund determines the value of SDRsdaily by summing, in U.S. dollars, the values—whichare based on market exchange rates—of a weighted

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10As defined in this Manual, monetary gold is generally construed to be at least995/1000 pure.

basket of currencies. The basket and weights aresubject to revision from time to time. SDRs can be used to acquire other members’ currencies (foreignexchange), to settle financial obligations, and to extendloans. Changes in the SDR holdings of monetaryauthorities can arise through (i) transactions involvingSDR payments to or receipts from the Fund, otherparticipants in the SDR Department of the Fund, orother holders or (ii) allocation or cancellation.Transactions such as those enumerated under (i) areincluded in the balance of payments; allocations orcancellations are not entered in the balance ofpayments but are reflected in the internationalinvestment position.

441. An IMF member may have, in the Fund’s GeneralResources Account, a position that is recorded underthe category for reserve assets. This position is referredto as the member’s reserve position in the Fund. Themember’s reserve position is the sum of the reservetranche purchases that a member may draw upon andany indebtedness of the Fund (under a loan agreement)that is readily repayable to the member. Reservetranche purchases are purchases from the Fund ofother currencies that do not cause Fund holdings of amember’s currency to exceed the member’s quota(minus holdings that reflect the member’s use of Fundcredit). A purchase from the Fund is recorded as anincrease in foreign exchange holdings and a decreasein the member’s reserve position in the Fund; arepurchase is recorded as a decrease and an increase,respectively. Purchases in the reserve tranche are notregarded as a use of Fund credit, are not subject tocharges, and do not require repurchase. In addition toreserve tranche purchases, members may use Fundresources in connection with compensatory andcontingency financing, buffer stock financing, theextended Fund facility, and the credit tranches(including policy on enlarged access) without havingthose purchases and holdings included in Fundholdings of member currencies for the purpose ofdefining the reserve tranche. A member’s drawing(other than against its reserve tranche position)constitutes the use of Fund credit. (See paragraph 415.)

442. Foreign exchange includes monetary authorities’claims on nonresidents in the forms of ECUs,11

currency bank deposits, government securities, otherbonds and notes, money market instruments, financialderivatives, equity securities, and nonmarketable claimsarising from arrangements between central banks orgovernments. (Foreign exchange covers claims that areshown as the foreign exchange component of theseries for international liquidity published by the Fundin International Financial Statistics.) The instrumentsubclassification of the foreign exchange component ofreserve assets is necessary in the context of the Fund’scompilation of global aggregates of the maincomponents of the world financial account and foranalyses of the global discrepancy in those aggregates.(The Fund adheres to strict confidentiality requirementsconcerning instruments.)

443. Other claims is a residual category coveringclaims that are not included previously and that mayconstitute reserve assets in the form of currency,deposits, or securities. For instance, the foreignexchange component may not invariably coverworking balances abroad of government nonmonetaryagencies or assets that are held by banks and subjectto the control of monetary authorities.

Valuation

444. In principle, all transactions in reserve assets arerecorded at market prices—that is, market exchangerates in effect at the times of transactions, marketprices for claims such as securities, and SDR marketrates as determined by the Fund. Monetary goldtransactions are valued at the market prices underlyingthe transactions. For valuation of stocks of reserveassets in the international investment position, marketprices in effect at the ends of appropriate periods areused.

Interpretation of Changes in Reserve Assets

445. Changes in reserve assets (within the context ofbroader aspects of external liquidity; see paragraph425) are an important analytic tool for assessingbalance of payments adjustment requirements butshould not be viewed in isolation. Difficulties mayarise, in some instances, in correctly identifying certainitems as reserve assets. Similar problems pertain to theidentification of liabilities constituting foreignauthorities’ reserves (LCFARs). Reflecting theseconsiderations, this chapter and Chapter 22 (coveringLCFARs and exceptional financing transactions) shouldbe considered complementary rather than mutuallyexclusive.


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11Countries participating in the European Monetary System were issued ECUsagainst deposits of gold and U.S. dollars with the European MonetaryCooperation Fund. Those reserves that were deposited are excluded from goldand foreign exchange holdings as published by the Fund, but the equivalentholdings of ECUs are included in foreign exchange.

Coverage

446. Several varieties of important transactions are notseparately identified in the components of thefinancial account. This supplementary information isnecessary to meet various analytical requirements,including the derivation of certain overall measures of abalance of payments deficit or surplus. The specificitems are liabilities constituting foreign authorities’reserves (LCFARs) and exceptional financingtransactions; the latter include several forms of debtreorganization related to balance of paymentsrequirements. The fact that these financing items arenot separately identified among the standardcomponents does not diminish the importance of suchitems in the analysis of balance of paymentsdevelopments. Rather, the absence of separateidentification reflects the views of most nationalbalance of payments compilers that inclusion of theseitems would unduly expand the list of standardcomponents. (A presentation of these and other itemsappears, together with the list of standard components,at the end of Chapter 8.)

Liabilities Constituting Foreign Authorities’Reserves

447. In this fifth edition of the Manual, LCFARs are notseparately identified as components of the financialaccount.12 In the fourth edition, LCFARs were identifiedas separate components of each type of financialliability, with the exception of direct investment, in thecapital account (in this Manual, the financialaccount). Objective criteria to identify LCFARs and therelationships to reserve assets remain elusive. It often isdifficult for a debtor economy to specifically link certainliabilities to those assets identified as reserve assets by acreditor economy. The potential utilization of reserveassets to serve varied purposes—as noted in Chapter21—makes it that much more difficult to match a related

liability to a particular function. As a result, it may notbe feasible to determine the underlying reasons forchanges in such liabilities in many instances.

448. Notwithstanding such difficulties, it is useful for acompiling (debtor) economy to attempt, when possible,to identify as LCFARs those liabilities that are treated asreserve assets by the creditor economy—even thoughthe compiling economy may not regard part or all ofsuch liabilities as a means of financing its paymentsimbalance. (The identification may facilitate cross-checks of bilateral and international comparisons ofdata on reserve assets.) In the table on SelectedSupplementary Information at the end of Chapter 8,LCFARs are classified primarily by instrument—debtsecurities, deposits, and other liabilities—and,secondarily, by appropriate sector.

449. In certain analytic presentations (see Appendix 5),including those of the Fund, LCFARs are groupedtogether with reserve assets, use of Fund credit andloans from the Fund, and exceptional financing asbelow-the-line items; that is, as financing items abovethe line in the current account and the financialaccount. Interpretation of the behavior of LCFARsdepends on the purpose of the analysis and the factorsthat brought about the changes recorded in the balanceof payments. The figures—along with those for reserveassets—certainly are not, under all circumstances, asatisfactory measure of the means that may have beenemployed by monetary authorities to finance apayments imbalance or a satisfactory measure of thesize of that imbalance. Also, interpretation of thefigures may sometimes be uncertain. For example, in areserve currency country, a shift—from a foreign centralbank to foreign private deposit money banks—inholdings of claims on deposit money banks may or maynot indicate strength in the reserve country’s paymentsposition. Nevertheless, changes in the liabilities that arethe counterparts of another economy’s reserve assetscan be relevant in understanding the global process ofreserve creation and neutralization.

450. Identification of certain assets as reserve assets isnot always a clear-cut matter even for holders of theassets. (See Chapter 21.) The problem of identification

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12LCFARs are any liabilities that are considered, from the viewpoint of thecreditor, to be reserve assets—even though the debtor (compiling economy)may not consider such liabilities to be offsets to its reserves or to be financingits payments imbalance.

is likely to be even more complicated from the side ofthe debtor, who presumably has less access to the factson which judgment is to be made. Generalconsiderations for identifying LCFARs are that anonresident creditor will probably classify as reserveassets any liabilities of the compiling economy (i) thatare repayable on demand or in the short run (i.e.,marketable) or that the debtor is prepared to redeemon short notice; (ii) that are repayable in assets that thedebtor would regard as reserve assets; and (iii) that areowed to a central bank or central government.

Exceptional Financing and Balance ofPayments Needs

451. The concept of exceptional financing and therelated balance of payments accounting treatment haveevolved since the fourth edition of the Manual waspublished and have assumed increased importance forIMF operations, statistics, and member countries inrecent years. As an alternative to—or in conjunctionwith the use of reserve assets, Fund credit and loansfrom the Fund (both standard components), andLCFARs to deal with payments imbalances—exceptionalfinancing consists of any other arrangements made byauthorities (or by other sectors fostered by authorities)of an economy to meet balance of payments needs.

452. Use of IMF resources is subject to a conceptualrequirement of need, which—according to the Articlesof Agreement of the IMF—is linked to a member’sbalance of payments, reserve position, or developmentsconcerning reserves. Determination of need involvesmaking a clear distinction between (i) above-the-linetransactions deemed to be autonomous or undertakenfor the sake of the transactions and thus contributing toor resulting in an overall payments deficit or surplusand (ii) below-the-line items considered to beaccommodating or financing the deficit or surplus.While such a distinction between groups of transactionsinvolves a degree of judgment, it nonetheless presentsa measure of the deficit or surplus and indicatesfinancing needs and/or policy adjustments required tocorrect the imbalance. (See Appendix 5.)

453. As is the case with reserve assets and LCFARs, theidentification of exceptional financing transactions islinked to an analytic concept rather than being basedon precise criteria. Among transactions identified asexceptional financing and linked to balance ofpayments and reserve considerations noted previouslyare those associated with (i) transfers—such as debtforgiveness, other intergovernmental grants, and grantsreceived from Fund subsidy accounts; (ii) direct or

other equity investment—such as debt or equity swapsinvolved with debt reduction; (iii) borrowing, includingbond issues, by the government or central bank (forexample, from foreign commercial banks); (iv) borrow-ing (including bond issues) implemented by othersectors of the economy and induced by authorities—usually with some form of exchange rate or interestsubsidy; and (v) other transactions related to debtreorganization, such as rescheduling of existing debtand accumulation and repayments of arrears.

Balance of Payments Accounting for SelectedExceptional Financing Transactions

454. In the balance of payments, treatment of debtreorganization involves entries in several accounts inthe standard presentation and entries to indicate below-the-line exceptional financing (see paragraph449) in an analytic presentation such as the aggregatedone in the Fund’s Balance of Payments StatisticsYearbook. In the case of multi-year arrangementsinvolving certain conditions affecting future periods, noentries are made in the accounts for the current period,although entries may be generated in future periods.The treatment of selected exceptional financingtransactions denotes components of balance ofpayments accounts in which such transactions areentered. For analytical purposes, credit entries forappropriate exceptional financing transactions areconstrued as satisfying balance of payments needs or asbelow-the-line items, although associated debit entriesmay be made above the line. In addition to thetransactions highlighted in paragraphs 455 through 458,repayments made in advance of the due dates by theauthorities of an economy and considered to be madefor balance of payments reasons should be treated asbelow-the-line items in analytical presentations. If anadvance repayment is deemed to be made for otherreasons (e.g., to improve a debtor economy’s standingin credit markets), the repayment is not classified asexceptional financing.

455. Debt forgiveness (i.e., the voluntary cancellationof all or part of a debt specified by a contractualarrangement between a creditor in one economy and adebtor in another economy that is experiencing balanceof payments difficulties) is treated as a capital transferfrom the creditor to the debtor. (See Chapter 17.) Thetransfer offsets the reduction of the liability of thedebtor in the financial account. For the debtoreconomy, if the obligations are past due, theforgiveness involves arrears (see paragraph 458), andboth entries (i.e., the receipt of the transfer and the


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reduction in arrears) are reflected under exceptionalfinancing. If obligations are due in the currentaccounting period, only the entry denoting the transferis shown under exceptional financing. Entriespertaining to the obligations are shown above the line.If the obligations are not yet due, there are no entriesunder exceptional financing.

456. Exceptional financing transactions related to directinvestment (for example, debt or equity swaps) involvethe exchange, usually at a discount, of bank claims on,or other debt instruments of, debtor economies fornonresident investors’ equity investments in thoseeconomies. Although variable in form, sucharrangements usually result in the extinction of a fixed-payment liability (e.g., a debt security or loan)denominated in foreign currency and the creation of an equity liability (denominated in domestic currency) to a nonresident. There may be an exchange of aliability of an enterprise for equity in that enterprise, or the central bank may redeem outstanding debt bypurchasing the debt, at a discount and in localcurrency, from a nonresident. The proceeds are thenreinvested by the nonresident as equity in theenterprise. A debt or equity swap often reflects adifference between the full value of the debt instrumentand the value of the equity obtained. That differenceshould be construed as a valuation adjustment in theinternational investment position rather than as atransaction (e.g., a capital transfer).

457. Rescheduling or refinancing of existing debtinvolves a change in an existing contract and replace-ment by a new contract to extend debt servicepayments due to lenders. This rescheduling constitutesa formal deferment with new maturities replacing thoseof the former contract. Interest and amortization obliga-tions due to be paid in the current accounting periodare considered paid on time and financed by therescheduled loan. Thus, there is a reduction of thosepayments on the old loan and the creation of a newloan. As to balance of payments entries, there are debitentries to interest income in the current account and,according to the maturity of the original loan, to short- or long-term loans in other investment; there isan offsetting credit entry under long-term loans in thatsame category. If the rescheduling concerns obligationspast due, arrears are involved. (See paragraph 458.) Ifthe rescheduling involves obligations not yet due,entries are made only under short- or long-term loans,as appropriate, in other investment. If, under arescheduling, the monetary authorities or generalgovernment sector assume the debt of banks or other

sectors of the economy, a credit is entered in thefinancial account for the assuming sector and a debitis entered for the other sector.

458. Arrears of interest and amortization (amountspast due and unpaid) are recorded in accordance withthe accrual principle as if paid, and a contra entry ismade to reflect the new liability. For interest arrearsaccruing in the reporting period, a debit entry isrecorded under income in the current account, anda corresponding credit entry is made (under otherinvestment-other liabilities-short-term) in the financialaccount. For amortization arrears, a debit entry ismade in the appropriate component of the financialaccount (for example, short- or long-term loans underother investment), and a credit contra entry is madeunder other investment-other liabilities-short-term. Inanalytical presentations, entries for arrears are madebelow the line (i.e., exceptional financing). Whenrescheduled interest or interest in arrears includesinterest accrued in a previous recording period, theaccrual principle for the recording of interest (seeparagraph 121) requires a debit entry under income inthat period and an offsetting credit entry (under theappropriate instrument) in the financial account.Subsequently, when the rescheduling is effected or theinterest is in arrears, only the interest accrued in thecurrent period is debited under income. Interestaccrued in the previous period is debited to theappropriate instrument in the financial account (tooffset the credit entry made in the previous period forthe interest accrued).

459. A detailed summary of entries required inbalance of payments accounts for various forms andaspects of exceptional financing transactions ispresented in Appendix 4.

Foreign Sources of Financing

460. Financial flows in the balance of payments aregenerally compiled on a domestic transactor basis andin concordance with related statistical systems (e.g.,the SNA and flows of funds accounts). However, forcertain analytical purposes—such as analyses of debtoreconomies’ sources of external borrowings by type oflender (official, bank, or other) and data comparisonsfor individual or groups of economies—identificationof the nonresident party to a transaction is ofsignificance. Because such uses are made of the data,it is recommended that statistics on foreign sources offinancing by sector (i.e., monetary authorities, generalgovernment, banks, and other) be collected assupplementary information.

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Concept and Coverage

461. Together, the balance of payments transactionsand international investment position covered in thisManual constitute the set of international accounts foran economy. The international investment position isthe balance sheet of the stock of external financialassets and liabilities. The financial items that comprisethe position consist of claims on nonresidents, liabilitiesto nonresidents, monetary gold, and SDRs. Byconvention, land and other immovable tangibles(except those owned by extraterritorial units; seeparagraph 64) are treated as the property of economicentities of the economies in which the immovabletangibles are located. Therefore, a nonresident ownerhas a financial claim on the resident entity to which theownership of such an asset is attributed rather thanownership of the actual nonfinancial asset.

462. In relation to the balance sheet (as delineated inthe SNA) of an economy, the net international invest-ment position (the stock of external financial assetsminus the stock of external liabilities) combined withan economy’s stock of nonfinancial assets comprisesthe net worth of that economy. (See Chapter 3.)

463. The position at the end of a specific periodreflects financial transactions, valuation changes, andother adjustments that occurred during the period andaffected the level of assets and/or liabilities. Becausestock levels often are utilized in the determination ofinvestment income receipts and payments in balance ofpayments accounts, consistent classification throughoutthe income category of the current account, thefinancial account, and the position components isessential for reconciliation of stocks and flows and formeaningful analysis of yields and rates of return onexternal investments. (See paragraphs 475 through 477.)

Classification

464. Classification of the international investmentposition (and of changes to the IIP) has twodimensions. (See the table at the end of this chapter.)In the rows of the table, the primary distinction isbetween assets and liabilities; the difference between

the two represents the net position. Fully consistentwith the balance of payments financial account, thefirst IIP subclassification is by function. Assets aredivided into direct investment, portfolio investment,other investment, and reserve assets; liabilities aredivided the same way (except for reserve assets).

465. Within the functional categories and inconcordance with the income component of thecurrent account and with the financial account ofthe balance of payments, direct investment issubdivided into equity capital, reinvested earnings, andother capital (intercompany debt). Claims on andliabilities to affiliated enterprises are shown separately.Portfolio investment is classified primarily byinstrument—equity securities, debt securities, andfinancial derivatives—and secondarily by appropriatesectors. Other investment also is classified first byinstrument and then by sector. Included are tradecredits, loans, currency and deposits, and other assetsand liabilities (such as capital subscriptions tointernational, nonmonetary organizations andmiscellaneous accounts receivable and payable).Reserve assets are largely interchangeable from afunctional standpoint. (See paragraphs 437 through443.)

466. In the columns of the table at the end of thischapter, the factors accounting for the change in theposition from the beginning to the end of a period arerecorded. Listed first are the transactions associatedwith the various components (e.g., for directinvestment, portfolio investment, etc.). The next twoitems—price changes and exchange rate changes—affect the valuation of components such as equity anddebt securities, direct investment, and reserve assets.(Price and exchange rate changes assume greaterimportance with increased volatility of securities andexchange markets.) Before the position at the end ofthe period is recorded, a fourth item (other adjustments)must be included. Among such adjustments (equivalentto “other changes in volume of assets” in the SNA) arechanges resulting from the allocation or cancellation ofSDRs and changes resulting from gold monetization ordemonetization, reclassifications (such as from portfolioinvestment to direct investment when the 10 percent

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equity threshold is reached), unilateral cancellation ofdebt by a creditor, and expropriations oruncompensated seizures.

Valuation of Components

467. In principle, all external financial assets andliabilities should be measured at current market pricesas of the dates involved (i.e., beginnings or ends ofreference periods).13 In practice, however, there may besome departures from the market price principle. Fordirect investment, book values from the balance sheetsof direct investment enterprises (or of direct investors)generally are utilized to determine the value of thestock of direct investments. These balance sheet values,if recorded on the basis of current market value, wouldbe in general accordance with the principle. If basedon historical cost or on an interim but not currentrevaluation, such balance sheet values would notconform to the principle. Consequently, it would bedesirable to have data collected and made available ona current-market-value basis to eliminate the gapbetween principle and practice. Those countries thatcompile data on the basis of market values derivedindirectly should, if the two types of data differ, alsocompile data from that provided by enterprises on abalance sheet (book value) basis to facilitateinternational comparability. (See paragraph 377.)

468. Portfolio investment (equity securities, debtsecurities, and financial derivatives) is valued at currentmarket prices at the appropriate reference dates. Forequities that are listed in organized markets or arereadily tradable, the value of outstanding stocks shouldbe based on actual prices. The value of equities that arenot quoted on stock exchanges or otherwise tradedregularly should be estimated by using the prices ofquoted shares that are comparable as to past, current,and prospective earnings and dividends. Alternatively,the net asset values of enterprises to which the equitiesrelate could be used to estimate market values if thebalance sheets of the enterprises are available on acurrent value basis. For debt securities that are listed inorganized markets or are readily tradable, theoutstanding value of stocks also should be determinedon the basis of current market prices. For debt securitiesthat are not readily tradable, the net present value of

the expected stream of future payments or receiptsassociated with the securities could be used to estimatemarket value. (The net present value of any futurereceipt is equal to the value of that receipt whendiscounted at an appropriate interest rate.)

469. Principles for valuation of financial derivatives inthe investment position are, in some respects, lessdefinitive than those for other portfolio investmentinstruments. There are ongoing efforts by national andinternational accounting bodies to define standards forthe measurement and recording of derivatives. Thus, inthe Manual, a thorough treatment of derivativevaluation is not attempted—particularly in view ofcontinued innovations in this area. Rather, briefvaluation guidelines that are consistent with those inthe SNA and applicable to a number of existingderivatives are presented subsequently.

470. Traded options, warrants, and traded financialfutures—all of which are treated as financial assets—areincluded in the position at market values on theappropriate accounting dates. For an option, the marketvalue recorded is either the current value of theoption—that is, the prevailing market rate—or theamount of the premium paid as a proxy. Thecounterpart liability is attributable, by convention, tothe writer of the option and is valued at the currentvalue of buying out the rights of the option holder. Fora warrant, the counterpart liability of the issuer is thecurrent value of buying out the exercise rights of theholder. A contract for a currency swap is recorded atmarket value; when payments are effected, the value ofthe asset and associated liability is amortized andsubsequently reflected in the position on theappropriate accounting date.

471. Among other investment items, those that are notreadily transferable among transactors (e.g., loans,deposits, miscellaneous accounts receivable andpayable) are recorded in the investment position atnominal or face value (as is the case for currency). Ingeneral, that value is an acceptable proxy for marketvalue. However, in recent years, loans to a number ofheavily-indebted countries have been subject tosignificant discounts in secondary markets that emergedfor the trading of such debt and brought the valuationof such debt into question. To conform with the marketvalue principle, secondary market quotations should bethe basis of valuation for transactions. As to recordingthe value of such debt in the position, the issue is notas clear. In principle, values recorded in the positionshould also be based on secondary market quotations.This presents no problem on the creditor side where

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13Market price may have to be approximated in some instances. For example,for direct investment branches and most subsidiaries, the market valuation ofthe parent enterprise’s equity is approximated as the net asset value of theresident enterprise; that is, the difference between the market value of assetsand liabilities to third parties (including the market value of shares held byminority or portfolio investors) and nonequity liabilities to shareholders.

claims are valued on the basis of the transaction(secondary market) price. However, on the debtor side,the amounts of principal that debtors are contractuallyobliged to repay creditors when loans mature are usedas the basis of valuation, and this practice represents adeparture from the market price principle. In thisparticular case, the departure is associated with contrac-tual restrictions that are usually applicable to such loansand that prohibit the debtor from buying back theloans in secondary markets unless the restrictions arewaived. (These limitations usually do not apply tobonds or other securities.) The use of market values onthe creditor side and nominal values on the debtor sideresults in an asymmetry between debtor and creditorpositions. To deal with that asymmetry, creditorsshould, if it is feasible, provide supplementary data onnominal values of discounted loans, and debtors shouldprovide such data on market values.

472. The effects of selected, debt-related arrangementson the position include (i) exchange of debt for equity(debt/equity swap—see paragraph 456), in which casethe difference between the nominal value of a loan andthe (lesser) value of the equity obtained is treated as avaluation adjustment in the position; (ii) forgiveness ofa loan, in which case a capital transfer offsets thereduction of the debtor’s liability in the balance ofpayments accounts and the transactions column of theposition reflects the reduction in the debtor’s liabilityand creditor’s asset; (iii) rescheduling of a loan, inwhich case a new loan in effect replaces an old loanand the nominal value of the new loan is the basis ofvaluation; or (iv) unilateral cancellation of a loan by thecreditor, which is recorded under other adjustments tothe position. (See paragraph 466.)

473. Reserve assets are valued at current market pricesat the appropriate reference dates. Monetary gold isvalued at the prevailing market price; SDRs are valuedat market rates calculated by the Fund; and reserveposition in the Fund is valued on the basis of Fundcalculation. Foreign exchange assets and other claimsare valued at market prices prevailing at the referencedates.

Relationship of the International InvestmentPosition to External Debt

474. The net international investment position of aneconomy—that is, external financial assets minusexternal liabilities—often is used to analyze develop-ments and trends in the performance of an economyvis-à-vis the rest of the world as of a specific date. Thenet position shows what the economy owns in relation

to what it owes in much the same way that a corporateor national balance sheet does. Sometimes the labelsnet creditor or net debtor, according to algebraic sign,are used to describe the net position. Although usefulfor some purposes, such labels are not appropriate as adepiction of the net position. Rather, it is more relevantto view only the nonequity components of the positionas debt (i.e., all recorded liabilities other than equitysecurities and direct investment equity capital, includingreinvested earnings). Such a view is in generalconcordance with the core definition of gross externaldebt in the joint study External Debt: Definition,Statistical Coverage, and Methodology (1988) by theIMF, World Bank, OECD, and Bank for InternationalSettlements.14

Investment Income, Rates of Return, and theInternational Investment Position

475. The links between investment income in thebalance of payments accounts and the internationalinvestment position—particularly those between netinvestment income and the net position—are complexand underline the importance of consistentclassification of transactions and stocks and of viewingthe two as an integrated set of accounts.

476. A number of factors can contribute to apparentanomalies between net investment income, on the onehand, and the net investment position on the other. Forinstance, the former can be positive and the latternegative as a reflection of a higher net rate of return onexternal assets than on liabilities. That higher rate ofreturn could reflect a greater risk factor abroad; moremature, outward direct investments with higher returnsthan less mature, inward investments; and/or therelative magnitude of components of the position. Inregard to the latter, for example, there might be a largenet positive position for the banking sector. As banksearn more on loans than they pay on deposits, their netincome would probably more than offset a net negativeposition (e.g., in equity investment on which dividendpayments generally are low in relation to the value ofthe equity involved). In association with the stock ofdirect investment, another factor that could result in anartificially high rate of return is the use of historical costbalance sheet values, which may be substantially lessthan current market values, as the denominator incalculating the rate of return.


106

14Gross external debt is the amount, at any specific time, of disbursed andoutstanding contractual liabilities of residents of a country to repay principal,with or without interest, or to pay interest, with or without principal, tononresidents.

477. The utilization of stocks to derive income flowestimates, as opposed to direct reporting of the latter,may present measurement problems. In cases in whichvarious interest rate and yield assumptions are appliedto stocks to estimate income flows (e.g. for securitiesholdings), the quality of estimates of dividend andinterest flows depends not only on the assumptions buton the stock estimates. Estimates based on outdatedsources or surveys may well be unreliable. In contrast,income estimates based on direct reporting (e.g., indirect investment surveys) are subject to fewer errors.In any event, both stock and flow estimates can serveas cross-checks on each other. When problems arise,

such checks can indicate that up-to-date surveys onstocks of the assets in question are necessary, thatmethods of collecting data on transactions should beimproved, and/or that other avenues to improveestimates be explored. (See the Guide.) Finally, theinterrelationship between the international investmentposition and cumulative balance of payments flows andthe effects of these on the net lender or net borrowerstatus of an economy have important analytical andpolicy implications for matters such as the formulationand implementation of adjustment programs, the relativecosts and financing requirements of these programs, andthe role of the IMF in these matters. (See Appendix 5.)

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International Investment Position: Standard Components

Changes in Position Reflecting:_________________________________________Position at Exchange Other PositionBeginning Trans- Price Rate Adjust- at End of

of Year actions Changes Changes ments Year

A. AssetsA. 1. Direct investment abroad*

1.1 Equity capital and reinvested earnings1.1.1 Claims on affiliated enterprises1.1.2 Liabilities to affiliated enterprises

A. 1. 1.2 Other capital1.2.1 Claims on affiliated enterprises1.2.2 Liabilities to affiliated enterprises

A. 2. Portfolio investment2.1 Equity securities


A. 1. 2.2 Debt securities2.2.1 Bonds and notes

2.2.1.1 Monetary authorities2.2.1.2 General government2.2.1.3 Banks2.2.1.4 Other sectors

A. 1. 2.2 2.2.2 Money market instruments2.2.2.1 Monetary authorities2.2.2.2 General government2.2.2.3 Banks2.2.2.4 Other sectors

A. 1. 2.2 2.2.3 Financial derivatives2.2.3.1 Monetary authorities2.2.3.2 General government2.2.3.3 Banks2.2.3.4 Other sectors

A. 3. Other investment3.1 Trade credits

3.1.1 General government3.1.1.1 Long-term3.1.1.2 Short-term

A. 1. 2.2 3.1.2 Other sectors3.1.2.1 Long-term3.1.2.2 Short-term

108

*Because direct investment is classified primarily on a directional basis—abroad under the heading Assets and in the reporting economy underthe heading Liabilities—claim/liability breakdowns are shown for the components of each, although these sub-items do not strictly conform tothe overall headings of Assets and Liabilities.

A. 1. 3.2 Loans3.2.1 Monetary authorities

3.2.1.1 Long-term3.2.1.2 Short-term

A. 1. 3.2 3.2.2 General government3.2.2.1 Long-term3.2.2.2 Short-term

A. 1. 3.2 3.2.3 Banks3.2.3.1 Long-term3.2.3.2 Short-term


A. 1. 3.3 Currency and deposits3.3.1 Monetary authorities3.3.2 General government3.3.3 Banks3.3.4 Other sectors

A. 1. 3.4 Other assets3.4.1 Monetary authorities

3.4.1.1 Long-term3.4.1.2 Short-ter m




A. 4. Reserve assets4.1 Monetary gold4.2 Special drawing rights4.3 Reserve position in the Fund 4.4 Foreign exchange


A. 1. 3.2 4.4.2 Securities4.4.2.1 Equities

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International Investment Position: Standard Components (continued)



4.4.2.2 Bonds and notes4.4.2.3 Money market instruments

and financial derivativesA. 1. 4.5 Other claims

B. Liabilities

B. 1. Direct investment in reporting economy*1.1 Equity capital and reinvested earnings

1.1.1 Claims on direct investors1.1.2 Liabilities to direct investors

B. 1. 1.2 Other capital1.2.1 Claims on direct investors1.2.2 Liabilities to direct investors

B. 2. Portfolio investment2.1 Equity securities

2.1.1 Banks2.1.2 Other sectors

B. 2. 2.2 Debt securities2.2.1 Bonds and notes


B. 2. 2.2 2.2.2 Money market instruments2.2.2.1 Monetary authorities2.2.2.2 General government2.2.2.3 Banks2.2.2.4 Other sectors

B. 2. 2.2 2.2.3 Financial derivatives2.2.3.1 Monetary authorities2.2.3.2 General government2.2.3.3 Banks2.2.3.4 Other sectors

B. 3. Other investmentB. 2. 3.1 Trade creditsB. 2. 2.2 3.1.1 General government


110

International Investment Position: Standard Components (continued)



*Because direct investment is classified primarily on a directional basis—abroad under the heading Assets and in the reporting economy underthe heading Liabilities—claim/liability breakdowns are shown for the components of each, although these sub-items do not strictly conform tothe overall headings of Assets and Liabilities.

B. 2. 2.2 3.1.2 Other sectors3.1.2.1 Long-term3.1.2.2 Short-term

B. 2. 3.2 Loans3.2.1 Monetary authorities

3.2.1.1 Use of Fund credit and loans from the Fund

B. 2. 2.2 3.2.2 3.2.1.2 Other long-term3.2.1.3 Short-term

B. 2. 2.2 3.2.2 General government3.2.2.1 Long-term3.2.2.2 Short-term

B. 2. 2.2 3.2.3 Banks3.2.3.1 Long-term3.2.3.2 Short-term


B. 2. 3.3 Currency and deposits3.3.1 Monetary authorities3.3.2 Banks

B. 2. 3.4 Other liabilitiesB. 2. 2.2 3.4.1 Monetary authorities


B. 2. 2.2 3.4.2 General government3.4.2.1 Long-term3.4.2.2 Short-term

B. 2. 2.2 3.4.3 Banks3.4.3.1 Long-term3.4.3.2 Short-term


111

International Investment Position: Standard Components (concluded)




R E G I O N A L A L L O C A T I O N

478. Part three of the Manual contains a discussion ofconceptual and practical issues concerning regionalallocation of transactions and stocks of external assetsand liabilities.

479. Previous chapters have covered the compilation ofglobal balance of payments and international investmentposition statements (i.e., statistics concerning the externaltransactions and the stock of external financial assets andliabilities of an economy in relation to the rest of theworld). Similar statements can be compiled on a regionalor bilateral basis to show—for a selected group ofeconomies or a particular economy—the externaltransactions with, or position vis-à-vis, another selectedgroup of economies or a particular economy. Regionalcompilations have assumed increased importance forstatistical, analytical, and policy purposes since the fourthedition of the Manual was published. The increasedimportance of regional compilations reflectsdevelopments such as the emergence of large paymentsimbalances between and among certain individualeconomies and groups of economies and the transitiontowards economic and monetary integration, particularlyin the European Community but also in other areas.Indeed, if and when such integration is fully achieved,regional balance of payments and position statementswill become even more important while statistics forindivi-dual member countries of the integrated areas maybecome less important. In any event, harmonization ofconcepts, methodology, and data collection for globaland regional balance of payments and positionstatements will mutually reinforce and improve thequality of international economic accounts.

480. Concepts and recommendations noted in earlierchapters for the compilation of global statements alsoapply to regional statements, but specific references toresidents of the relevant foreign economy or group ofeconomies should be substituted for general referencesto nonresidents or the rest of the world. This substi-tution should be made for the compiling economy’spayments statements of transactions in goods, services,and income; transactions involving financial claims andliabilities; transactions, which are classified as transfers,with a particular economy or group of economies; andfor the position vis-à-vis those economies.

Regional Allocation Principles

481. As for major components of the classificationsnoted in previous paragraphs, trade in goods generallyshows—as a reflection of the change of ownershipprinciple associated with coverage of this item—exportsallocated to the region of residence of the new ownerand imports allocated to the region of residence of theformer owner.15 When there is no change in ownership(e.g., processing and financial leases), exports andimports of goods are treated as if such a change occurs.For trade in services, allocation is to the region wherethe provider or acquirer of the service is resident and,for income, to the region where the resident receives orpays the income. For transfers, allocation is to theregion of the donor or recipient, as appropriate.

482. In regard to financial flows, there are two princi-ples that may serve as the basis for regional allocation:the debtor/creditor principle and the transactor princi-ple. Under the debtor/creditor principle, changes infinancial claims of the compiling economy are allocatedto the country of residence of the nonresident debtor,and changes in liabilities are allocated to the country ofresidence of the nonresident creditor. Under the trans-actor principle, changes in the claims and liabilities areallocated to the country of residence of the nonresi-dent party to the transaction (the transactor).

483. In many instances, regional allocation oftransactions on either basis will coincide (e.g., for bankdeposit claims and liabilities, trade credits, and mostdirect investment transactions). However, in others (i.e.,tradable claims), quite different regional allocations mayarise, according to which one of the two principles isused. Examples are (portfolio) securities transactionsand direct investment acquisitions involving thirdparties.

484. As concerns the international investment position,data compiled on a regional basis for stocks of financialassets and liabilities are geographically allocated on the

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XXIV. Regional Statements

15 See the Guide for a full discussion of the allocation aspects of trade ingoods—in particular those aspects related to country of shipment versuscountry of origin for imports and country shipped to versus country of ultimatedestination for exports.

basis of the debtor/creditor principle. Financial claimsof the compiling economy are allocated to the countryof residence of the nonresident debtor, and liabilitiesare allocated to the country of residence of thenonresident creditor.

Problems and Limitations

Securities transactions

485. The regional allocation of securities transactionsillustrates the dissimilar results produced by, and thelimitations of, the debtor/creditor and the transactorprinciples. Broad secondary markets and the partici-pation of a variety of financial intermediaries charac-terize international securities transactions. In broadsecondary markets, when the debtor/creditor principleis applied to cross-border transactions in domesticsecurities (those issued by the compiling economy), theresident issuer (debtor) may not be aware of the resultsof secondary market trading. That is, the issuer may notknow the identity or residence of the nonresident buyer(creditor). If financial intermediaries are not acting fortheir own accounts (if that can be determined), issuerswould not usually be aware of the identities orresidence of creditors who purchase securities throughintermediaries—particularly in an international financialcenter to which many transactions are directed. Thus,although the debtor/creditor principle is effective onone side the (creditor knows the residency of thedebtor), it is not effective on the other; the debtor doesnot necessarily know, unless such information can beobtained from the intermediary or the creditor, theresidency of the creditor. As a result, one couldcharacterize such a situation as the operation of adebtor/transactor principle.16

486. However, for transactions in foreign securities, thedebtor/creditor principle is effective on both sidesbecause the buyer or seller knows the identity andresidence of the issuer (debtor) and can allocate thetransaction to the economy of the debtor.17

487. Under the transactor principle, as applied totransactions in domestic securities, the sale of a securityissued by country A to an intermediary acting for itsown account in country B would be allocated bycountry A to country B because country B is thenonresident counter party (transactor) to the transac-tion. If the intermediary in country B were acting onbehalf of a resident in country C (if that can bedetermined), country A would allocate the transactionto country C. No transaction would be recordedbetween countries A and B. Similarly, a sale of aforeign security (issued by country B) by country A to acountry C intermediary acting on behalf of a resident incountry D (if that can be determined) would beallocated by country A to country D. No transactionswould be recorded by country A with country B orwith country C. If the intermediary in country C wereacting for its own account, country A would allocatethe transaction to country C. No transactions would berecorded, on the basis of the transactor principle, bycountry A with country B.

488. In practice, whether a foreign intermediary isacting for its own account or on behalf of a resident ofanother country is seldom known, and information isdifficult to obtain. Also, there may be differinginterpretations as to whether or not the intermediaryactually assumes ownership of the securities beforeengaging in subsequent transactions. As a result, inpractice, allocation of securities transactions on thebasis of the transactor principle often is attributed, bythe compiling economy, to the financial intermediary’scountry of residence rather than to the economy ofresidence of the party on whose behalf theintermediary is acting.

Monetary gold and SDRs

489. Transactions in, or holdings of, monetary goldand SDRs cannot be allocated to any particular regionon the basis of the debtor/creditor principle becausethe two are financial assets for which there are nooutstanding liabilities. Thus, such transactions canonly be attributed to an unallocated or residual,regional category. On the basis of the transactorprinciple, purchases or sales of monetary gold arerecorded as increases or decreases in reserve assets forthe compiling economy and vice versa for thecounterpart economy. As for SDRs, which are notconsidered liabilities of the Fund, transactions arerecorded in a manner similar to those recorded formonetary gold.

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116

16As an example, if a resident in country A sells a domestic security (issued bycountry A) to a country B intermediary acting on behalf of a buyer resident incountry C, compilers in country A (the debtor) generally would not know thatthe creditor (buyer) is a resident of country C. Only if that information wereprovided by country B or C to country A could the debtor/creditor principle beimplemented, and that is usually not the case. In practice, the sale of thesecurity would most often be recorded by country A as a transaction,equivalent to one made on a debtor/transactor basis, with country B.

17For instance, if a resident in country A sells or buys a foreign security issuedby country C to or from a resident of country B, the transaction, which is basedon the debtor/creditor principle, could be allocated by country A to country Cbecause the identity of country C as the debtor is known to country A.

Direct investment transactions involving third parties

490. For direct investment, there also may bedifficulties concerning the regional allocation oftransactions. For instance, a direct investor in country Aacquires, from a resident of country C, a directinvestment enterprise (or shares in that enterprise)located in country B. Under the debtor/creditorprinciple, from the standpoint of country A, such atransaction should be recorded between country A andcountry B because the direct investment position ofcountry A in country B is affected. Under the transactorprinciple, the transaction should be recorded betweencountry A and country C, which is the residence of theother party to the transaction. A reconciliation item thenwould be required to bridge the difference between thebalance of payments entries and the position becausethe latter is compiled on the basis of the debtor/creditorprinciple. (See paragraph 484.)

Multilateral settlements

491. Regional allocation may not necessarily result in abalanced statement for a region. For instance, a residentin the compiling economy may make payment to, oraccept payment from, a nonresident (resident of countryA) in the form of a claim on another nonresident(resident of country B). Such a situation may arise whenclaims on a reserve currency country are used by othereconomies as media for making settlements. Theinconsistencies resulting from the allocation oftransactions in real resources to the region of thenonresident owner/transactor and changes in financialitems to the region of the nonresident creditor ordebtor, however, are explicitly recognized by presentinga regional statement compiled in that way. Thus, anitem for multilateral settlements restores an accountingbalance by serving as an offset to the inconsistencies inthe regional statement. That item may be seen torepresent, in concept, the settlement of an imbalance inthe compiling economy’s transactions with one regionby a transfer to or from that region of claims on, orliabilities to, some other region or regions.

492. The data on multilateral settlements, however, areseldom available. In practice, therefore, the item isusually derived as a residual; however, it can becalculated only in combination with the item for neterrors and omissions, which is also a residual orbalancing item. Inconsistencies or errors of this or anyother kind in classifying entries regionally should nothave any effect on a global statement, which represents

the sum total of all regional statements, becausemultilateral settlements appearing in individual regionalstatements cancel each other when all regions arecombined.

Analytical Implications

493. As noted in paragraph 484, data reflected in theinternational investment position are geographicallyallocated on the basis of the debtor/creditor principle.Therefore, adherence to that principle—although it isoften difficult to implement—for the allocation oftransactions results in a complete and conceptuallyconsistent set of flows and stocks data at a country orregional level. Use of the transactor principle for flowsrequires a reconciliation to be effected between stocksand flows data.

494. From an analytical perspective, both thedebtor/creditor principle and the transactor principleare of interest. The debtor/creditor basis facilitatesanalyses concerned with such issues as whosesecurities are being purchased and sold; the relativeimportance of securities transactions attributable toindividual countries (and entities within them) and toregional groups; types of offerings, etc. The transactorbasis allows for analysis of where residents engage insecurities transactions with nonresidents, changes in therelative importance and growth of internationalfinancial centers, etc. In practice, both principles havelimitations for assessment of regional and bilateralportfolio transactions.

495. If it is feasible for countries to exchange positiondata on stocks of appropriate assets and liabilities, thedata exchange is helpful for developing moreconsistent and useful regional allocations of suchstocks. Such data provide better information about theidentities of nonresident creditors holding the liabilitiesof the compiling economies.

Selection of Regions

496. Regional statements generally refer toclassification of entries by a compiling economyaccording to the residence of a foreign economicentity, which is either the owner/transactor or thecreditor/debtor. The rules on residence presented inthis Manual (see Chapter 4) are applicable fordetermining the residence of the entity. A regionwould then comprise an economic territory or a groupof economic territories, as the residence of any entityis based on its association with a specific economic

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territory. The methods of allocation discussedpreviously are concerned principally with a regionalclassification of that sort. A regional statement,however, is sometimes viewed in other ways. Astatement may be prepared that shows, for example,those transactions that were originally denominated ina certain currency or undertaken with the residents ofa particular currency area, rather than an economicterritory.

497. A special case is presented by an internationalorganization that is not included in the economic

territory of the country of location or consideredresident in that economy. Thus, a separate region for international organizations would be appropriate for allocation purposes.

498. The regional subclassification relevant for aparticular economy or group of economies dependsprimarily on how the statement is to be utilized. ThisManual does not contain a standard list of countriesor regions for which the reporting economy or groupshould compile separate statements.

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A P P E N D I C E S

I.Relationship of the Rest of the World Account to the Balanceof Payments Accounts and the International Investment Position

Introduction

499. Balance of payments accounts and related data onthe international investment position (stocks of externalfinancial assets and liabilities) are closely linked to theSNA. This linkage is reinforced by the fact that, in mostcountries, data on the balance of payments and theinternational investment position (IIP) are compiled firstand subsequently incorporated in relevant externalaccount components of the SNA rest of the worldaccount. There is virtually complete concordancebetween the SNA and the Manual with respect to thedelineation of resident units (either producers orconsumers); valuation of transactions and of the stockof external assets and liabilities; time of recording oftransactions; conversion procedures; coverage ofinternational transactions in goods and services, incomeflows, current transfers, capital transfers, and foreignfinancial assets and liabilities; and coverage of the IIP.Differences in classification or level of detail exist,however, between the rest of the world account andthe balance of payments accounts. These reflect, interalia, differences in analytical requirements and thenecessity of using, in the SNA, a uniform classificationscheme for all sectors of the economy. The bulk of thediscussion in this appendix focuses on the relationshipbetween aggregates and details contained in the rest ofthe world account and corresponding items in balanceof payments accounts.

Resident units

500. In the SNA and the Manual, resident producersand consumers are identified in the same fashion.Chapter 4 of the Manual, which contains a discussionon residence, is entirely consistent with Chapter XIV ofthe SNA. In both the SNA and in balance of paymentsaccounts, resident units are identified on the basis ofthe center of economic interest concept and thedefinition of economic territory. (These definitions arecontained in Chapter 4.)

Valuation

501. In both the SNA and the balance of paymentsaccounts, market price is used as the primary basis of

valuation. For transactions accounts, market price refersto the actual price agreed upon by transactors (that is,the amount that a willing buyer pays to acquiresomething from a willing seller when the exchange isone that occurs between independent parties and oneinto which nothing but commercial considerationsenter). It is noted in Chapter 5 of the Manual thatmarket price proxies or equivalents should be used insituations in which market prices in the literal sensecannot be determined (for example, transfer pricingthat significantly distorts measurement in resourcetransfers between affiliated enterprises, bartertransactions, grants in kind, etc.). The use of end-of-period market (current) prices or proxies is advocatedfor both systems in balance sheet accounts affectingexternal claims and liabilities.

Time of Recording

502. For both systems, the time of recordingtransactions is the same as that for accrual accounting(that is, when economic value is created, transformed,exchanged, transferred, or extinguished). Claims andliabilities are deemed to arise when there are changesin ownership. Application of the accrual basis isessentially identical in specific categories of transactionsin both systems. For example, exports and imports ofgoods are, in principle, recorded on the basis ofchanges of ownership although, in both systems, thereare specific exceptions with regard to goods underfinancial lease, goods shipped between affiliatedenterprises, goods for processing, and goods underlyingmerchanting transactions. Services are recorded whenactually rendered—times that often coincide with thetimes at which the services are produced. Interest isrecorded on an accrual basis; dividends are recorded asof the dates payable. Reinvested earnings on directinvestment are recorded in the periods in which theearnings are generated. Transfers (taxes, fines, etc.)imposed by one party on another are recorded as ofthe dates of occurrence of the transactions giving riseto the liabilities to pay; other transfers are recorded atthe times that the resources to which the transfers areoffsets change ownership. Transactions in financialclaims and liabilities are recorded on the basis of

121

BALANCE OF PAYMENTS MANUAL

changes of ownership (that is, when both the creditorand debtor enter the claim and liability, respectively, ontheir books). Chapter 6 contains a full discussion of theapplication of the accrual basis underlying the balanceof payments accounts.

Conversion Procedures

503. Consistent procedures are employed forconverting transactions denominated in a variety ofcurrencies or units of account into the unit of account(usually the national currency) used for compiling thebalance of payments statement and the nationalaccounts. Under a single exchange rate system, use ofthe market exchange rate prevailing at the time thetransaction takes place is suggested in the SNA and theManual. This rate is defined as the midpoint betweenbuying and selling rates applicable to the transaction or,alternatively, as the average rate for the shortest periodapplicable. When parallel markets are in existence, theappropriate conversion rate is the rate (midpoint spotrate) applying to foreign currencies purchased or soldin parallel markets.

504. A system of multiple official exchange rates givesrise to implicit taxes and subsidies. In the SNA, it isrecommended that transactions be converted at the actual(multiple) rates applicable. However, global adjustmentsreflecting the amount of taxes or subsidies should beshown in the rest of the world account, and counterpartentries should be made under capital transfers. Taxesand subsidies are calculated as the difference between (i) the values of transactions at the actual multiple ratesapplicable to specific transactions and (ii) the values at aunitary rate, which is calculated as a weighted average ofall official rates used for external transactions. Whenmultiple rates exist, the use of a unitary or principalrate—that is, the actual (multiple) exchange rate thatapplies to the largest part of external transactions—issuggested in the Manual.

505. For conversion of balance sheet items (stocks ofexternal financial assets and liabilities), the use ofactual market exchange rates applicable to specificassets and liabilities on the date to which the balancesheet relates is suggested in the Manual.

Classification and Linkages

506. Although harmonization of the coverage of majoraggregates has been attained between the two systems,differences in level of detail reflect differences inanalytical requirements, the relative quantitativesignificance of some items in international transactions,

122

and constraints imposed by the internal structures ofthe respective systems. Nonetheless, bridges can beconstructed to derive relevant national accountingflows and stocks from balance of payments accountsand the IIP.

507. In terms of transactions, these accounts are distin-guished in the SNA rest of the world account (externaltransactions account): V.I External account of goodsand services, V.II External account of primary incomesand current transfers, V.III.1 Capital account, andV.III.2 Financial account. The latter two are componentsof V.III External accumulation accounts. In balance ofpayments accounts, the transactions reflected inaccounts V.I and V.II are contained in the currentaccount; those reflected in account V.III.1 arecontained in the capital account of the capital andfinancial account. Flows reflected in account V.III.2are shown in the financial account of the capitaland financial account. Account V.III.3.1 Otherchanges in volume of assets and V.III.3.2 Revaluationaccount are separate subdivisions of the IIP statement.Thus, account V.III.3.1 corresponds to the column forother adjustments in the IIP, while account V.III.3.2corresponds to the columns for valuation changes (thatis, price changes and exchange rate changes) in the IIP.Account V.IV External assets and liabilities is equivalentto the IIP, which is that part of the national wealthstatement representing the stock of external financialassets and liabilities. Located at the end of thisappendix, tables 1 through 6 provide a reconciliationbetween categories shown in relevant external accountsof the SNA and corresponding items in balance ofpayments accounts and the IIP; tables 7 through 9 referto the classification scheme that is reflected in theManual and underlies balance of payments accountsand the IIP statement. Items marked with asterisks (*)denote additional details necessary to derive relevantnational accounting flows from balance of paymentsand IIP data.

508. As indicated in Table 1, SNA coverage of exportsand imports of goods and exports and imports ofservices is identical to balance of payments coverage ofcorresponding items—with the exception of the item“financial intermediation charge indirectly measured.”According to the Manual, this service is included underinvestment income as an indistinguishable part ofinterest income. In balance of payments accounts,exports and imports of services are disaggregated inconsiderable detail to provide data for analysis andpolicy decisions—particularly for negotiations ininternational trade in services within the framework ofthe General Agreement on Tariffs and Trade. Categories

APPENDIX I

of services identified in the balance of payments areconsistent with those of the Central ProductClassification (CPC)—except for travel and governmentservices n.i.e., which have no counterparts.

509. For account V.II, external account of primaryincomes and current transfers, comparable categories inthe balance of payments are 1. B. Income and 1. C.Current transfers. Account V.II coverage ofcompensation of employees and property income isvirtually identical with that of 1. B. Income except thatthe latter includes “financial intermediation chargeindirectly measured” indistinguishably under investmentincome-direct investment-interest. This treatment wasadopted because of the practical difficulties ofderiving—by sector, instrument, currency, and termstructure—a multiplicity of reference rates for interestand appropriate asset or liability positions to estimatethe imputed financial intermediary service charge.

510. The major elements of account V.III.1, the capitalaccount of the external accumulation accounts, areidentical with the capital account of the capital andfinancial account of the balance of payments. Although the balancing item net lending/net borrowingin account V.III.1 is not explicitly identified in thebalance of payments, this item can be derived by adding

the balance of the current account and the balance ofthe transactions reflected in the capital account.

511. Coverage of account V.III.2, the SNA financialaccount, is identical with that of the financial accountof the capital and financial account in the balance ofpayments, although the level of detail is different. (SeeTable 4 at the end of this appendix.) In the SNA,financial assets are classified primarily by type ofinstrument. In the balance of payments, financial itemsare classified primarily by function—direct investment,portfolio investment, other investment (including loans),and reserve assets. In addition to categories identifyingtypes of financial instruments (insurance technicalreserves being an exception), the balance of paymentscontains an abbreviated sector breakdown ( monetaryauthorities, general government, banks, and othersectors) to provide links with other bodies of economicand financial statistics such as money and banking,government finance, international banking, and externaldebt. Furthermore, to conform with the SNA, theManual states that entries in the financial account ofthe balance of payments are recorded, in principle, ona net basis (increases less decreases in assets orliabilities). However, gross recording is included assupplementary information (for example, in the case ofdrawings and repayments on long-term loans).

123

Reconciliation of Rest of the World Accounts with Balance of Payments Accounts

Table 1Account V.I External Account of Goods and Services

SNA categories Correspond to Balance of Payments Standard Components(items), Additional Details, and Aggregates

USES CREDIT

P.6 Exports of goods and services Item 1.A.a and 1.A.b.1 through 11, as notedsubsequently

P.61 Exports of goods Item 1.A.a goods

P.62 Exports of services Sum of items 1.A.b.1 through 11 services plusitems 1.B.2.2.2.1.1 and 1.B.2.3.1 financialintermediation charge indirectly measured

RESOURCES DEBIT

P.7 Imports of goods and services Items 1.A.a and 1.A.b.1 through 11, as noted subsequently

P.71 Imports of goods Item 1.A.a goods

P.72 Imports of services Sum of items 1.a.b.1 through 11 services plusitems 1.B.2.2.2.1.1 and 1.B.2.3.1 financialintermediation charge indirectly measured

B.11 EXTERNAL BALANCE OF GOODS AND SERVICES Item 1.A

Table 2Account V.II External Account of Primary Incomes and Current Transfers


USES CREDIT

D.1 Compensation of employees Item 1.B.1 compensation of employees

D.29 Other taxes on production Item 1.C.1.2 other taxes on production

D.39 Other subsidies on production Item 1.C.1.3 other subsidies on production

D.4 Property income Item 1.B.2 investment income minus items1.B.2.2.2.1.1 and 1.B.2.3.1 financialintermediation charge indirectly measured

D.5 Current taxes on income, wealth, etc. Item 1.C.1.1 current taxes on income, wealth,etc.

D.61 Social contributions Item 1.C.1.4 social contributions

124

Table 2 (concluded)Account V.II External Account of Primary Incomes and Current Transfers


USES CREDIT

D.62 Social benefits Item 1.C.2.2.5 social benefits

D.7 Other current transfers Item 1.C.2.1 workers’ remittances plus item1.C.1.6 other current transfers of generalgovernment plus item 1.C.2.2.6 other currenttransfers of other sectors

D.8 Adjustment for the change in net equity of households in pension funds*

RESOURCES DEBIT

D.1 Compensation of employees Item 1.B.1 compensation of employees

D.29 Other taxes on production Item 1.C.2.2.2 other taxes on production

D.39 Other subsidies on production Item 1.C.2.2.3 other subsidies on production

D.4 Property income Item 1.B.2 investment income minus items1.B.2.2.2.1.1 and 1.B.2.3.1 financialintermediation charge indirectly measured

D.5 Current taxes on income, wealth, etc. Item 1.C.2.2.1 current taxes on income, wealthetc.

D.61 Social contributions Item 1.C.2.2.4 social contributions

D.62 Social benefits Item 1.C.1.5 social benefits

D.7 Other current transfers Item 1.C.2.1 workers’ remittances plus item1.C.1.6 other current transfers of generalgovernment plus item 1.C.2.2.6 other currenttransfers of other sectors

B.12 CURRENT EXTERNAL BALANCE Item 1. current account

*Item D.8 is not included in the current account in the balance of payments, nor are the receipts of pensions from,or net contributions to, (funded) pension funds.

Table 3Account V.III.1 Capital Account [of Account V.III External Accumulation Accounts]

SNA categories Correspond to Balance of Payments Components (items),Additional Details, and Aggregates

CHANGES IN ASSETS TRANSACTIONS IN ASSETS

K.2 Acquisitions less disposals of Item 2.A.2 acquisition/disposal of nonproduced,nonproduced, nonfinancial assets nonfinancial assets

B.9 NET LENDING (+)/NET BORROWING (–) Item 1. current account balance plus item 2. Acapital account balance

125

Table 3 (concluded)Account V.III.1 Capital Account [of Account V.III External Accumulation Accounts]

SNA categories Correspond to Balance of Payments Components (items),Additional Details, and Aggregates

CHANGES IN LIABILITIES AND NET WORTH TRANSACTIONS IN LIABILITIES

B.12 CURRENT EXTERNAL BALANCE Item 1. current account

D.9 Capital transfers receivable Item 2.A.1 capital transfers

D.9 Capital transfers payable Item 2.A.1 capital transfers

B.10.1 CHANGES IN NET WORTH DUE TO Item 1. current account balance plus item SAVING AND NET CAPITAL TRANSFERS 2.A.1 net capital transfers

Table 4Account V.III.2 Financial Account [of Account V.III External Accumulation Accounts]


CHANGES IN ASSETS TRANSACTIONS IN ASSETS

F.1 Monetary gold and SDRs Sum of items 2.B.4.1 monetary gold and 2.B.4.2special drawing rights

F.2 Currency and deposits Sum of items 2.B.3.1.3 currency and deposits(part of other investment) and 2.B.4.3.1deposits (part of reserve position in the Fund),2.B.4.4.1 currency and deposits (part of foreignexchange), and 2.B.4.5.1 currency and deposits(part of other reserve claims)

F.3 Securities other than shares Sum of items 2.B.2.1.2 debt securities (part ofportfolio investment), 2.B.4.4.2.2 bonds andnotes (part of foreign exchange), 2.B.4.4.2.3money market instruments and financialderivatives (part of foreign exchange),2.B.4.5.2.2 debt securities (part of other reserve claims), 2.B.1.2.3.1.1 debt securitiesissued by direct investors (part of directinvestment in the reporting economy), and2.B.1.1.3.1.1 debt securities issued by affiliatedenterprises (part of direct investment abroad)

F.4 Loans Sum of items 2.B.3.1.2 loans (part of otherinvestment) and 2.B.4.3.2 loans (part of reserve position in the Fund)

126

Table 4 (continued)Account V.III.2 Financial Account [of Account V.III External Accumulation Accounts]


F.5 Shares and other equity Sum of items 2.B.1.1.1.1 equity capital-claimson affiliated enterprises (part of directinvestment abroad), 2.B.1.1.2 reinvestedearnings (part of direct investment abroad),2.B.1.2.1.1 equity capital-claims on directinvestors (part of direct investment in thereporting economy), 2.B.2.1.1 equity securities(part of portfolio investment), and 2.B.4.4.2.1and 2.B.4.5.2.1 equities (part of foreignexchange and other reserve claims)

F.6 Insurance technical reserves Sum of items 2.B.3.1.4.4.1.1 net equity ofhouseholds in life insurance reserves and inpension funds and 2.B.3.1.4.1.1.1,2.B.3.1.4.2.1.1, 2.B.3.1.4.3.1.1, and2.B.3.1.4.4.1.2 prepayments of premiums andreserves against outstanding claims (all part ofother investment)

F.7 Other accounts receivable Sum of items 2.B.1.1.3.1.2 other claims onaffiliated enterprises (part of direct investmentabroad), 2.B.1.2.3.1.2 other claims on directinvestors (part of direct investment in thereporting economy), 2.B.3.1.1 trade credits(part of other investment), and 2.B.3.1.4 otherassetsminus items 2.B.3.1.4.4.1.1, net equity ofhouseholds in life insurance reserves and inpension funds, and 2.B.3.1.4.1.1.1,2.B.3.1.4.2.1.1, 2.B.3.1.4.3.1.1, and2.B.3.1.4.4.1.2 prepayments of premiums andreserves against outstanding claims (all part ofother investment)

CHANGES IN LIABILITIES AND NET WORTH TRANSACTIONS IN LIABILITIES

F.2 Currency and deposits Item 2.B.3.2.3 currency and deposits

F.3 Securities other than shares Item 2.B.1.1.3.2.1 debt securities issued bydirect investors plus item 2.B.1.2.3.2.1 debtsecurities issued by affiliated enterprises plusitem 2.B.2.2.2 debt securities (part of portfolioinvestment)

F.4 Loans Item 2.B.3.2.2 loans

127

Table 4 (concluded)Account V.III.2 Financial Account [of Account V.III External Accumulation Accounts]


F.5 Shares and other equity Sum of items 2.B.1.1.1.2 equity capital-liabilitiesto affiliated enterprises (part of directinvestment abroad), item 2.B.1.2.1.2 equitycapital-liabilities to direct investors (part ofdirect investment in the reporting economy),item 2.B.1.2.2 reinvested earnings (part ofdirect investment in the reporting economy),and item 2.B.2.2.1 equity securities (part ofportfolio investment)

F.6 Insurance technical reserves Sum of items 2.B.3.2.4.4.1.1 net equity ofhouseholds in life insurance reserves and inpension funds and 2.B.3.2.4.4.1.2 prepaymentsof premiums and reserves against outstandingclaims

F.7 Other accounts payable Sum of items 2.B.1.1.3.2.2 other liabilities ofdirect investors (part of direct investmentabroad), 2.B.1.2.3.2.2 other liabilities to directinvestors (part of direct investment in thereporting economy), item 2.B.3.2.1 trade credits(part of other investment), and item 2.B.3.2.4other liabilities

minus items 2.B.3.2.4.4.1.1 net equity ofhouseholds in life insurance reserves and inpension funds, and 2.B.3.2.4.4.1.2 prepaymentsof premiums and reserves against outstandingclaims (all part of other investment)

B.9 NET LENDING (+)/NET BORROWING (–)

Table 5 Account V.III.3.1 Other Changes in Volume of Assets Account

SNA Categories Correspond to IIP Standard Components and Additional Details

CHANGES IN ASSETS CHANGES IN ASSETS

K.7 Catastrophic losses Catastrophic losses (part of other adjustments)

K.8 Uncompensated seizures Uncompensated seizures (part of otheradjustments)

K.10 Other volume changes in financial assets Other volume changes (part of other and liabilities n.e.c. adjustments)

128

Table 5 (concluded)Account V.III.3.1 Other Changes in Volume of Assets Account


K.12 Changes in classifications and structure Change in classifications and structure (part ofother adjustments)

CHANGES IN LIABILITIES AND NET WORTH CHANGES IN LIABILITIES

K.7 Catastrophic losses Catastrophic losses (part of other adjustments)

K.12 Changes in classifications and structure Changes in classifications and structure (part ofother adjustments)

B.10.2 CHANGES IN NET WORTH DUE TO OTHER CHANGES IN VOLUME OF ASSETS

Account V.III.3.2 Revaluation Account


CHANGES IN ASSETS CHANGES IN ASSETS

K.11 Nominal holding gains/losses in financial assets Sum of entries in the columns for price andexchange rate changes

K.11.1 Neutral holding gains/losses in financial assets Sum of entries in the columns for neutralholding gains/losses

K.11.2 Real holding gains/losses in financial assets Sum of entries in the columns for real holdinggains/losses

CHANGES IN LIABILITIES AND NET WORTH CHANGES IN LIABILITIES

K.11 Nominal holding gains/losses in liabilities Sum of entries in the columns for price andexchange rate changes

K.11.1 Neutral holding gains/losses in liabilties Sum of entries in the columns for neutralholding gains/losses in liabilities

K.11.2 Real holding gains/losses in liabilities Sum of entries in the columns for real holdinggains/ losses in liabilities

B.10.3 CHANGES IN NET WORTH DUE TO Price and exchange rate changes in assets less NOMINAL HOLDING GAINS/LOSSES price and exchange rate changes in liabilities

B.10.31 CHANGES IN NET WORTH DUE TO Neutral holding gains/losses in assets less NEUTRAL HOLDING GAINS/LOSSES neutral holding gains/losses in liabilities

B.10.32 CHANGES IN NET WORTH DUE TO Real holding gains/losses in assets less real REAL HOLDING GAINS/LOSSES holding gains/losses in liabilities

129

Table 6Account V.IV External Assets and LiabilitiesAccount V.IV.1 Opening Balance Sheet


AF Financial assets ASSETS

Sum of items A.1.1.1 claims (equity capital andreinvested earnings) on affiliated enterprises(part of direct investment abroad), A.1.2.1claims (other capital) on affiliated enterprises(part of direct investment abroad), B.1.1.1claims (equity capital and reinvested earnings)on direct investors (part of direct investment inthe reporting economy), B.1.2.1 claims (othercapital) on direct investors (part of directinvestment in the reporting economy), A.2portfolio investment, A.3 other investment, andA.4 reserve assets

AF Liabilities LIABILITIES

Sum of items B.1.1.2 liabilities (equity capitaland reinvested earnings) to direct investors (part of direct investment in the reportingeconomy), B.1.2.2 liabilities (other capital) todirect investors (part of direct investment in the reporting economy), A.1.1.2 liabilities(equity capital and reinvested earnings) toaffiliated enterprises (part of direct investmentabroad), A.1.2.2 liabilities (other capital) toaffiliated enterprises (part of direct investmentabroad), B.2 portfolio investment, and B.3 other investment

B.90 NET WORTH

Account V.IV.2 Changes Between Balance Sheets

SNA categories Correspond to IIP Standard Components and Additional Details

AF Total changes in financial assets Sum of transactions, price and exchange ratechanges, and other adjustments in respect ofthe corresponding IIP items identified in account V.IV.1 of the SNA

AF Total changes in liabilities Sum of transactions, price and exchange ratechanges, and other adjustments in respect ofcorresponding IIP items identified in accountV.IV.I of the SNA

130

Table 6 (concluded)Account V.IV.1 Opening Balance Sheet


ASSETS

B.10 CHANGES IN NET WORTH, TOTAL Total changes in item A (assets) minus totalchanges in item B (liabilities)

Account V.IV.3 Closing Balance Sheet


AF Financial assets Sum of end-of-period values of correspondingitems contained in the IIP and identified inaccount V.IV.I of the SNA

AF Liabilities Sum of end-of-period values of correspondingitems contained in the IIP and identified inaccount V.I.V.I of the SNA

131

Table 7Balance of Payments: Standard Components and Additional Detail

Credit Debit

1. Current account

1. A. Goods and servicesa. Goods

1. General merchandise2. Goods for processing3. Repairs on goods4. Goods procured in ports by carriers5. Nonmonetary gold

5.1 Held as a store of value5.2 Other

1. A. b. Services1. Transportation

1.1 Sea transport1.1.1 Passenger1.1.2 Freight 1.1.3 Other

1. A. b. 1. 1.2 Air transport1.2.1 Passenger1.2.2 Freight1.2.3 Other

1. A. b. 1. 1.3 Other transport1.3.1 Passenger1.3.2 Freight1.3.3 Other

1. A. b. 2. Travel1. A. b. 1. 2.1 Business

2.2 Personala

1. A. b. 3. Communications services1. A. b. 4. Construction services1. A. b. 5. Insurance servicesb

1. A. b. 6. Financial services1. A. b. 7. Computer and information services1. A. b. 8. Royalties and license fees1. A. b. 9. Other business services

9.1 Merchanting and other trade-related services9.2 Operational leasing services9.3 Miscellaneous business, professional,

and technical servicesa

1. A. b. 10. Personal, cultural, and recreational services10.1 Audiovisual and related services10.2 Other cultural and recreational services

1. A. b. 11. Government services n.i.e.

132

aSee Selected Supplementary Information table on page 139 for components.bMemorandum items: 5.1 Gross premiums; 5.2 Gross claims

1. B. Income

1. B. 1. Compensation of employees2. Investment income

2.1 Direct investment2.1.1 Income on equity

2.1.1.1 Dividends and distributed branch profitsc

2.1.1.2 Reinvested earnings and undistributed branch profitsc

1. B. 2. 2.2 2.1.2 Income on debt (interest)1. B. 2. 2.2 Portfolio investment

2.2.1 Income on equity (dividends)2.2.2 Income on debt (interest)

2.2.2.1 Bonds and notes2.2.2.1.1 Financial intermediation charge

indirectly measured*1. B. 2. 2.2 2.2.2.1 2.1.2 2.2.2.1.2 Other interest1. B. 2. 2.2 2.2.2. 2.2.2.2 Money market instruments and financial

derivatives1. B. 2. 2.3 Other investment

2.3.1 Financial intermediation charge indirectly measured*

1. B. 2. 2.2 2.3.2 Other interest2.3.3 Imputed income to households from net equity

in life insurance reserves and in pension funds*

1. C. Current transfers

C. 1. 1. General government1.1 Current taxes on income, wealth etc.* XXX1.2 Other taxes on production* XXX1.3 Other subsidies on production* XXX1.4 Social contributions* XXX1.5 Social benefits* XXX1.6 Other current transfers of general government*

C. 1. 2. Other sectors2.1 Workers’ remittances2.2 Other transfers

2.2.1 Current taxes on income, wealth, etc.* XXX2.2.2 Other taxes on production* XXX2.2.3 Other subsidies on production* XXX2.2.4 Social contributions* XXX2.2.5 Social benefits* XXX2.2.6 Other current transfers of other sectors*

133

Table 7 (continued)Balance of Payments: Standard Components and Additional Detail

Credit Debit

cIf distributed branch profits are not identified, all branch profits are considered to be distributed.*Details necessary for reconciliation with classifications used in the SNA Rest of the World Account

2. Capital and Financial AccountC. A. Capital account

1. Capital transfers1.1 General government

1.1.1 Debt forgiveness1.1.2 Other

C. A. 1. 1.2 Other1.2.1 Migrants’ transfers1.2.2 Debt forgiveness1.2.3 Other

2. A. 2. Acquisition/disposal of nonproduced, nonfinancial assets

C. B. Financial account1. Direct investment

1.1 Abroad1.1.1 Equity capital

1.1.1.1 Claims on affiliated enterprises1.1.1.2 Liabilities to affiliated enterprises

C. A. 1. 1.1 1.1.2 Reinvested earnings1.1.3 Other capital

1.1.3.1 Claims on affiliated enterprises1.1.3.1.1 Debt securities issued by affiliated

enterprises*C. A. 1. 1.1 1.1.2 1.1.3.2 1.1.3.1.2 Other claims on affiliated enterprises*C. A. 1. 1.1 1.1.2 1.1.3.2 Liabilities to affiliated enterprises

1.1.3.2.1 Debt securities issued by direct investors*1.1.3.2.2 Other liabilities of direct investors*

C. A. 1. 1.2 In reporting economy1.2.1 Equity capital


C. A. 1. 1.1 1.2.2 Reinvested earnings1.2.3 Other capital

1.2.3.1 Claims on direct investors1.2.3.1.1 Debt securities issued by direct investors*1.2.3.1.2 Other claims on direct investors*

C. A. 1. 1.1 1.1.2 1.2.3.2 Liabilities to direct investors1.2.3.2.1 Debt securities issued by affiliated

enterprises*C. A. 1. 1.1 1.1.2 1.1.3.2 1.2.3.2.2 Other liabilities to direct investors*C. A. 2. Portfolio investment

2.1 Assets2.1.1 Equity securities


134


Credit Debit

*Details necessary for reconciliation with classifications used in the SNA Rest of the World Account

C. A. 1. 1.1 2.1.2 Debt securities2.1.2.1 Bonds and notes


C. A. 1. 1.1 2.1.2 2.1.2.2 Money market instruments2.1.2.2.1 Monetary authorities2.1.2.2.2 General government2.1.2.2.3 Banks2.1.2.2.4 Other sectors

C. A. 1. 1.1 2.1.2 2.1.2.3 Financial derivatives2.1.2.3.1 Monetary authorities2.1.2.3.2 General government2.1.2.3.3 Banks2.1.2.3.4 Other sectors

1. B. 2. 2.2 Liabilities2.2.1 Equity securities

2.2.1.1 Banks2.2.1.2 Other sectors

C. A. 1. 1.1 2.2.2 Debt securities2.2.2.1 Bonds and notes


C. A. 1. 1.1 2.1.2 2.2.2.2 Money market instruments2.2.2.2.1 Monetary authorities2.2.2.2.2 General government2.2.2.2.3 Banks2.2.2.2.4 Other sectors

C. A. 1. 1.1 2.1.2 2.2.2.3 Financial derivatives2.2.2.3.1 Banks2.2.2.3.2 Other sectors

C. A. 3. Other investment3.1 Assets

3.1.1 Trade credits3.1.1.1 General government


C. A. 1. 1.1 2.1.2 3.1.1.2 Other sectors3.1.1.3.1 Long-term3.1.1.3.2 Short-term

C. A. 1. 1.1 3.1.2 Loans3.1.2.1 Monetary authorities


135


Credit Debit

C. A. 1. 1.1 2.1.2 3.1.2.2 General government3.1.2.2.1 Long-term3.1.2.2.2 Short-term

C. A. 1. 1.1 2.1.2 3.1.2.3 Banks3.1.2.3.1 Long-term3.1.2.3.2 Short -term


C. A. 1. 1.1 3.1.3 Currency and deposits3.1.3.1 Monetary authorities3.1.3.2 General government3.1.3.3 Banks3.1.3.4 Other sectors

C. A. 1. 1.1 3.1.4 Other assets3.1.4.1 Monetary authorities

3.1.4.1.1 Long-term3.1.4.1.1.1 Prepayments of premiums

and reserves against outstanding claims*

C. A. 1. 1.1 2.1.2 3.1.2.4 3.1.4.1.1 3.1.4.1.1.2 Other assets*C. A. 1. 1.1 2.1.2 3.1.2.4 3.1.4.1.2 Short-termC. A. 1. 1.1 2.1.2 3.1.4.2 General government



C. A. 1. 1.1 2.1.2 3.1.2.4 3.1.4.1.1 3.1.4.2.1.2 Other assets*C. A. 1. 1.1 2.1.2 3.1.2.4 3.1.4.2.2 Short-termC. A. 1. 1.1 2.1.2 3.1.4.3 Banks



C. A. 1. 1.1 2.1.2 3.1.2.4 3.1.4.1.1 3.1.4.3.1.2 Other assets*C. A. 1. 1.1 2.1.2 3.1.2.4 3.1.4.3.2 Short-termC. A. 1. 1.1 2.1.2 3.1.4.4 Other sectors

3.1.4.4.1 Long-term3.1.4.4.1.1 Net equity of households in

life insurance reserves and in pension funds*

C. A. 1. 1.1 2.1.2 3.1.2.4 3.1.4.1.1 3.1.4.4.1.2 Prepayments of premiums and reserves against outstanding claims*

C. A. 1. 1.1 2.1.2 3.1.2.4 3.1.4.1.1 3.1.4.4.1.3 Other assets*C. A. 1. 1.1 2.1.2 3.1.2.4 3.1.4.4.2 Short-term

136


Credit Debit


1. B. 2. 3.2 Liabilities3.2.1 Trade credits

3.2.1.1 General government3.2.1.1.1 Long-term3.2.1.1.2 Short-term


C. A. 1. 1.1 3.2.2 Loans3.2.2.1 Monetary authorities

3.2.2.1.1 Use of Fund credit and loans from the Fund

C. A. 1. 1.1 2.1.2 3.1.2.4 3.2.2.1.2 Other long-term3.2.2.1.3 Short-term




C. A. 1. 1.1 3.2.3 Currency and deposits3.2.3.1 Monetary authorities3.2.3.2 Banks

C. A. 1. 1.1 3.2.4 Other liabilities3.2.4.1 Monetary authorities




C. A. 1. 1.1 2.1.2 3.2.4.4 Other sectors3.2.4.4.1 Long-term

3.2.4.4.1.1 Net equity of households in life insurance reserves and in pension funds*

C. A. 1. 1.1 2.1.2 3.1.2.4 3.1.4.1.1 3.2.4.4.1.2 Prepayments of premiums and reserves against outstanding claims*

C. A. 1. 1.1 2.1.2 3.1.2.4 3.1.4.1.1 3.2.4.4.1.3 Other liabilities*C. A. 1. 1.1 2.1.2 3.1.2.4 3.2.4.4.2 Short-term

137


Credit Debit


2. A. 4. Reserve assets4.1 Monetary gold4.2 Special drawing rights4.3 Reserve position in the Fund

4.3.1 Deposits*4.3.2 Loans*

2. A. 4. 4.4 Foreign exchange4.4.1 Currency and deposits

4.4.1.1 With monetary authorities4.4.1.2 With banks

2. A. 4. 4.4 4.4.2 Securities4.4.2.1 Equities4.4.2.2 Bonds and notes4.4.2.3 Money market instruments and financial derivatives

2. A. 4. 4.5 Other claims4.5.1 Currency and deposits*4.5.2 Securities*

4.5.2.1 Equities*4.5.2.2 Debt securities*


138

Table 7 (concluded)Balance of Payments: Standard Components and Additional Detail

Credit Debit

Table 8Selected Supplementary Information

1. Liabilities constituting foreign authorities’ reserves1.1 Bonds and other securities


1. 1.2 Deposits1.2.1 Monetary authorities1.2.2 Banks

1. 1.3 Other liabilities1.3.1 Monetary authorities1.3.2 General government1.3.3 Banks1.3.4 Other sectors

2. Exceptional financing transactions2.1 Transfers

2.1.1 Debt forgiveness2.1.2 Other intergovernmental grants2.1.3 Grants received from Fund subsidy accounts

1. 2.2 Direct investment2.2.1 Investment associated with debt reduction2.2.2 Other

1. 2.3 Portfolio investment: borrowing by authorities or by other sectors on behalf of authorities—liabilities*

1. 2.4 Other investment—liabilities*2.4.1 Drawings on new loans by authorities or by other sectors on

behalf of authorities1. 2.4 2.4.2 Rescheduling of existing debt

2.4.3 Accumulation of arrears2.4.3.1 Principal on short-term debt2.4.3.2 Principal on long-term debt2.4.3.3 Original interest2.4.3.4 Penalty interest

1. 2.4 2.4.4 Repayments of arrears2.4.4.1 Principal2.4.4.2 Interest

1. 2.4 2.4.5 Rescheduling of arrears2.4.5.1 Principal2.4.5.2 Interest

1. 2.4 2.4.6 Cancellation of arrears2.4.6.1 Principal2.4.6.2 Interest

3. Other transactions3.1 Portfolio investment income

3.1.1 Monetary authorities

139

*Specify sector involved and standard component in which the item is included.

1. 2.4 3.1.2 General government3.1.3 Banks3.1.4 Other sectors

1. 3.2 Other (than direct investment) income3.2.1 Monetary authorities3.2.2 General government3.2.3 Banks3.2.4 Other sectors

1. 3.3 Other investment (liabilities)3.3.1 Drawings on long-term trade credits3.3.2 Repayments of long-term trade credits3.3.3 Drawings on long-term loans3.3.4 Repayments of long-term loans

4. Services sub-items4.1 Travel (personal)

4.1.1 Health-related4.1.2 Education-related4.1.3 Other

1. 4.2 Miscellaneous business, professional, and technical services4.2.1 Legal, accounting, management consulting, and public

relations1. 4.2 4.2.2 Advertising, market research, and public opinion

polling1. 4.2 4.2.3 Research and development

4.2.4 Architectural, engineering, and other technical services4.2.5 Agricultural, mining, and on-site processing4.2.6 Other

140

Table 8 (concluded)Selected Supplementary Information

Table 9International Investment Position: Standard Components and Additional Details

Changes in Position Reflecting__________________________________________Position Exchange

at Price Rate Other PositionBeginning Trans- Changes Changes Adjust- at End of

of Year actions *a *b *a *b ments Year

A. Assets

A. 1. Direct investment abroad♦

1.1 Equity capital and reinvested earnings1.1.1 Claims on affiliated enterprises1.1.2 Liabilities to affiliated enterprises

A. 1. 1.2 Other capital1.2.1 Claims on affiliated enterprises1.2.2 Liabilities to affiliated enterprises

A. 2. Portfolio investment2.1 Equity securities






A. 3. Other investment3.1 Trade credits



141

♦ Because direct investment is classified primarily on a directional basis—abroad under the heading Assets and in the reporting economy underthe heading Liabilities—disaggregations of claims/liabilities are shown for the components of each, although these sub-items do not strictlyconform to the overall headings of Assets and Liabilities.*Details necessary for reconciliation with classifications used in the SNA Rest of the World Account: a = neutral holding gains/losses; b = realholding gains/losses






A. 1. 3.3 Currency and deposits3.3.1 Monetary authorities3.3.2 General government3.3.3 Banks3.3.4 Other sectors

A. 1. 3.4 Other assets3.4.1 Monetary authorities





A. 4. Reserve assets4.1 Monetary gold4.2 Special drawing rights4.3 Reserve position in the Fund4.4 Foreign exchange


A. 1. 2.2 4.4.2 Securities4.4.2.1 Equities

142

Table 9 (continued)International Investment Position: Standard Components and Additional Details




*Details necessary for reconciliation with classifications used in the SNA Rest of the World Account: a = neutral holding gains/losses; b = realholding gains/losses

A. 1. 2.2 3.2.2 4.4.2.2 Bonds and notes4.4.2.3 Money market instruments

and financial derivativesA. 1. 4.5 Other claims

B. Liabilities1. Direct investment in reporting economy♦

1.1 Equity capital and reinvested earnings1.1.1 Claims on direct investors1.1.2 Liabilities to direct investors

A. 1. 1.2 Other capital1.2.1 Claims on direct investors1.2.2 Liabilities to direct investors

B. 2. Portfolio investment2.1 Equity securities

2.1.1 Banks2.1.2 Other sectors





B. 3. Other investment3.1 Trade credits


143

Table 9 (continued)International Investment Position: Standard Components and Additional Details




♦ Because direct investment is classified primarily on a directional basis—abroad under the heading Assets and in the reporting economy underthe heading Liabilities—disaggregations of claims/liabilities are shown for the components of each, although these sub-items do not strictlyconform to the overall headings of Assets and Liabilities.*Details necessary for reconciliation with classifications used in the SNA Rest of the World Account: a = neutral holding gains/losses; b = realholding gains/losses



3.2.1.1 Use of Fund credit and loans from the Fund

A. 1. 2.2 3.2.1 3.2.1.2 Other long-term3.2.1.3 Short-term




A. 1. 3.3 Currency and deposits3.3.1 Monetary authorities3.3.2 Banks

A. 1. 3.4 Other liabilities3.4.1 Monetary authorities





144

Table 9 (concluded)International Investment Position: Standard Components and Additional Details




*Details necessary for reconciliation with classifications used in the SNA Rest of the World Account: a = neutral holding gains/losses; b = realholding gains/losses

II. A Note on Sectors

512. As presented in this Manual, sectorization of thebalance of payments portfolio investment and otherinvestment accounts and related components of theinternational investment position strengthens the linksbetween the international accounts, the SNA, and IMFstatistical systems such as money and banking,government finance, and international banking. Inaddition, the sectorization enhances the analyticusefulness of the accounts.

513. Identification of four sectors—monetaryauthorities, general government, banks, and othersectors—of the compiling economy provides acombined functional and institutional approach tosectorization. Although the sectors do not compriseinstitutional units as in the SNA, there is a significantdegree of concordance with that system. Specificdifferences are noted subsequently.

514. The monetary authorities sector, which is basedon a functional concept, includes the central bank (orcurrency board, monetary agency, etc.) and certainoperations that are usually attributed to the centralbank but are sometimes carried out by othergovernment institutions or commercial banks. Suchoperations include the issuance of currency;maintenance and management of international reserves,including those resulting from transactions with theIMF; and the operation of exchange stabilization funds.Such transactions are, in effect, rerouted through thecentral bank. This coverage of monetary authorities isconsistent with that described in the IMF draft of theManual on Monetary and Financial Statistics. In theSNA, the central bank is a subsector of the financialcorporate sector.

515. The general government sector, with theexception noted in the previous paragraph, isconsistent with that sector in the SNA. Generalgovernment consists of (i) government units that existat each level—central, state, or local—of government

within the national economy; (ii) social security fundsoperated at each level of government; (iii) nonprofitinstitutions that are majority financed and controlledby government units; and (iv) unincorporatedenterprises that are owned and operated bygovernment units and that produce goods andservices, including collective services or public goods.(However, if it is appropriate under SNA guidelines totreat unincorporated enterprises as quasi-corporations,such enterprises are allocated to the financial ornonfinancial corporate sectors.)

516. The banking sector is identical with the “other(than the central bank) depository corporations”subsector of the financial corporate sector in the SNAand the “other (than the central bank) depositoryinstitutions” subsector of the financial institutionssector in IMF money and banking statistics. Includedare all resident units engaging in financialintermediation as a principal activity and havingliabilities in the form of deposits or financialinstruments (such as short-term certificates of deposit)that are close substitutes for deposits. Deposits includethose payable on demand and transferable by checkor otherwise usable for making payments and thosethat, while not readily transferable, may be viewed assubstitutes for transferable deposits. Thus, in additionto commercial banks, the banking sector encompassesinstitutions such as savings banks, savings and loanassociations, credit unions or cooperatives, buildingsocieties, and post office savings banks or othergovernment-controlled savings banks (if such banksare institutional units separate from government).

517. The other sectors category is comprised ofnonfinancial corporations (private, public, and quasi-corporations), insurance companies, pensionfunds, other nondepository financial intermediaries,private nonprofit institutions, and households.

145

III.Balance of Payments Classification of International Servicesand the Central Product Classification

Classification of International Transactions inServices

Scope

518. The classification of international transactions inservices, which is included among the standardcomponents of the balance of payments, provides forthe recording of all international trade in services. Theclassification is not as detailed as the Central ProductClassification (CPC), mainly because the CPC applies tothe structure of total production and encompassesdomestic as well as international transactions.Meaningful analytical categories are formed bycombining appropriate items that may be comparativelyinsignificant in international transactions, although suchitems may be important in domestic transactions.

Structure and coding system of theclassification

519. The structure of the classification is hierarchical,and the related coding system is decimal—as is theCPC. The categories were developed from thesubclasses (five-digit codes), classes (four-digit codes),groups (three-digit codes), and divisions (two-digitcodes) of the CPC, although the classificationcorresponds with the CPC mostly at the three-digitlevel. Other differences from the CPC are discussedsubsequently in this appendix.

520. The classification is flexible in that each three-digit category (the most detailed in the classifi-cation) can be expanded by the addition of anotherdecimal place. Conversely, if less detail is available,one- or two-digit categories are appropriate.

Central Product Classification

Objectives

521. The main objective of the CPC is to provide aframework for international comparison of variouskinds of statistics on goods, services, and assets. The

146

CPC is a useful guide for countries and internationalorganizations that are developing new systems orrevising existing schemes in order to make suchsystems or schemes compatible with the internationalstandard.

Scope

522. The CPC covers categories for all products thatcan be the objects of domestic or internationaltransactions or entered into stocks. In addition toproducts that are the output of economic activity,nonproduced assets—including land and intangibleassets such as patents, licenses, trademarks, andcopyrights—that arise from legal contracts are alsocovered.

Structure and coding system

523. The structure of the CPC is hierarchical, and thecoding system is purely decimal. The classificationconsists of sections (identified by the first digit),divisions (identified by the first and second digits),groups (identified by the first three digits), classes(identified by the first four digits), and subclasses(identified by five digits). Codes for the sections rangefrom zero through nine, and each section may bedivided into nine divisions. At the third digit of thecode, each division may, in turn, be divided into ninegroups, which may be further divided into nine classesand into nine subclasses.

Differences Between the CPC and the Balanceof Payments Classification

524. Although the balance of payments classificationclosely follows the CPC, there are a number ofdifferences in coverage and classification between thetwo systems:

Two categories, travel and government services n.i.e.,in the balance of payments classification of servicesdo not have analogues in the CPC.

Travel is covered as a balance of payments categorybecause it subsumes a number of related servicessuch as appropriate transportation, catering,entertainment, etc. Also, data for this item arecollected from the consumers of these services, andmost countries present data in this form in balanceof payments statements.

Government services n.i.e., includes the consumptionof goods and services by embassies, consulates,military, and other establishments of foreigngovernments; of diplomatic and consular staff andtheir dependents in the countries where they arestationed; and of international and regionalorganizations. This category also includes publicadministration and other services provided bygovernments and extraterritorial organizations.

Whereas the CPC treats all processing and repairs asservice items, the balance of payments classificationtreats only the value of on-site processing andcertain repairs (e.g., on computers, construction, andtransport equipment maintenance performed in portsand airports) as services to be reported under theappropriate category. All other processing and thevalue of all other repairs are included in the balanceof payments under goods on the practical groundsthat most processing involves transformation of thegoods and most repairs are made to investmentgoods.

525. The table on pages 148 and 149 shows thecorrespondence of balance of payments standardcomponents to various CPC categories.

APPENDIX III

147

Comparison of the Balance of Payments Classification of International Transactions in Services andthe Central Product Classification (CPC)1

Central Product Classification2________________________________________________________________________Section Division Group Class

1. Transportation 71.1 Sea transport 721+part

1.1.1 Passenger of 745 72111.1.2 Freight 72121.1.3 Other 7213+7214+part of

sea-going vessels in 745

1. 1.2 Air transport 731.2.1 Passenger 731 7311+73121.2.2 Freight 732 7321+7322+73291.2.3 Other 734+746

1. 1.3 Other transport3

1.3.1 Passenger1.3.2 Freight1.3.3 Other

2. Travel42.1 Business2.2 Personal5

2.2.1 Health-related*2.2.2 Education-related*2.2.3 Other

3. Communications services 756 7511+7512

4. Construction services 51 511 through 518

5. Insurance services7 812+814

6. Financial services part of 811 8111 through 811381

7. Computer and information services 84 + 962 9621

8. Royalties and license fees 892 8921+8922

9. Other business services8

9.1 Merchanting and other trade-related 62 621 6211services

1. 9.2 Operational leasing services 83 831 83109.3 Miscellaneous business, professional,

and technical services*

148

10. Personal, cultural, and recreational services 96+97 (excluding 962)10.1 Audiovisual and related services 961 9611 through 961310.2 Other cultural and recreational 963, 964, 970,

services 9619

1Categories left blank have no direct correspondence with the Central Product Classification (CPC).2Section = one-digit; division = two-digit; group = three-digit; class = four-digit3Comprises CPC groups 711, 712, 713, 722, 733, 741 through 744, part of 745, 748, and 7494Includes CPC classes 7471 and 74725Includes CPC divisions 92 and 936Excludes classes 7541 and 75427Memorandum items: 5.1 Gross premiums and 5.2 Gross claims8Comprises CPC divisions 62, 83, and 85 through 88*These subdivisions are not included among the standard components of the balance of payments but are included under selected supplementary information.

149

Central Product Classification2________________________________________________________________________Section Division Group Class

Central Product Classification______________________________________________________________________Section Division Group Class______ _______ _______________ ______________________

9.3.1 Research and Development 85 851 through 853 8510 through 8530

9.3.2 Legal, accounting, management 861+862 8611 through 8613+8619consulting, and public relations +865+part of 864 +8621 through 8622

9.3.3 Advertising, market research, 871+864 8711 through 8712+8719and public opinion polling

9.3.4 Architectural, engineering, and 867 8671 through 8676other technical services

9.3.5 Agricultural, mining, and 88° 881 through 883 8811 through 8830on-site processing

9.3.6 Other 82 863+866+ 8720+8730+8740+872 through 879 8750+8760+8790

°Part of 88 relates to maintenance of transportation equipment.

526. The accounting procedures for recordingexceptional financing transactions in the balance ofpayments are relevant in the context of an analyticpresentation such as the IMF’s aggregated presentationin the Balance of Payments Statistics Yearbook (BOPSY).In an analytic presentation, exceptional financingtransactions that accommodate balance of paymentsneeds are shown below the line in the appropriateaccounts; credit entries and corresponding debit entriesare shown above the line. However, there are somecases in which below-the-line debit entries are alsorecorded under exceptional financing (e.g., whenpayments arrears are extinguished by way ofrepayment, forgiveness, refinancing, rescheduling, orother arrangements and when the authorities—forbalance of payments reasons—make loan repaymentsin advance of the due dates).

527. The table at the end of Appendix 4 summarizes(in both analytic and standard presentations)appropriate balance of payments entries for recordingselected exceptional financing transactions for debtorcountries. Entries for creditor countries should be fullysymmetrical. However, for creditor countries, thereshould be no below-the-line entries under exceptionalfinancing. The table, for illustrative purposes, showsseparate credit and debit entries for each relevant itemof the financial account, although net recording isgenerally recomended in the Manual for the financialaccount. In practice, credit and debit entries affectingthe same item of the financial account will canceleach other and thus will not appear as separate entriesin the balance of payments statement.

Accumulation of Arrears

528. In the standard presentation of the balance ofpayments, arrears of interest and amortization—that is,amounts that are past due and unpaid—are recorded asif the amounts had been paid on schedule. Anoffsetting entry is made to reflect the associated newshort-term liability. For arrears of interest accrued in thecurrent recording period, a debit entry is recordedunder investment income in the current account, anda corresponding credit entry is made under other

investment-other liabilities (short-term) in the financialaccount for the accrual of arrears. For arears of interestaccrued in a previous recording period, the entries aresomewhat different. The accrual principle for recordinginterest requires a debit entry under investment incomein the period in which interest was accrued and anoffsetting credit entry in the financial account underthe appropriate instrument. Subsequently, when arrearsare incurred on interest accrued in a previous period, adebit entry is recorded under the appropriateinstrument in the financial account and a creditcontra entry is recorded for the accrual of arrears underother investment-other liabilities (short-term). Foramortization arrears, a debit entry is made in theappropriate component of the financial account (forexample, short- or long-term loans under otherinvestment) and a credit contra entry is made underother investment-other liabilities (short-term) for theaccrual of arrears.

529. In the analytic presentation, only paymentsarrears resulting from balance of payments difficulties(that is, arrears resulting from the inability of theauthorities to provide foreign exchange and not fromthe inability of the original debtor to provide nationalcurrency) are included under exceptional financing.Such payments arrears are recorded below the line ascredit entries under exceptional financing, andoffsetting debit entries are recorded above the lineunder the appropriate account.

Repayment of Arrears

530. In the standard presentation of the balance ofpayments, the repayment of arrears—cash settlements(only) of both interest and amortization—is recorded asa debit entry under other investment-other liabilities(short-term), and a corresponding credit entry isrecorded under reserve assets.

531. In the analytic presentation, repayments of arrearsarising from balance of payments needs are recordedbelow the line as debit entries under exceptionalfinancing (for the reduction of liabilities), andcorresponding credit contra entries are recorded underreserve assets.

150

IV. Accounting for Exceptional Financing Transactions

Debt Forgiveness

532. In the standard presentation of the balance ofpayments, debt forgiveness—the voluntary cancellationof all or part of a debt within a contractual arrangementbetween a creditor in one economy and a debtor inanother economy that is experiencing balance ofpayments difficulties—is recorded by the debtor as acredit entry under capital transfers. An offsetting debitentry is recorded for the reduction of the liability in thefinancial account. The appropriate debit entriesdepend upon the recording period in which theforgiven debt service obligations fall due. Forforgiveness of obligations past due (that is, arrears ofinterest and amortization), a debit entry is recordedunder other investment-other liabilities (short-term). Forforgiveness of obligations due in the current recordingperiod, a debit entry is recorded, under the appropriatedebt instrument in the financial account, for thereduction of the principal and for any interest accruedin the previous period. For interest accruing in thecurrent recording period, a debit entry is recordedunder investment income in the current account. Forforgiveness of an obligation not yet due, a debit entryis recorded under the appropriate debt instrument inthe financial account. No entry is made for interestnot yet due.

533. In the analytic presentation, debt forgiveness forobligations falling due in the current recording periodand in arrears is recorded below the line as a creditentry under exceptional financing. Corresponding debitentries are recorded above the line—except whenarrears are forgiven, in which case the debit entry isrecorded below the line. In contrast, for the forgivenessof debt not yet due, credit and debit entries arerecorded above the line so that entries are the same inboth the analytic and standard presentations.

534. For valuation of debts forgiven, it is recomendedin the Manual that, in principle, market prices be usedas the valuation basis for both flows and stocks.Because typical debt forgiveness agreements are usuallyrestricted to debt that is owed to official creditors andnot traded in organized markets, the value recorded forsuch nonmarketable debt instruments is nominal orface value, which—in this case—is an acceptable proxyfor market value.

Other Intergovernmental Grants

535. Grants (including grants from Fund subsidyaccounts) provided for the purpose of satisfying balanceof payments needs in the recipient country are part of

exceptional financing. In the analytic presentation, thegrants are recorded below the line as credit entriesunder exceptional financing, and a corresponding debitentry is recorded under reserve assets.

Debt/Bond Swaps

536. In the standard balance of payments presentation,a debt/bond swap (the exchange, usually at a discount,of an existing debt instrument such as a loan foranother form of debt instrument such as a bond) isrecorded by the debtor as a credit entry underportfolio investment to show the creation of the newobligation. An offsetting debit entry is made under theappropriate debt instrument for the reduction inliabilities. Appropriate debit entries are shown in thetable at the end of Appendix 4.

537. In the analytic presentation, debt/bond swaps ofobligations falling due in the reporting period and inarrears are recorded below the line as credit entriesunder exceptional financing; corresponding debitentries are made above the line. However, whenarrears are canceled as a result of debt/bond swaps,debit entries are recorded below the line. For obliga-tions not yet due, appropriate entries are recordedabove the line.

538. A debt/bond swap often involves a differencebetween the nominal or face value of the debtswapped and the face value of the bond being issued.In the balance of payments, such swaps are recordedat market prices. If the bond is similar to other bondsbeing traded, the market price of a traded bondwould be an appropriate proxy for the value of thenew bond. If the debt being swapped was recentlyacquired by the creditor, the acquisition price wouldbe an appropriate proxy. Alternatively, if the couponinterest rate on the new bond is below the prevailinginterest rate, the discounted value of the bond couldserve as a proxy. If such information is not available,the face value of the bond being issued may be usedas a proxy. The difference between the face value ofthe old debt and the market price of the new bondrepresents a realized holding (capital) loss for thecreditor.

Debt/Equity Swaps

539. Debt/equity swaps consist of the exchange,usually at a discount, of bank claims on, or other debtinstruments of, debtor economies for nonresidentinvestors’ equity investments in those economies.

APPENDIX IV

151

540. For debt exchanged directly for equity investment,the recording is similar to that for debt/bond swaps(discussed in paragraphs 536 through 538). In this case,however, the credit entries should be made underdirect investment-equity capital. These transactionsshould be recorded at the prices at which the equityinvestors acquired the claims in the secondary market.

541. Under a second modality, a fixed-paymentliability denominated in foreign currency (e.g., a debtsecurity or loan) is exchanged at a discount for afinancial instrument denominated in domestic orforeign currency or exchanged directly for a domesticdeposit. In the standard presentation, this transaction isrecorded by the debtor as an increase in liabilities(credit) under the appropriate financial instrumentexchanged for the debt being redeemed; correspondingdebit entries depend on the classification of theobligation (liability) being redeemed. Subsequently, thenonresident investor exchanges the financial instrumentreceived for equity investment in an enterprise of thedebtor economy. At this point, a credit entry isrecorded under direct investment-equity capital, and anoffsetting debit entry is made under the appropriatefinancial instrument being exchanged. Specific entriesare shown in the table at the end of Appendix 4.

542. In the analytic presentation, only the initialtransaction associated with a debt/equity swap isrelevant. Swaps of obligations falling due in thereporting period and in arrears are recorded below theline as credit entries under exceptional financing;corresponding debit entries are made above the line. Adebit entry is also recorded below the line if arrears arecanceled as a result of the debt/equity swap agreement.For obligations not yet due, no entries are recordedbelow the line as exceptional financing.

543. Debt/equity swaps are valued at market prices inthe balance of payments. If the balance of payments iscompiled in foreign currency, the market value inforeign currency of the first transaction—the exchangeof the debt instrument for another type of financialinstrument—is the price at which the claim on thedebtor country was acquired from the original creditorby the nonresident equity investor. The secondtransaction associated with the debt/equity swap isrecorded on the basis of the price (paid in domesticcurrency and converted into foreign currency at themarket exchange rate) for the equity acquired by thenonresident investor. If the balance of payments iscompiled in domestic currency, the value for the firsttransaction is the amount received by the equityinvestor in exchange for the debt instrument.18 For the

second transaction, the value is the domestic currencyvalue of the equity acquired by the nonresidentinvestor.

Borrowing for Balance of Payments Support

544. Borrowing for balance of payments support refersto borrowing (including bond issues) by thegovernment or central bank (or by other sectors onbehalf of the authorities) to meet balance of paymentsneeds. In the analytical presentation, the drawing ofsuch a loan or the issue of such a bond is recordedbelow the line as a credit entry under exceptionalfinancing; subsequent repayments are recorded abovethe line. Advance repayments for balance of paymentspurposes are also recorded under exceptionalfinancing.

Rescheduling and Refinancing

545. Debt rescheduling refers to the formal defermentof debt service payments and the application of newand extened maturities to the deferred amounts; debtrefinancing refers to the conversion of an original debt,including any arrears, into a new loan. In the standardbalance of payments presentation, appropriate debitentries for debt rescheduling depend upon therecording period in which the debt obligations fall due.Corresponding credit contra entries are recorded underother investment-liabilities-loans (long-term) in thefinancial account to reflect the drawing of a new loan.For rescheduling of obligations past due (that is, arrearsof interest and amortization), a debit entry is recordedunder other investment-other liabilities (short-term). Forrescheduling or refinancing of obligations due in thecurrent recording period, debit entries are recordedunder the appropriate debt instruments in the financialaccount for the reduction of principal and for anyinterest accrued in the previous recording period. Forinterest accruing in the current recording period, a debitentry is recorded in the current account underinvestment income. For rescheduling of obligations notyet due, debit entries are recorded under theappropriate debt instruments in the financial account.No entry is made for interest not yet due.

BALANCE OF PAYMENT MANUAL

152

18 There will be a discrepancy, in terms of domestic currency, between thevalue of the financial instrument received by the investor and the value atwhich he acquired the debt instrument from the original creditor when thedebt instrument is converted into domestic currency at the market exchangerate. This discrepancy should be viewed as a favorable exchange rate involvingan implicit subsidy granted by the authorities to the equity investor.

546. Some debt restructuring agreements link therescheduling of obligations due beyond the currentrecording period to the fulfillment of certainconditions by the time that the obligations fall due. In such cases, entries are recorded in the balance ofpayments only in the period in which the specifiedconditions are met.

547. In the analytic presentation, only rescheduling orrefinancing arising from balance of payments needs isrecorded. Reschedulings or refinancings of debt fallingdue in current recording periods and in arrears arerecorded below the line as credit entries underexceptional financing; offsetting debit entries aremade above the line, except when arrears arerescheduled or refinanced. In this case, debit entriesare also recorded below the line. For rescheduling orrefinancing of obligations not yet due, there are onlyentries above the line under the appropriate debtinstrument.

New Money Facilities

548. Some debt restructurings feature new moneyfacilities (new loan facilities that may be used for thepayment of existing debt service obligations). In thestandard balance of payments presentation, successivedrawings on new money facilities are recorded, usuallyunder other investment-liabilities-loans-monetaryauthorities (long-term), in the current recording periodas a credit for the debtor. Offsetting debit entries aremade under reserve assets. As debt service payments aremade on the loans included in the debt restructuring,debit entries are recorded under investment income inthe current account; the repayment of principal,interest accrued in the previous recording period, andarrears (if any) are recorded under the appropriateliability.

549. In the analytic presentation, the entries are thesame as those described in paragraph 547.

APPENDIX IV

153

Bal

ance

of

Paym

ents

Acc

oun

tin

g f

or

Sele

cted

Exc

epti

on

al F

inan

cin

g T

ran

sact

ion

s1

An

alyt

icSt

and

ard

Typ

e of

Tra

nsac

tion2

Cre

dit

Deb

itC

redi

tD

ebit

____

____

____

____

___

____

____

___

____

____

____

AC

CU

MU

LATI

ON

OF

ARR

EARS

Inte

rest

Exce

ptio

nal f

inan

cing

Inve

stm

ent

inco

me,

oth

erO

ther

inve

stm

ent,

oth

er

Inve

stm

ent

inco

me,

oth

er

inve

stm

ent3

liabi

litie

s (s

hort

-ter

m)

inve

stm

ent3

Oth

er in

vest

men

t, li

abili

ties,

O

ther

inve

stm

ent,

liab

ilitie

s,lo

ans

(long

-ter

m)4

loan

s (lo

ng-t

erm

)4

Am

ortiz

atio

nEx

cep

tiona

l fin

anci

ngO

ther

inve

stm

ent,

liab

ilitie

s,

Oth

er in

vest

men

t, o

ther

O

ther

inve

stm

ent,

liab

ilitie

s,

loan

s (lo

ng-t

erm

)lia

bilit

ies

(sho

rt-t

erm

)lo

ans

(long

-ter

m)

REPA

YMEN

T O

F A

RREA

RS5

Inte

rest

Rese

rve

asse

tsEx

cep

tiona

l fin

anci

ngRe

serv

e as

sets

Oth

er in

vest

men

t, o

ther

liabi

litie

s (s

hort

-ter

m)

Am

ortiz

atio

nRe

serv

e as

sets

Exce

ptio

nal f

inan

cing

Rese

rve

asse

tsO

ther

inve

stm

ent,

oth

er

liabi

litie

s (s

hort

-ter

m)

DEB

T FO

RGIV

ENES

S

Paym

ents

falli

ng d

ue in

the

cu

rren

t re

cord

ing

perio

d

Inte

rest

Exce

ptio

nal f

inan

cing

Inve

stm

ent

inco

me,

oth

er

Cap

ital t

rans

fers

, de

bt

Inve

stm

ent

inco

me,

in

vest

men

t3fo

rgiv

enes

sot

her

inve

stm

ent3

Oth

er in

vest

men

t, li

abili

ties,

O

ther

inve

stm

ent,

liab

ilitie

s,

loan

s (lo

ng-t

erm

)4lo

ans

(long

-ter

m)4

Am

ortiz

atio

nEx

cep

tiona

l fin

anci

ngO

ther

inve

stm

ent,

liab

ilitie

s,

Cap

ital t

rans

fers

, de

bt

Oth

er in

vest

men

t, li

abili

ties,

lo

ans

(long

-ter

m)

forg

iven

ess

loan

s (lo

ng-t

erm

)

Paym

ents

in a

rrea

rs

Inte

rest

Exce

ptio

nal f

inan

cing

Exce

ptio

nal f

inan

cing

Cap

ital t

rans

fers

, de

bt

Oth

er in

vest

men

t, o

ther

forg

iven

ess

liabi

litie

s (s

hort

-ter

m)

Am

ortiz

atio

nEx

cep

tiona

l fin

anci

ngEx

cep

tiona

l fin

anci

ngC

apita

l tra

nsfe

rs,

debt

O

ther

inve

stm

ent,

oth

erfo

rgiv

enes

slia

bilit

ies

(sho

rt-t

erm

)

Paym

ents

not

yet

due

in t

hecu

rren

t re

cord

ing

perio

d

Am

ortiz

atio

nC

apita

l tra

nsfe

rs,

debt

O

ther

inve

stm

ent,

liab

ilitie

s,

Cap

ital t

rans

fers

, de

bt

Oth

er in

vest

men

t, li

abili

ties,

fo

rgiv

enes

slo

ans

(long

-ter

m)

forg

iven

ess

loan

s (lo

ng-t

erm

)

154

155

OTH

ER IN

TERG

OVE

RNM

ENTA

L G

RAN

TS6

Exce

ptio

nal f

inan

cing

Rese

rve

asse

tsC

urre

nt t

rans

fers

, ge

nera

l Re

serv

e as

sets

gove

rnm

ent

DEB

T/BO

ND

SW

APS

Paym

ents

falli

ng d

ue in

the

cu

rren

t re

cord

ing

perio

d7

Am

ortiz

atio

nEx

cep

tiona

l fin

anci

ngO

ther

inve

stm

ent,

liab

ilitie

s,

Port

folio

inve

stm

ent,

O

ther

inve

stm

ent,

liab

ilitie

s,lo

ans

(long

-ter

m)

liabi

litie

s, d

ebt

secu

ritie

slo

ans

(long

-ter

m)

Paym

ents

in a

rrea

rs7

Inte

rest

Exce

ptio

nal f

inan

cing

Exce

ptio

nal f

inan

cing

Port

folio

inve

stm

ent,

O

ther

inve

stm

ent,

oth

er

liabi

litie

s, d

ebt

secu

ritie

slia

bilit

ies

(sho

rt-t

erm

)

Am

ortiz

atio

n7Ex

cep

tiona

l fin

anci

ngEx

cep

tiona

l fin

anci

ngPo

rtfo

lio in

vest

men

t,

Oth

er in

vest

men

t, o

ther

liabi

litie

s, d

ebt

secu

ritie

slia

bilit

ies

(sho

rt-t

erm

)

Paym

ents

not

yet

due

Am

ortiz

atio

nPo

rtfo

lio in

vest

men

t,

Oth

er in

vest

men

t, li

abili

ties,

Po

rtfo

lio in

vest

men

t,

Oth

er in

vest

men

t, li

abili

ties,

lia

bilit

ies,

deb

t lo

ans

(long

-ter

m)

liabi

litie

s, d

ebt

secu

ritie

slo

ans

(long

-ter

m)

secu

ritie

s

DEB

T/EQ

UIT

Y SW

APS

Dire

ct s

wap

s

Paym

ents

falli

ng d

ue in

the

cu

rren

t re

cord

ing

perio

d8

Am

ortiz

atio

nEx

cep

tiona

l fin

anci

ngO

ther

inve

stm

ent,

liab

ilitie

s,

Dire

ct in

vest

men

t, e

qui

ty

Oth

er in

vest

men

t, li

abili

ties,

lo

ans

(long

-ter

m)

cap

ital

loan

s (lo

ng-t

erm

)

Paym

ents

in a

rrea

rs8

Inte

rest

Exce

ptio

nal f

inan

cing

Exce

ptio

nal f

inan

cing

Dire

ct in

vest

men

t, e

qui

ty

Oth

er in

vest

men

t, o

ther

ca

pita

l`lia

bilit

ies

(sho

rt-t

erm

)

Am

ortiz

atio

nEx

cep

tiona

l fin

anci

ngEx

cep

tiona

l fin

anci

ngD

irect

inve

stm

ent,

eq

uity

O

ther

inve

stm

ent,

oth

er

cap

ital

liabi

litie

s (s

hort

-ter

m)

Paym

ents

not

yet

due

Am

ortiz

atio

nD

irect

inve

stm

ent,

O

ther

inve

stm

ent,

liab

ilitie

s,

Dire

ct in

vest

men

t, e

qui

ty

Oth

er in

vest

men

t, li

abili

ties,

eq

uity

cap

ital

loan

s (lo

ng-t

erm

)ca

pita

llo

ans

(long

-ter

m)

Bal

ance

of

Paym

ents

Acc

oun

tin

g f

or

Sele

cted

Exc

epti

on

al F

inan

cin

g T

ran

sact

ion

s1(c

onti

nued

)

An

alyt

icSt

and

ard

Typ

e of

Tra

nsac

tion2

Cre

dit

Deb

itC

redi

tD

ebit

____

____

____

____

___

____

____

___

____

____

____

156

Indi

rect

sw

aps

Exch

ange

of a

fixe

d-pa

ymen

t lia

bilit

y de

nom

inat

ed in

fo

reig

n cu

rren

cy fo

r a

secu

rity

deno

min

ated

in d

omes

tic c

urre

ncy9

Paym

ents

falli

ng d

ue in

the

curr

ent

reco

rdin

g pe

riod8

Am

ortiz

atio

nEx

cep

tiona

l fin

anci

ngO

ther

inve

stm

ent,

liab

ilitie

s,

Port

folio

inve

stm

ent,

O

ther

inve

stm

ent,

liab

ilitie

s,lo

ans

(long

-ter

m)

liabi

litie

s, d

ebt

secu

ritie

slo

ans

(long

-ter

m)

Paym

ents

in a

rrea

rs8

Inte

rest

Exce

ptio

nal f

inan

cing

Exce

ptio

nal f

inan

cing

Port

folio

inve

stm

ent,

O

ther

inve

stm

ent,

oth

er

liabi

litie

s, d

ebt

secu

ritie

slia

bilit

ies

(sho

rt-t

erm

)

Am

ortiz

atio

nEx

cep

t io

nal f

inan

cing

Exce

ptio

nal f

inan

cing

Port

folio

inve

stm

ent,

O

ther

inve

stm

ent,

oth

er

liabi

litie

s, d

ebt

secu

ritie

slia

bilit

ies

(sho

rt-t

erm

)

Paym

ents

not

yet

due

8

Am

ortiz

atio

nPo

rtfo

lio in

vest

men

t,

Oth

er in

vest

men

t, li

abili

ties,

Po

rtfo

lio in

vest

men

t,

Oth

er in

vest

men

t, li

abili

ties,

lia

bilit

ies,

deb

t lo

ans

(long

-ter

m)

liabi

litie

s, d

ebt

secu

ritie

slo

ans

(long

-ter

m)

secu

ritie

s

Exch

ange

of a

liab

ility

de

nom

inat

ed in

dom

estic

cu

rren

cy fo

r eq

uity

inve

stm

ent

Dire

ct in

vest

men

t,

Port

folio

inve

stm

ent,

liab

ilitie

s,

Dire

ct in

vest

men

t, e

qui

ty

Port

folio

inve

stm

ent,

eq

uity

cap

ital

debt

sec

urite

sca

pita

llia

bilit

ies,

deb

t se

curit

ies

BORR

OW

ING

FO

R BA

LAN

CE

OF

PAYM

ENTS

SU

PPO

RT10

Dra

win

gs o

n ne

w lo

ans

Exce

ptio

nal f

inan

cing

Rese

rve

asse

tsO

ther

inve

stm

ent,

liab

ilitie

s,

Rese

rve

asse

tslo

ans

(long

- /s

hort

-ter

m)

Bond

issu

esEx

cep

tiona

l fin

anci

ngRe

serv

e as

sets

Port

folio

inve

stm

ent,

Re

serv

e as

sets

liabi

litie

s, d

ebt

secu

ritie

s

Bal

ance

of

Paym

ents

Acc

oun

tin

g f

or

Sele

cted

Exc

epti

on

al F

inan

cin

g T

ran

sact

ion

s1(c

onti

nued

)

An

alyt

icSt

and

ard

Typ

e of

Tra

nsac

tion2

Cre

dit

Deb

itC

redi

tD

ebit

____

____

____

____

___

____

____

___

____

____

____

157

RESC

HED

ULI

NG

AN

D R

EFIN

AN

CIN

G

Paym

ents

falli

ng d

ue in

the

cu

rren

t re

cord

ing

perio

d

Inte

rest

Exce

ptio

nal f

inan

cing

Inve

stm

ent

inco

me,

oth

er

Oth

er in

vest

men

t, li

abili

ties,

In

vest

men

t in

com

e, o

ther

inve

stm

ent3

loan

s (lo

ng-t

erm

)in

vest

men

t3

Oth

er in

vest

men

t, li

abili

ties,

O

ther

inve

stm

ent,

liab

ilitie

s,

loan

s (lo

ng-t

erm

)4lo

ans

(long

-ter

m)4

Am

ortiz

atio

nEx

cep

tiona

l fin

anci

ngO

ther

inve

stm

ent,

liab

ilitie

s,

Oth

er in

vest

men

t, li

abili

ties,

O

ther

inve

stm

ent,

liab

ilitie

s,

loan

s (lo

ng-t

erm

)lo

ans

(long

-ter

m)

loan

s (lo

ng-t

erm

)

Paym

ents

in a

rrea

rs

Inte

rest

Exce

ptio

nal f

inan

cing

Exce

ptio

nal f

inan

cing

Oth

er in

vest

men

t, li

abili

ties,

O

ther

inve

stm

ent,

oth

er

loan

s (lo

ng-t

erm

)lia

bilit

ies

(sho

rt-t

erm

)

Am

ortiz

atio

nEx

cep

tiona

l fin

anci

ngEx

cep

tiona

l fin

anci

ngO

ther

inve

stm

ent,

liab

ilitie

s,

Oth

er in

vest

men

t, o

ther

lo

ans

(long

-ter

m)

liabi

litie

s (s

hort

-ter

m)

Paym

ents

not

yet

due

in

the

curr

ent

reco

rdin

g pe

riod

Am

ortiz

atio

nO

ther

inve

stm

ent,

O

ther

inve

stm

ent,

liab

ilitie

s,

Oth

er in

vest

men

t, li

abili

ties,

O

ther

inve

stm

ent,

liab

ilitie

s,

liabi

litie

s, lo

ans

loan

s (lo

ng-t

erm

)lo

ans

(long

-ter

m)

loan

s (lo

ng-t

erm

)(lo

ng-t

erm

)

1 For

deb

t re

sche

dule

d or

ref

inan

ced,

sw

app

ed in

to e

qui

ty o

r bo

nds,

or

canc

eled

bef

ore

mat

urity

, th

e re

duct

ion

in t

he li

abili

ty s

houl

d be

att

ribut

ed t

o th

e ap

pro

pria

te d

ebt

inst

rum

ent

in t

he f

inan

cial

acco

unt.

In t

his

tabl

e, it

has

bee

n as

sum

ed t

hat

long

-ter

m lo

ans

are

the

inst

rum

ent.

2 Thi

s p

rese

ntat

ion,

for

illu

stra

tive

pur

pos

es,

show

s se

par

ate

debi

t an

d cr

edit

entr

ies

for

finan

cial

acc

ount

item

s. In

pra

ctic

e, b

ecau

se n

et r

ecor

ding

is r

ecom

men

ded

for

finan

cial

acc

ount

item

s, e

ntrie

saf

fect

ing

the

sam

e ite

m w

ill b

e of

fset

ting

and

thus

will

not

ap

pea

r as

sep

arat

e en

trie

s in

a b

alan

ce o

f p

aym

ents

sta

tem

ent.

3 For

inte

rest

acc

rued

in t

he c

urre

nt r

ecod

ing

per

iod

4 For

inte

rest

acc

rued

in t

he p

revi

ous

per

iod

5 Cas

h se

ttle

men

t on

ly6 O

nly

inte

rgov

ernm

enta

l gra

nts

rece

ived

to

finan

ce b

alan

ce o

f p

aym

ents

nee

d (G

rant

s re

ceiv

ed f

rom

Fun

d su

bsid

y ac

coun

ts a

re in

clud

ed s

ince

suc

h gr

ants

are

con

side

red

exce

ptio

nal f

inan

cing

tran

sact

ions

.)7 T

hese

pay

men

ts a

re r

ecor

ded

by u

sing

the

mar

ket

pric

e of

the

new

sec

urity

issu

ed.

8 The

se p

aym

ents

are

rec

orde

d by

usi

ng t

he p

rice

at w

hich

the

cla

im o

n th

e de

btor

cou

ntry

was

acq

uire

d by

the

non

resi

dent

eq

uity

inve

stor

.9 I

nitia

lly,

the

debt

or c

ount

ry c

an e

xcha

nge

the

liabi

lity

deno

min

ated

in a

for

eign

cur

renc

y fo

r a

secu

rity

deno

min

ated

in d

omes

tic c

urre

ncy,

a s

ecur

ity d

enom

inat

ed in

for

eign

cur

renc

y, o

r do

mes

ticde

pos

its.

Ther

efor

e, t

he a

pp

rop

riate

deb

it en

try

dep

ends

on

the

typ

e of

liab

ility

for

whi

ch t

he li

abili

ty t

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Introduction

550. Preceding sections of the Manual present, inconsiderable detail, concepts underlying the standardcomponents of the balance of payments and theinternational investment position of an economy. Theimportance of this accounting and statistical reportingframework describing a country’s international transac-tions derives primarily from the links between thesetransactions and the domestic economy. These links goin two directions: (i) from the external to the internalside of the economy and (ii) from changes in domesticeconomic conditions to changes in a country’s transac-tions with the rest of the world. This section discussessome of these major links and a number of importantconnections between the major components of thebalance of payments and between these componentsand a country’s international investment position. Thisdiscussion directs particular emphasis to the factorsinfluencing external transactions and the extent towhich such factors are sustainable. Finally, some of theimplications of balance of payments adjustments foreconomic policy are considered. In this appendix, it isassumed, by and large, that international and domestictransactions are not constrained by formal or informaladministrative controls and that market participants arefree to respond to price signals and macroeconomicpolicies.

General Framework

551. The relationship between the balance of paymentsand the domestic economy has already been described(in Chapter 3 and Appendix 1) in terms of the SNA andthe current account. Embodied in an identity derivedin Chapter 3, this relationship shows that the currentaccount balance is equal to the difference betweengross domestic saving (S) and investment (I):

(1) CAB = X–M+NY+NCT = S–I

when

X = exports of goods and servicesM = imports of goods and services

NY = net income from abroadNCT = net current transfers

Thus the current account balance mirrors the savingand investment behavior of the domestic economy. Inanalyzing changes in the current account position ofa country, it is therefore important to understand themanner in which these changes reflect movements insaving and investment. For example, an increase indomestic investment relative to domestic saving willhave the same impact on the current account—atleast in the short run—as a decline in saving relative toinvestment. However, the longer-run implications forthe external position of the country may be quitedifferent. More generally, equation (1) shows that anychange in a country’s current account position (e.g., alarger surplus or smaller deficit) must necessarily bematched by an increase in domestic saving relative toinvestment. This highlights the importance ofascertaining the extent to which any policy measuresdesigned to alter the current account balance directly(e.g., changes in tariffs, quotas, and exchange rates)will affect domestic saving and investment behavior insuch a way as to achieve the intended effects of thepolicy measures on the external sector.

552. This link between the domestic and externalsectors of an economy can be expressed alternativelyin terms of the difference between gross nationaldisposable income (GNDY) and expenditure on goodsand services by domestic residents (A). These twovariables are defined as:

(2) GNDY = C+I+G+CAB

(3) A = C+I+G = domestic absorption or expenditure

From these two equations, it follows that the balanceon goods, services, and net income plus net currenttransfers is equal to the difference between grossnational disposable income and the use or absorptionof this income through expenditures by residents:

(4) CAB = GNDY–A

The implication of this relationship for balance ofpayments analysis is the same as that already noted:improvement in a country’s current account requiresthat resources must be released through a fall indomestic absorption (i.e., a reduction in expenditurerelative to income). Alternatively, it may be possible to

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V. Selected Issues in Balance of Payments Analysis

achieve an improvement in the external position bymeans of an increase in national income that is notmatched by a commensurate rise in absorption.Implementation of structural measures that reducedistortions and increase the efficiency of the economywould be one way to achieve this objective.

553. This last point highlights an important aspect ofthe equations shown previously; these are identitiesthat define relationships among variables rather thandescribe the behavior of economic agents. Bythemselves, the equations cannot provide a full analysisof the factors determining developments in the currentaccount. For example, total spending on goods andservices by domestic residents (A) is likely to beinfluenced in part by their income (GNDY). Thus itwould be inappropriate to use equation (4) to analyze the impact of a change in GNDY on thebalance of goods and services without taking fullaccount of the induced response in A of such achange. In particular, if an increase in income werespent by domestic residents entirely on additionalgoods and services (foreign and domesticallyproduced), higher income would have no impact onthe external balance. This example illustrates thenecessity for understanding the spending propensitiesof domestic residents when analyzing the balance ofpayments.

554. The interrelationship between the internal andexternal sectors of an economy can be seen in greaterdetail by distinguishing between the private andgovernment sectors. Private saving and investment(Sp and Ip) and government saving and investment(Sg and Ig) are identified:

(5) S–I = Sp+Sg–Ip–Ig

Use of the definition of the current account fromequation (1) then gives:

(6) CAB = (Sp–Ip)+(Sg–Ig) = S–I

This equation shows that, if government sectordissaving is not offset by net saving on the part of theprivate sector, the current account will be in deficit.More specifically, the equation shows that thebudgetary position of the government (Sg-Ig) may bean important factor influencing the current accountbalance. In particular, a sustained current accountdeficit may reflect persistent government spending inexcess of receipts, and such excess spending suggeststhat fiscal tightening is the appropriate policy action.

555. To reiterate an important point, however, equation (6) cannot be used by itself to analyze

developments in the foreign sector in terms ofinvestment and saving on the part of the private andgovernment sectors because there are links between thevariables on the right-hand side of equation (6). Forexample, an increase in taxes could be considered theappropriate policy measure both to raise governmentsaving (or reduce dissaving) and to contribute to animprovement in a country’s current account position. Inanalyzing the impact of higher taxes, it is necessary totake account of the behavioral response of privatesaving and private investment. Private investment couldbe positively or negatively affected by higher taxes. Theeffect would depend, in part, on whether the taxeswere levied on consumption, an action that wouldrelease domestic resources and thereby tend to “crowdin” domestic investment, or on returns to capital. Inaddition, private saving would tend to fall because ofthe decline in disposable income caused by taxes onconsumption. Thus equation (6) provides only a startingpoint for an analysis of the interaction betweendomestic saving and investment decisions and theexternal sector; the equation must be supplemented byspecific information about the factors that determine thebehavior of both the private sector and the governmentbefore the effect of policy measures on a country’scurrent account can be ascertained.

556. In addition to current transactions (i.e., thoseinvolving the exchange of goods, the provision ofservices, and the receipt and payment of income andtransfers), the flow of financial transactions (i.e., thoseinvolving changes in financial claims on, and liabilitiesto, the rest of the world) must be analyzed. As noted inchapters 8 and 16, these transactions have two maincomponents: (i) narrowly defined financial transactionsin direct investment, portfolio investment, and otherinvestment (including trade credits, loans, and deposits)and (ii) transactions in reserve assets. There are directlinkages between these components of a country’sinternational transactions. For example, imports ofgoods are often financed by nonresident suppliers sothat an increase in imports will typically be matched bya financial inflow. At the expiration of the financingperiod, the payment to the nonresident supplier willinvolve either a drawdown of foreign assets (e.g.,foreign deposits held by domestic banks) or thereplacement of the liability to the nonresident supplierby another liability to nonresidents. There are also closeconnections between many financial account trans-actions. For example, the proceeds from the sale ofbonds in foreign capital markets (a financial inflow)may be invested temporarily in short-term assets abroad(a financial outflow).

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557. As noted in Chapter 2, the basic principle ofdouble-entry bookkeeping used in constructing thebalance of payments implies that the sum of allinternational transactions—current and capital andfinancial, including reserve assets—is in principle equalto zero. However, because data for balance ofpayments entries often are derived independently fromdifferent sources, implementation of the double-entryrecording system is not perfect. As a result, theretypically are net credits or net debits (i.e., net errorsand omissions in the accounts). To simplify theexposition in this section, it is assumed that there areno recording errors or omissions and that the sum ofall current and capital and financial account items,including reserve assets, is equal to zero. This propertyof the entire set of a country’s internationaltransactions, which is called the balance of paymentsidentity, is stated by equation (7), in which (again forsimplicity) it is assumed that net capital transfers areequal to zero.

(7) CAB = NKA+RT

when

NKA = net capital and financial account (i.e., allcapital and financial transactions excludingreserve assets)

RT = reserve asset transactions

558. This equation shows that the current accountbalance is necessarily equal (with sign reversed) to thenet capital and financial account balance plus reserveasset transactions. This relationship shows that the netprovision, as measured by the current account balance,of resources to or from the rest of the world must—bydefinition—be matched by a change in net claims onthe rest of the world. For example, a current accountsurplus is reflected in an increase in net claims, whichmay be in the form of official or private claims, onnonresidents or in the acquisition of reserve assets onthe part of the monetary authorities. Alternatively, adeficit implies that the net acquisition of resources fromthe rest of the world must be paid for by eitherliquidating foreign assets or increasing liabilities tononresidents. Seen in this light, the balance ofpayments identity constitutes the budget constraint forthe entire economy.

559. The previously described framework for analysisof the balance of payments is applicable, irrespective ofthe exchange rate regime adopted by a country. Forexample, if the exchange rate is pegged, thentransactions in reserve assets will be determined by thenet demand or supply of foreign exchange at that

exchange rate (i.e., RT = CAB–NKA). At the otherextreme, if the exchange rate arrangement involves apure float so that no exchange market interventiontakes place, then CAB = NKA. In the intermediate caseof a managed float, purchases and sales of reserveassets are typically undertaken to achieve a desiredexchange rate path for the domestic currency in termsof one or more foreign currencies. (This section doesnot cover the advantages and disadvantages ofparticular exchange rate arrangements and policies.However, the exchange rate is an important instrumentof balance of payments adjustment, and a subsequentsection includes information on this topic.)

The Capital and Financial Account andBalance of Payments Financing

560. The capital and financial account measures netforeign investment or net lending/net borrowing vis-à-vis the rest of the world. This account is onechannel through which a country invests its net wealth;the other is primarily tangible domestic capital. Thewealth accumulation aspect of the capital andfinancial account can be seen more clearly byrecalling that the current account is equal to thedifference between total domestic saving andinvestment. Hence equation (7) can be rewritten as:

(8) S–I = NKA+RT

Thus, to the extent that domestic saving is not matchedby an increase in domestic capital accumulation, therewill be an increase in private or official assets held inthe rest of the world.

561. Equation (8) describes flows of resources andcapital over time. The summation, over an extendedperiod of time, of a country’s saving provides a pictureof the stock of its total wealth. As defined in Chapter 3,a nation’s stock of assets consists of nonfinancial andfinancial assets. As the financial assets and liabilities ofdomestic sectors cancel each other, a country’s balancesheet consists of its stock of domestic nonfinancialassets plus its net international investment position (thestock of external financial assets minus the stock ofexternal liabilities).

562. Concepts and measurement issues related to acountry’s international investment position are discussed in Chapter 23. As noted there, the netinternational investment position of a country at theend of a specific period reflects not only financialflows, which are given by the right-hand side ofequation (8), but also valuation changes and otheradjustments during the period, all of which affect the


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current value of a country’s total (private and official)claims on nonresidents and its total liabilities tononresidents. (Valuation and other adjustments areomitted as the primary focus of this discussion of thebalance of payments is on links between stocks ofclaims and liabilities vis-à-vis nonresidents, changes inthese stocks, and the current account.)

563. There is another connection between thefinancial account and the current account. Financialflows generate changes in foreign claims and liabilities.In nearly all cases, these financial stocks earn a rate ofreturn (interest, dividends, or profits) that appears inthe current account as investment income. This linkbetween the accounts is particularly relevant in the caseof a country running a current account deficit becausethere is an important dynamic relationship between anexisting deficit and the future current account position.A deficit in the current account must be financed bysome combination of an increase in liabilities tononresidents and a reduction in claims on nonresidentsso that the net result is a decline in net foreign assets.As a consequence, there will be a reduction in netinvestment income (unless rates of return adjust in anoffsetting manner), and this reduction will increase thecurrent account deficit. This interaction between thecurrent account and the financial account can leadto a destabilizing situation in which the current accountposition progressively worsens unless changes ineconomic policies or adjustments in certain variables(e.g., exchange rates) are made to arrest thedeterioration.

564. In analyzing the balance of payments and, inparticular, the sustainability of any specific currentaccount situation, it is important to consider the deter-minants of financial flows. These relate mainly tofactors affecting the rate of return and risk on foreignand domestic assets. Such factors include interest rates,the profitability of direct and other investments,expected changes in exchange rates, and tax considera-tions. These factors are embodied in the expected real(i.e., adjusted for exchange rates and inflation) after-taxrate of return on the stock of foreign assets held byresidents and on the stock of claims held by nonresi-dents. Residents and nonresidents are subject to different legal and tax considerations, which affect therates of return on asset holdings. However, both aresimilarly affected by economic conditions external tothe countries in which they are resident. Moreover,these external conditions are exogenous to anindividual country. Therefore (for the purposes of thisdiscussion), it seems reasonable to assume that theseconditions are constant and to focus on the domestic

economic situation affecting rates of return oninvestments in the relevant country.

565. In addition, domestic and nonresident investorsappear to be influenced largely by the same set offactors affecting rates of return on domestic invest-ments. In other words, irrespective of whether theinvestor’s residence is in the home country or abroad,the decision of whether to invest in the home countryor another country will be influenced—for the mostpart—by the same set of considerations relating toexpected returns on domestic assets. Changes (such asinterest rates, rate of profit, inflation, and the exchangerate) in domestic variables are therefore likely to havesimilar effects on residents deciding to invest at homeor abroad and on nonresidents choosing to invest intheir home countries rather than in other, worldwideinvestment opportunities. Consequently, when oneviews the net financial account, one may plausiblyassume that the stock of claims on nonresidents andthe stock of liabilities to nonresidents are influenced bythe same array of considerations.19

566. On the basis of this background, it is possible toexamine a key aspect of balance of payments analysis(namely, the financing of a current account deficit bymeans of net financial inflows and reserve assets) andsome of the economic policy issues involved.20 Forsuch an analysis, it would be helpful to use equation(7), the balance of payments identity, and to assumethat initially S = I (i.e., that the current account iszero and that net capital and financial account andreserve asset account transactions are also zero). Fromthis initial situation, it is instructive to trace the effects,

APPENDIX V

161

19This perspective includes the assumption that there are no controls oninternational capital flows. As such controls are not typically applied in thesame manner to transactions involving residents and to those undertaken bynonresidents, the presence of such controls implies that the same factors arelikely to affect residents and nonresidents in different ways.

20Balance of payments presentations sometimes show an overall balance,which has been variously defined according to the perspectives of the analyst.This measure involves distinguishing transactions recorded above the line fromthose recorded below the line. This procedure is linked to the double-entrysystem of recording balance of payments entries because the two groups mustbe numerically equal with opposite signs. Drawing the line involves makingcertain analytical distinctions. In many instances, the overall balance is equal,with the exclusion of transactions in reserve assets and exceptional financing, tothe sum of current and capital and financial account transactions. According tothis definition of the overall balance, below-the-line transactions are consideredto be accommodating or financing the net result of above-the-line transactions,which are considered autonomous. In other balance of payments presentations,the overall balance is equal, with the exclusion of transactions (including thosein reserve assets) of the domestic banking sector, to the sum of current andcapital and financial account transactions. In such a presentation, the below-the-line transactions correspond to the net foreign assets of the bankingsystem (including the central bank). This presentation may be helpful inanalyzing the impact of such transactions on the creation of domestic liquidity.

on the current account and the financial account,of an autonomous increase, which is generated by arise in the productivity of capital, in domestic invest-ment. If this additional investment is not matched by acorresponding rise in domestic saving, interest rates willtend to rise as long as the monetary authorities do notpeg the rates. The excess of investment over domesticsaving will be reflected in a current account deficit,which may be financed by a net financial inflowinduced by the rise (in comparison to interest ratesabroad) in domestic interest rates.

567. Whether there is spontaneous financial accountfinancing of a current account deficit depends on anumber of considerations. First, the financial inflowmay be directly related to increased domestic capitalspending in the form of foreign direct investment, loansobtained from foreign banks, or bonds issued ininternational capital markets. The foreign financing canbe for the purchase of foreign goods and servicesrequired for an investment project and for the purchaseof domestic inputs. Alternatively, additional investmentmay be financed domestically by means of bank loansor issues of equities and bonds. In this case, there is nodirect link between increased domestic expendituresand foreign financing. However, the tendency fordomestic interest rates to rise (in comparison with ratesabroad) because of the increased investment willprovide an incentive for funds to flow into the country.Whether or not funds do so depends largely on howinvestors view the economic prospects of the country.The prevalence of stable economic and politicalconditions—particularly if it is not likely that the higherinterest rate will be offset by a continuing depreciationof the exchange rate of the country—will increase thespontaneous movement of funds into the country.

568. The financial inflow associated with the excess ofinvestment over saving involves a reduction in the netforeign asset position of the country and the reduction,in turn, will change the net investment income flow ofthe country. The key analytical issue is whether thecountry will be able to service the change in the netforeign investment position without undertaking signif-icant modifications in economic policies or withoutincurring undesirable changes in interest rates orexchange rates. Servicing is likely to occur withoutchanges if the investment makes a significant contribu-tion to the productivity of the economy. Such acontribution can be manifested in two ways: first, thefirm or government enterprise undertaking theinvestment must be sufficiently profitable to pay therate of return that will attract the funds to finance theinvestment; second, the additional investment must

enhance the debt-servicing capacity of the economy. Aslong as funds imported from abroad are investedproductively in the domestic economy, externalfinancing for a current account deficit is likely to beforthcoming for a considerable period of time. In thissituation, the capital-importing country’s currentaccount deficit manifests an efficient allocation ofresources.

569. Alternatively, it is useful to consider a case inwhich investment is unchanged but domestic savingdeclines—either because of an increase in governmentspending not matched by a rise in tax and otherrevenue or because of an increase in privateconsumption not matched by an offsetting change ingovernment saving. In this situation, domestic interestrates would also tend to rise. However, unlike theprevious case, the shift to a current account deficit isnot paralleled by an increase in productivity in theeconomy. Under these conditions, there may not be aspontaneous inflow of funds if investors view thedeterioration in the current account as reflectinginappropriate and unsustainable government policies.For example, the decline in domestic saving may reflectan enlarged public sector deficit that is not associatedwith increased investment. Alternatively, the rise inabsorption may be due to higher private spendinggenerated by an expansionary monetary policy. Underthese circumstances, investors may not wish to increasetheir net claims on the country.

570. In the absence of a spontaneous financial inflow,some combination of the following will be necessary:policy actions to attract private funds, the use of reserveassets for balance of payments financing, and/or theimplementation of balance of payments adjustmentmeasures. From the balance of payments identity(equation (7), it can be seen that, if the currentaccount shifts into deficit, financing must take placeeither by drawing down the country’s internationalreserve assets or by increasing incentives for attractingprivate funds. The latter can be achieved by enhancingthe domestic economic environment for long-terminvestment. The adoption of monetary and fiscalpolicies that support stable economic conditions andencourage direct and other investment would tend toinduce financial inflows on a sustained basis. Fundsmay also be induced to flow in from abroad—and toprovide balance of payments financing—by the raisingof domestic interest rates. Such a policy may well beappropriate if the current account deficit is caused byaggregate demand pressures; a restrictive monetarypolicy would have the effect of dampening excessdemand and providing short-term financing. However,


162

such financing may not be dependable from a long-term perspective as, for example, changes inforeign monetary conditions may make investment ofliquid assets in the domestic economy appearunattractive. Therefore, it is necessary to look at theunderlying causes of a current account deficit requiringfundamental balance of payments adjustment to suchan extent that the deficit cannot be financed byfinancial inflows on a sustained basis.

571. The appropriateness of using reserve assets tofinance a gap between domestic expenditure andincome, rather than undertaking adjustment measuresto reduce or eliminate this gap, depends on the extentto which the gap is temporary or reversible. As acountry’s stock of owned reserve assets (as well as theresources it can borrow to supplement its reserveassets) are limited, the use of reserve assets to finance acurrent account deficit is confined within these limits.However, by mitigating the necessity for balance ofpayments adjustment, official financing can perform auseful buffer function. For example, temporary shocks,such as poor harvests or other temporary supplydisruptions, to domestic output do not necessarilyrequire comparable changes in the domestic absorptionof goods and services. Thus the financing, through theuse of reserve assets, of a temporary excess ofconsumption and investment over national income canprovide a desirable smoothing of the path of expen-ditures by residents. The reserve assets can also be usedto finance seasonal swings in foreign payments andreceipts. While the financing of temporary shocks isappropriate, recourse—although it can make theadjustment path smoother and more gradual—toowned or borrowed reserve assets does not obviate thenecessity for adjustment if deterioration in the currentaccount persists.

572. There are limits on the extent to which privatefunds and official resources can finance a currentaccount deficit. The willingness of the private sector toinvest in the country may be directly influenced byongoing changes in reserve assets. If the existing stockof reserve assets is relatively low in comparison with thecurrent account deficit and the monetary authorities areexpected to exhaust the country’s reserve assets withinthe investment horizon of the investors, then theprobability of a depreciation of the exchange rate orthe introduction of other policy measures adverselyaffecting the rate of return expected by investors wouldtend to increase significantly. Under these circum-stances, any private funds from abroad that arefinancing all or part of a current account deficit couldquickly switch from a net inflow to a net outflow. As

can be seen from equation (8), unless adjustmentmeasures are implemented to reverse both the currentaccount deficit and the financial account outflow,reserve assets would be required to finance both anexcess of domestic investment over saving and a netincrease in claims on nonresidents. Such a situationwould probably result in a loss of confidence in thecurrency, exacerbation of the financial outflow, and arapid exhaustion of reserve assets.

Balance of Payments Adjustment

573. There are many situations in which it may not befeasible to rely on private and official resources tofinance a current account deficit on a sustained basis.For balance of payments analysis, it is thereforeimportant to consider the possible introduction ofadjustment measures to achieve a viable externalpayments position (i.e., conditions under which adeficit on goods and services can be financed byprivate and official transfers, private capital inflows, andsome recourse to reserve assets). The subsequentdiscussion examines briefly the roles of exchange ratechanges, fiscal measures, and monetary policy inachieving balance of payments adjustment.

574. In this analysis, it is useful to rewrite equation (8)as:

(9) S–I = CAB = TB+SIB+TRANB = NKA+RT

when

TB = trade balance

SIB = service and income balance

TRANB = current transfer balance

The magnitude of the necessary adjustment in thebalance of payments depends, to some extent, on thenature of the components of the current accountbalance. For example, a country may have beenrunning a persistent trade deficit that was financed, inpart, by borrowing from private and official sources. Inthis situation, the country is also likely to be running adeficit on the service and income balance that reflectsthe servicing of this debt. Part of the deficit arising fromtrade, service, and income transactions may, however,be offset by a surplus from current transfers, whichcould reflect both official and private transfers. If suchinward transfers are expected to be of a long-termnature and can confidently be relied upon to finance allor part of the deficit in other components of thecurrent account, then the extent of the necessarybalance of payments adjustment may be rather small.

APPENDIX V

163

575. However, even in the case of a small adjustment,it is nonetheless important to be fully cognizant of thefact that foreign debts must be paid in the future. Thusthe amortization schedule of the country is animportant factor for judging the sustainability of aparticular balance of payments position. If largeamortization payments are due in the near future andexpected financial inflows are not sufficient to coverpayments falling due, it may be necessary to undertakeadjustment measures beforehand to avoid more drasticmeasures required for dealing with a subsequentbalance of payments crisis.

576. In the face of an unsustainable current accountdeficit, one adjustment measure that should beconsidered is a depreciation of the exchange rate of thedomestic currency. Such a depreciation may benecessary to offset a domestic price rise (relative toprices abroad) that—by penalizing exports andencouraging imports—worsens the trade balance. Tothe extent that the depreciation raises the prices oftraded goods (i.e., exports and imports) in comparisonwith the prices of non-traded goods and services,depreciation will promote the substitution of domesticproducts for imported goods and stimulate foreigndemand for domestic output. However, as thedepreciation will be accompanied by a rise in domesticprices in response to the increase in the cost ofimported goods and services and the rise in demandfor exports and domestically produced importsubstitutes, the improvement in internationalcompetitiveness generated by the exchange rate changewill be partially or fully eroded. Such a developmentunderscores the importance of supplementing theexchange rate adjustment with restrictive monetary andfiscal policies to facilitate the shift in resources signaledby the change (caused by the depreciation) in relativeprices. Thus, an expenditure-switching policy in theform of exchange rate depreciation must generally besupported by expenditure-reducing measures; indeed,such measures are essential if there is no excesscapacity in the economy.

577. The need for such action can be seen fromequation (9), which shows that any improvement in thecurrent account must be matched by a correspondingpositive change in the difference between domesticsaving and investment. An exchange rate depreciationby itself may generate such a change in the desireddirection. In particular, if there is no change in thestance of monetary policy, the increase in demandgenerated by the depreciation will raise the demand formoney. With an unchanged money supply, the greaterdemand for money will tend to increase nominal and

real domestic interest rates. As a result, interest-sensitiveexpenditures will be dampened, and there could be apositive impact on domestic saving. However, it isunlikely that this induced effect on the gap betweensavings and investment will itself be sufficient,particularly if the economy is at full employment, toachieve the desired improvement in the currentaccount. Therefore, in all likelihood, it will benecessary to accompany the adjustment in theexchange rate with measures to reduce the level ofdomestic expenditure through tighter monetary andfiscal policies that release resources to expand outputin the exporting and import-substitution industries.

578. The discussion of equation (6) pointed to fiscaldeficits as one potential cause of external imbalances.Changes in government spending and taxation maytherefore be mandated to achieve the requiredreduction in the saving/investment gap—to the extentthat an exchange rate depreciation does not induce asufficient response in the difference between totaldomestic saving and investment. However, it isimportant that fiscal policy measures be designed toachieve the desired objective and not exacerbate theadjustment problem. For example, cuts in infrastructureinvestment may have the desired short-run balance ofpayments effect, but such cuts could have, particularlyif the spending reductions are in such areas astransportation, a long-run adverse impact on the supplypotential of the country and the generation and supplyof energy designed to relieve bottlenecks. Moreover,tax measures that result in very high marginal tax ratesor that are aimed particularly at capital income couldhave the undesired side effect of inducing offsettingreductions in private saving and reducing incentives toinvest in the country. Such disincentive effects can beavoided by implementing fiscal action aimed atreducing or eliminating subsidies to inefficient govern-ment enterprises and the private sector and by cuttingback on government activity that can be performedequally well, if not better, by the private sector.

579. The stance of monetary policy plays an importantrole in balance of payments adjustment. The existingexternal imbalance may reflect an excess of domesticinvestment over saving (or what is the same thing—anexcess of domestic spending over income) that resultsfrom an excessively expansionary monetary policy. It is,first of all, important to adjust the stance of monetarypolicy so that interest rates are generally positive in realterms and provide an incentive to savers and so thatdomestic economic conditions are sufficiently stable toencourage investment. From the perspective ofaggregate supply and demand, it can be seen from


164

equation (4) that monetary policy should ensure thatthe level of domestic expenditure is in line with theproductive capacity of the economy. Thus, from thepoint of view of balance of payments analysis, theobjective of monetary and fiscal policies is to limitdomestic spending to what is available from domesticresources and foreign financing.

580. One important aspect of monetary policy inbalance of payments adjustment is the link betweenreserve asset transactions and domestic monetaryconditions. A decline in reserve assets may beassociated with a current account deficit and/or a netfinancial outflow caused by an expansionary monetarypolicy. The reserve asset decline can lead to areduction in the monetary base and therefore to atightening in the stance of monetary policy. A morerestrictive monetary policy tends to correct the pay-ments imbalance through higher interest rates thatdampen domestic demand and make domestic assetsmore attractive to investors. However, this built-inadjustment mechanism can be short-circuited if themonetary authorities offset the effect of the loss ofreserve assets on the monetary base by increasing thedomestic component of the base (e.g., through openmarket purchases of securities held by the bankingsystem). Such offsetting action tends to prevent domes-tic interest rates from rising and thereby contributes tothe persistence of the balance of payments deficit.

581. The foregoing discussion focuses entirely on aneconomy that faces an actual or incipient balance ofpayments problem in the form of a persistent currentaccount deficit or financial outflow that may also beaccompanied by a loss of reserve assets. This concen-tration on external deficits reflects the more prevalenttendency for domestic expenditure to exceed availableincome and the frequent necessity of formulatingpolicies to deal with the financing or adjustment of abalance of payments deficit.21 The opposite situation(namely, a persistent current account surplus, inflow ofcapital, and substantial accumulation of reserve assets)occurs less often and generally does not pose as severea problem for economic policy.

582. Nonetheless, an analysis of some aspects of asurplus balance of payments situation is useful. As can

be seen from equation (7), the balance of paymentsidentity, a surplus in the current account is reflectedin an increase in net claims held by the private sectoror government (NKA) on nonresidents and/or anincrease in official reserve assets (RT). The change inthe net foreign asset position may be due to areduction in liabilities to nonresidents rather than to anincrease in gross claims. Such a reduction may well bea desirable development if a previous large buildup ofliabilities has imposed a severe debt service burden onthe country. In this case, a current account surplus canbe an appropriate step toward achieving a viablebalance of payments position.

583. The case of an economy with no recent deficitsof payments and an increase in its gross private claimson the rest of the world reflects an excess of aggregatedomestic saving over domestic investment. If thegovernment’s fiscal position is in deficit, private sectorsaving will exceed domestic investment. The allocationof part of domestic saving to foreign assets presumablyreflects the fact that investors find the rate of return onthese assets more attractive, at the margin, thaninvestment opportunities in the domestic economy.The provision of resources to the rest of the world inthe form of a buildup of net claims on nonresidentswill, by and large, result in an efficient allocation ofthe domestic economy’s saving as long as the buildupof net claims reflects the operation of market forcesrather than government policies designed directly orindirectly to increase such claims.

584. Thus, for analyzing the balance of payments of acountry in persistent surplus, one key consideration iswhether government policies distort saving/investmentdecisions and thereby bias the payments position of aneconomy toward a surplus. Such distortions can takemany forms. First, there are measures aimed directly atinfluencing the current account. Examples are tariffsand quotas that limit imports, restrictions on paymentsabroad, and export subsidies and governmentprocurement policies that give preference to domesticproducers. Moreover, an exchange market interventionpolicy may be directed at deliberately undervaluing thecountry’s currency to achieve a current accountsurplus. Finally, there may be measures that limitforeign acquisition of domestic assets—a limitation thatwould tend to bias the financial account toward anet outflow and thereby shift the current account inthe direction of a surplus.

585. These measures may, in fact, not be successful inachieving a larger current account surplus. Policy

APPENDIX V

165

21Of course, for the world as a whole, the balance of payments positions of allcountries are equal to zero. Nonetheless, the recorded balance of paymentsposition for the world, which is equal to the sum of the positions of allcountries, is not equal to zero because of measurement problems. For adiscussion of this issue, see the International Monetary Fund’s Report on theWorld Current Account Discrepancy, September 1987, and Report on theMeasurement of International Capital Flows, September 1992.

actions aimed at particular components of the balanceof payments will, over time, lead to offsettingmovements in other components in the absence ofchanges in the underlying determinants of saving andinvestment. In any event, if a large and persistentcurrent account surplus appears to arise from suchdistortionary measures, the appropriate policy action isthe reduction and eventual removal of these distortions.If a persistent surplus remains after such measures areeliminated, then the accumulation of net claims on therest of the world would appear to manifest the savingand investment propensities of the economy. If, in thiscase, one were to identify the surplus as a problem, itwould generally be necessary to establish that privatesaving or government saving was excessively high orthat domestic investment was too low. It is considerablymore difficult to arrive at such a conclusion than toidentify the previously enumerated distortions thatrelate directly to international transactions.

586. A current account surplus, while reflecting entirelya response to market forces, may cause economicdifficulties for a country. For example, a country with“Dutch disease” experiences either a natural resourcediscovery or a substantial improvement in the terms oftrade for the natural resources sector. The expandingsector or terms of trade gains lead to an improvementin the current account and an appreciation of theexchange rate. This development tends to make othersectors of the economy contract and be lesscompetitive internationally. If the newly discoveredresources are expected to be depleted fairly rapidly andthe gains in terms of trade to be transitory, it may beappropriate to protect the sectors adversely affected.One way to achieve this objective is through exchangemarket intervention to prevent or moderate theexchange rate appreciation. The accumulation ofreserve assets tends to insulate the real economy fromhaving to adjust to the short-run disturbance.

587. The general conclusion of such an analysis is that,when no government policy actions are aimed atachieving a surplus balance of payments position, it

may be difficult to establish that an economy isinvesting too much of its saving abroad. However, itmay be somewhat easier to reach a conclusion withrespect to reserve assets. Rather than leading to a rise innet foreign assets held by the private sector, a currentaccount surplus can be reflected in a buildup of foreignreserve assets. A buildup represents specific governmentpolicy action in the form of foreign exchange marketintervention. Intervention, which involves the sale ofdomestic currency in exchange for foreign currency,has the tendency to keep the foreign exchange value ofthe domestic currency lower than it otherwise wouldbe. The accumulation of reserve assets may thereforelimit the extent to which the currency appreciates andthereby prevent the operation of the self-correctingmechanism that would tend to reduce the currentaccount surplus.

588. Thus, one aspect of balance of payments analysisfor a country with a persistent current account surplusinvolves an appraisal of the level of external reserveassets held by monetary authorities. The accumulationof such assets is excessive if the assets exceed, by awide margin, the amount required to finance short-runbalance of payments deficits. In such a situation, thecountry’s resources may well be better invested indomestic capital formation. If the private andgovernment sectors are unlikely to increase domesticcapital formation, cessation of reserve assetaccumulation would lead to an increase in domesticabsorption and/or to a rise in net foreign investment bydomestic residents.22 In either case, allocation of theeconomy’s resources would tend to be more efficient asthe allocation would be responding to market forces.


166

22Countries that are large exporters of nonrenewable resources, such as oil,may have limited domestic investment opportunities. In such cases, the buildupof foreign assets can be viewed not so much as an accumulation of reserveassets for balance-of-payments financing purposes but rather as a diversificationof the country’s stock of wealth. Also, there may be a case for the accumu-lation of reserve assets in the instance of a country subject to Dutch disease ifthe effects are expected to be transitory.


I N D E X

167

Numbers refer to paragraphs; ranges (e.g., 175–185) are inclusive. References followed by nindicate footnotes.

Above-the-line entries, 452, 526, 566n

Absorption or expenditure, domestic, 552, 553

Accountingaccrual, 121, 396, 458for exceptional financing, 454–459, 526–549

Accounting services, 264

Accounts receivable and payable, 413, 422

Accrual accounting, 121, 396, 458

Accumulation accounts, 45, 47

Acquisition or disposal of nonproduced, nonfinancialassets, 175, 312, 358

valuation and timing, 341, 342

Adjustment(s), 383, 573–588. See also Time of recordingmonetary policy in, 579, 580in reserve assets, 436seasonal, 433

ADRs. See American Depositary Receipts

Advance repayment, 454, 544

Advertising services, 264

Affiliated enterprise(s), 93, 97–103, 119, 205, 316

Agents, 83commissions, 255fees, 228, 240

Agricultural services, 264

Aid, development, 432

Aid agencies, 59

Aircraft, 208, 217, 263

Airfield facilities, repairs of, 230

Airport fees, 300

Airport services, 240

Alimony, 303

Allocation. See Regional allocation

American Depositary Receipts (ADRs), 388

Amortization, 458, 528, 575cash settlements of, 530

Analysis, 550–588general framework, 551–559

Animals for breeding, show, or racing, 209

Annual or regular contributions to internationalorganizations, 298

Arbitrage, 323

Architectural services, 264

Arrears. See also Exceptional financingaccumulation of, 453, 528–529of interest and amortization, 458, 528repayment of, 453, 530–531

Art exhibits, 209

Asset-backed securities, 390

Assets, 331, 413, 422. See alsoAcquisition or disposal of nonproduced,nonfinancial assets; Financial assets;International investment position; Reserve assets

classification of, 464committed, 433external, 505immovable, 316intangible, 358net recording of, 324nonfinancial, 214not considered reserves, 432

169

Index

other than reserves, 32stocks of, 35

regional allocation principles, 484valuation of, 107–108

subsoil, 312, 358transactions in, 317–320

borderline cases, 322–323valuation changes in, 310

Associates, 362, 384

Auction sales, 262

Audiovisual services, 265

Auxiliary services, 240

Bad debts, 285. See also Write-offs

Baggage fees, 232

Balance of payments, 139–181, 292. See also specificaccounts

conceptual framework, 12–33definition of, 13SNA rest of the world account and, 499–511standard components, 143–145structure, 139–142uses of, 7–10

Balance of Payments Compilation Guide, 2, 481n

Balance of payments identity, 557, 566

Balance of payments need, 451–453borrowing for, 544

Balance sheets, 45, 54, 55, 377, 467, 561

Balancing item (label), 147

Bank deposits, 442

Bankers acceptances, 258, 391

Banking sector, 516

Banknotes, uncirculated, 420

Banks, 333, 372, 516central, 442, 514

regional, 90commercial, 516savings, 516

Barter, 93

Below-the-line entries, 452, 454, 526, 566n

Bilateral statements, 479

Black market rates, 137–138

BMD. See OECD Detailed Benchmark Definition ofForeign Direct Investment

Bonds, 387, 389, 390, 442, 544. See also Debt securitiesconvertible, 390, 390ndeep discounted, 283, 390, 396dual currency, 390floating rate, 390indexed, 390with optional maturity dates, 390zero coupon, 390, 396

Bond swaps. See Debt/bond swaps

Bonus shares, 290

Book values, 99, 377, 467

Border workers, 67

Borrowing, 453for balance of payments support, 544

Branches (direct investment), 362, 384

Brokerage fees, 258

Buffer stock, 441

Buildings. See Structures

Building societies, 516

Bunker fuel. See Fuels

Business services, 264other, 166, 212, 230, 254, 261, 267

Business travel, 246–248

Business travelers, 246

CAB. See Current account balance

Cable services. See Communications services

Call option, 401

Cancellation of debt. See Debt forgiveness


170

Capitaldirect investment, 368–374equity, 369

Capital account, 4, 50, 172, 311–312, 507components, 175coverage, 309, 343SNA, 47, 50, 510

Capital and financial account, 4, 50, 149, 150, 172–181,343

coverage, 308–310and financing, 560–572structure and characteristics, 308–342valuation and timing, 341–342

Capital gains and losses. See Holdings

Capital subscriptions to international organizations, 422

Capital transfers, 28, 175, 294, 311, 344–345characteristics, 295classification, 311, 345, 346–357distinction between current transfers and, 295–297,

344general government, 347–350net, 50other sectors, 351–357taxes on, 350, 357valuation, 341

Cargo handling, 240

Carriers. See also Mobile equipment; Transportationequipment

crews, 246goods procured in ports by, 156, 195, 230registration fees, 300rentals (charters) of carriers without crew, 230

Cash items, 106

Cash settlements of interest and amortization, 530

Cash transfers, 297, 298

Catastrophes, 285

Center(s) of economic interest, 21–22, 39, 58, 62–64guidelines, 63international, 71

Central bank currency swaps, 405, 434

Central banks, 442, 514regional, 90

Central Product Classification (CPC), 518differences between balance of payments

classification and, 508, 524objectives, 521scope, 522structure and coding system, 523

Certificates of deposit, 390negotiable, 391short-term, 516

Change(s) of ownership, 112, 113, 114–118, 126,203–210, 216, 316, 317. See also Time of recording

convention for recording, 204exceptions, 119–120, 205–207temporary, 207, 208

Charters. See also Leases; Rentalstime, 239of transportation equipment without crew, 230, 263

c.i.f. valuation. See Valuation

Circus equipment, 209

Civil servants, 70

Claims, 372, 424, 442. See also Financial accountavailability for use, 431direct investment, 371intercompany, 270for non-life insurance, 304reclassification of, 32tradable, 483

Classification, 43–44, 506–511. See also Reclassification;specific items

detailed, 151differences between CPC and, 524–525of income, 269–281of international investment position, 464–466of international transactions in services, 518–520major, 149–150

CMOs. See Collateralized mortgage obligations

Coin(s), 214, 215, 420commemorative, 420

Collateralized mortgage obligations (CMOs), 390

Commemorative coins, 420

Commercial banks, 516

Commercial paper, 391

INDEX

171

Commissions, 240, 255, 258, 262

Commitment charges, 258, 281

Commodities, 262, 392

Commodity gold, 157, 184, 195, 208, 215classification, 438definition, 202

Common stocks, 388. See also Securities; Shares

Communications services, 160, 253

Compensation of employees, 5, 169, 190, 191, 270classification, 272coverage, 509definition, 269

Compensation payments, 350, 357

Compensatory financing, 441. See also Exceptionalfinancing

Compilation guide, balance of payments, 2

Computer and information services, 164, 200, 212, 259

Confidentiality, 442

Consignment. See Goods

Construction enterprises, 380

Construction services, 161, 200, 230, 254

Consular fees, 229

Consulates, 59

Contingency financing, 441

Contracts. See also Futures contracts; Transaction(s)transferable, 358. See also Leases

Contributions. See also Transfersto international organizations, 298, 303to social security, 304

Conversion, 128. See also Exchange rate(s)multiple official exchange rates and, 134–136principles and practices, 132–133procedures, 42, 503–505

Conversion rate, 503

Copyrights, 312, 358

Corporate bonds. See Bonds

Corporate equity. See Equity

Corporation(s)definition of, 74nonfinancial, 517public, 77

incorporated, 76

Correspondence courses, 244

Counterparts, 3, 304, 436

Courier services, 253

Coverage, 195

CPC. See Central Product Classification

Credit(s), 16, 19. See also Accounting; Loansfrom IMF, 413, 415, 419letters, 258lines, 258trade, 413, 414, 416

Credit tranches, 441

Credit unions or cooperatives, 516

Crewsof carriers, 246rentals of transportation equipment with, 239of transportation equipment, 67

Cross-border investment in equity and debt securities,330

Cross-currency warrant, 404

CTB. See Current transfer balance

Cultural services. See Personal, cultural, andrecreational services

Currency, 413, 420, 442. See also Conversiondomestic

exchange rate depreciation, 576sale of, for foreign currency, 587

reserve assets, 442

Currency swaps, 392, 405, 434, 470

Currency warrant, 404

Current account, 50, 149, 150, 152–171, 182–194classification, 174, 183–191


172

connections between financial account and,562–563

gross recording, 192–193SNA, 45, 46structure, 183time of recording, 121, 194valuation, 106, 194

Current account balance (CAB), 53, 182, 551, 552–555,557, 558, 559, 574

Current account deficit, 553, 558, 563, 569adjustment for, 573–588financing, 566–568, 570–572, 588

Current account surplus, 558, 581, 582–585, 586, 587,588

policy aimed to achieve, 584–585reduction of, 587

Current transfer balance (CTB), 574

Current transfers, 28, 152, 171, 191classification, 298–305, 345definition and coverage, 291–294distinction between capital transfers and, 295–297,

344external account, 507, 509valuation and timing, 306–307

Customs frontiers, 203, 219, 222, 224

Customs returns, 203, 215

Damages, 350

Data, uses of, 7–10

Death duties, 350, 357

Debentures, 389, 390. See also Debt securities

Debit(s), 16, 19. See also Accounting

Debt. See also Loansexternal, 474forgiven, 534gross external, 474nincome on, 279, 280negotiable, 389

Debt/bond swaps, 536–538

Debt cancellation. See Debt forgiveness

Debt/equity swaps, 453, 456, 472, 539–543

valuation of, 543

Debt forgiveness, 348, 356, 453, 455, 532–534

Debtor/creditor principle, 482, 486nanalytical implications, 493–494

Debtor/transactor principle, 485, 485n

Debt refinancing, 457, 547

Debt reorganization, 453, 454, 456

Debt repayment, 316

Debt rescheduling, 453, 457, 545, 547

Debt restructuring, 546

Debt securities, 332, 387, 389, 394. See also Bondscross-border investment in, 330

Deep discounted bonds, 283, 390, 396

Deficit. See also Current account deficitexternal, 581

Demonetization of gold, 3, 310, 436, 439

Depletion of natural resources, 285

Depository institutions, 372, 516

Deposits, 372, 413, 420, 421, 423, 516. See alsoCertificates of deposit

bank, 442reciprocal, 434reserve assets, 442savings, 421temporary exchange of, 434time, 421transferable, 421Depreciation, 576calculation of, 286

Destroyed goods, 208, 209

Development aid, 432

Diamonds, 215

Diplomatic shipments, 209

Diplomats, 70

Direct insurance, 255. See also Insurance services

INDEX

173

Direct investment, 32, 176, 177, 330, 339, 359–384capital, 368–374classification, 329, 330, 465concept and characteristics, 359–361enterprises, 362–366, 378–383income, 170, 276–279measurement and recording of earnings, 285–289net recording, 375profitability of, 564recording, 326reinvested earnings, 31, 277, 278, 284, 288, 321,

369supplementary information, 384transactions involving third parties, 490valuation of, 376–377, 467

Direct investors, 367, 384

Direct transit trade, 209

Discounts, 274, 283, 391, 396, 400

Display equipment, 209

Distributive services, 221, 222, 227. See also Shippingservices

Diversification, 588n

Dividends, 274, 277. See also Bonus shares; Investmentincome

liquidating, 290stock, 290time of recording of, 282, 284

Doctors’ fees, 244

Domestic absorption or expenditure, 552, 553

Domestic currencyexchange rate depreciation, 576sale of, 587

Domestic saving. See Gross saving

Domestic sector, 333–335

Domestic securities, 485, 487

Double entry system, 16–20, 109, 113, 557

Dowries, 303

Dual currency bonds, 390

“Dutch disease,” 586, 588n

Duties. See Customs returns; Death duties

Earnings. See also Income; Investment incomemeasurement and recording of direct investment,

285–289operational, 285reinvested, 31, 277, 278, 321, 369

recording of, 288time of recording of, 284

Economic interest, center(s) of. See Center(s) ofeconomic interest

Economic territory, 21–22, 39, 58, 59–61

Economic transactions. See Transactions

ECUs, 442, 442n

Education services. See Personal, cultural, andrecreational services

Electricity, 215

Embassies, 59

Employees, 67, 269. See also Compensation ofemployees; Personnel

government, 70, 215, 243, 246, 248of international organizations, 67, 88, 246, 248

Engineering services, 264

Enterprise(s)affiliated, 93, 97–103, 119, 205, 316attribution of production, 78–79definition of, 74direct investment, 362–366government, 77incorporated, 76offshore, 79operating mobile equipment, 80–82owned by two or more governments, 89private, 76public, 76, 362residence of, 73–83, 231

guideline for, 73types of, 75–77unincorporated, 76, 316

Enterprise surveys, 384

Equipment, 214, 349display, 209


174

military, 349gifts of, 298

mobile, 208, 209. See also Transportationequipmentunits operating, 80–82

stage and circus, 209

Equitycross-border investment in, 330income on, 274, 277, 280reverse investment in, 371

Equity capital, 369

Equity securities, 387, 388, 394, 442

Errors. See Net errors and omissions

Eurocommercial paper, 399

Exceptional financing, 446, 451–453accounting for, 454–459, 526–549identification of, 453

Exchange rate(s), 132, 133, 559. See also Conversionappreciation, 586black or parallel market, 137–138changes, 466depreciation, 576, 577, 578expected changes in, 564favorable, 543nfloating, 559market, 132, 133multiple, 131multiple official, 134–136, 138, 504official, 137, 138principal, 135unitary, 135

Exchanges, 27

Excursionists, 243

Exhibits, 209

Expenditure(s)domestic, 552, 553shipboard, 232

Exportsof general merchandise, 199of goods, 114, 508

exclusions, 209–210inclusions, 208

government, 215

returned, 209of services, 508temporary, 209

Expropriation, 285, 310

Extended Fund facility, 441

External assets, stocks of, 505conversion of, 133, 136

External debtgross, 474nrelation of international investment position to, 474

External deficits, 581

External financing for current account deficit, 568

External liabilities, stocks of, 505conversion of, 133, 136

External transactions account, 507, 509

Extraordinary income, 285

Fares, passenger, 232

f.a.s. valuation, 225

Fees, 300. See also specific types

Financial account, 268, 313–339, 507. See also Capitaland financial account

borderline cases, 322–323classification of components, 6, 174, 176–181, 308,

328–329connections between current account and, 562–563coverage, 309, 313–316, 446net recording, 527SNA, 47, 50, 52, 511supplementary information, 446–460time of recording, 121

Financial assets, 149classification of, 316, 511external, 133, 136foreign, 313

Financial derivatives, 315, 387, 389, 392, 393, 442valuation of, 469

Financial external assets, conversion of stocks of, 133,136

INDEX

175

Financial instruments. See specific instruments

Financial intermediaries, non-depository, 517

Financial intermediation charge indirectly measured,

258n, 508, 509

Financial items. See also specific itemsvaluation of, 106

Financial leases, 206, 239, 258, 267, 417goods transferred under, 93, 119, 316

Financial liabilities, 149conversion of stocks of external, 133, 136

Financial paper, 391

Financial services, 163, 258

Financial transactions, 52, 106, 123analysis of, 556regional allocation principles, 482–483type of instrument, 332

Financing. See also Refinancingcapital and financial account and, 560–572compensatory, 441. See also Financing, exceptionalcontingency, 441current account deficit, 566–568, 570–572, 588exceptional, 446, 451–453

accounting for, 454–459, 526–549identification of, 453

external, 568foreign sources of, 460official resources for, 572private funds for, 572reserve assets for, 571, 572

Fines, 300

Fiscal policy. See also Monetary policyobjective of, 579

Fish, 208

Fishing licenses, 300

Fishing vessels, 209

Flags of convenience, ships flying, 81

Floating exchange rates, 559

Floating rate bonds, 390

f.o.b. valuation, 219, 222, 225, 228

Foreign currency, sale of domestic currency for, 587

Foreign exchange, 258, 330, 442. See also Exchangerate(s)

Foreign exchange assets, 180, 424, 442. See alsoReserve assets

held by monetary authorities, 432, 433liabilities, 313, 340valuation of, 473

Foreign exchange holdings, availability for use, 431

Foreign exchange market intervention, 587for exchange rate appreciation, 586

Foreign general government, 87

Foreign sector, 334

Foreign securities, 486, 487

Foreign sources of financing, 460

Forwarding. See Distributive services

Forward rate agreements (FRAs), 408

Franchises, 312, 358

FRAs. See Forward rate agreements

Freight insurance, 158, 162, 187, 230, 255, 256

Freight services, 187, 233–238. See also Transportationfuels, 201

Fuels, 156, 201

Fund (IMF). See International Monetary Fund

Futures contracts, 392, 407valuation of, 470

Gains and losses, holding, 285

Gas, 215

Gas drilling rigs, 208, 209

GDP. See Gross domestic product

General government, 85–89, 333, 515foreign, 87


176

General government transfers, 298, 299, 347–350

General merchandise, 153, 195, 199, 353. See alsoGoods

definition of, 196exports of, 199

General Resources Account (GRA), 441

Geographic territory, 21, 59

Gifts, 13, 215, 303large, 357of military equipment, 298for relief efforts, 298, 303

Gift taxes, 350, 357

Global statement, 479, 492

GNDY. See Gross national disposable income

Goldheld as store of value, 184, 202, 438industrial (other), 184, 202monetary, 180, 214, 330, 424, 431

classification, 438definition, 438, 438nregional allocation, 489valuation, 444, 473

monetization/demonetization of, 3, 310, 436, 439nonmonetary (commodity), 157, 184, 195, 208, 215

classification, 438definition, 202

reclassification, 439

Gold swaps, 434

Goods, 127, 152, 153–157, 184, 185, 195–229. See alsoChange of ownership; specific types

classified under other items, 211–214on consignment, 127, 218coverage and principles, 195definitions, 196–202exports, 114, 508


external account of, 507general merchandise, 153, 195, 196, 199, 353imports, 114, 508


lost or destroyed, 208, 209for processing, 120, 154, 195, 196

exceptions, 199

procured in ports, 156, 195, 201, 230regional allocation principles, 481repairs on, 155, 195, 200salvaged, 208services items, 212–213smuggled, 215special types, 215time of recording adjustments for, 114–118, 204transferred under financial leases, 93, 119, 316travel, 250–251treated as financial items, 214

Government(s)employees, 70, 243, 246, 248exports and imports, 215general, 85–89, 298, 299, 333, 347–350, 515payments for salaries, 298personnel, 159, 215, 243policy actions aimed at achieving surplus, 584–585purchases abroad, 208regular transfers by international organizations to,

298

Government agenciesgeneral, 85unclassified, 86

Government-controlled savings banks, 516

Government enclaves, 70

Government enterprises, 77unincorporated, 77Government securities, 442

Government services, 159, 168, 212, 243, 266, 524

GRA. See General Resources Account

Grantsfrom Fund subsidy accounts, 453, 535intergovernmental, 453, 535investment, 349, 357

Gross domestic product (GDP), 48, 53

Gross external debt, definition of, 474n

Gross national disposable income, 53, 552, 553

Gross recording, 271, 325, 511current account, 192–193

Gross saving, 53, 566

Guide. See Balance of Payments Compilation Guide

INDEX

177

Harbor fees, 240

Harbors, repairs of, 230

Haulage, 240. See also Distributive services

Health-related transactions. See Personal, cultural, andrecreational services; Travel

Hedging, 258, 393

Highway vehicles. See Mobile equipment

Holdingsforeign exchange, 431gains and losses, 285

Households, 517residence of, 66

IBRD obligations. See World Bank obligations

Immigration offices, 59

Immovable assets, 316

Implicit taxes and subsidies. See Multiple officialexchange rates

Importsof goods, 114, 508


government, 215returned, 209of services, 508temporary, 209

Imputed income, 274, 281

Imputed transactions, 31

Income, 152, 169–170, 190, 267–290. See alsoCompensation of employees; Earnings

coverage, 267–268on debt, 279, 280definition and classification, 269–281direct investment, 170, 276–279distributed, 277dividends, 274, 282, 284, 290on equity, 274, 277, 280external account for, 507, 509extraordinary, 285imputed, 274, 281interest, 282

investment, 5, 170, 190, 267, 268, 316classification, 275, 281definition, 274and international investment position, 475–476time of recording, 282–284types of, 274

primary, 507, 509property, 274, 509regional allocation principles, 481taxes on, 122workers’, 267

Income account, time of recording, 121

Indemnity payments, 299

Indexed bonds, 390

Index-linked securities, 397

Individualsresidence of, 66–72resident, 67, 69with several international residences, 72

Industrial gold, 202

Information or immigration offices, 59

Information services, 164

Infrastructure investment, 578

Inheritances, 303

Inheritance taxes, 350, 357

Institutional units, resident, 58, 65

Instruction services. See Personal, cultural, andrecreational services

Insurancedirect, 255freight, 158, 162, 187, 230, 255, 256life, 257non-life, 257

premiums and claims for, 304technical reserves, 257, 257n

Insurance companies, 517

Insurance enterprises, 379

Insurance services, 158, 162, 187, 255, 256international, 257memorandum items, 257


178

Intangible assets, 358. See also Acquisition/disposal ofnon-produced, nonfinancial assets; Royalties

Integrated economic accounts, 45–56algebraic summary, 53

Intercompany claims and liabilities, 270

Intercompany transactions, 372

Interest, 316arrears of, 458, 528cash settlements of, 530

Interest charges, on late tax payments, 300

Interest income, time of recording, 282

Interest rates, 564

Interest rate swaps, 392, 405

Intergovernmental grants, 453, 535

Intermediary service fees, 258

International Financial Statistics, 442

International investment position, 55, 181, 461–477adjustments, 383classification, 464–466concept and coverage, 461–463conceptual framework, 12–33investment income and, 475–477net, 55, 462, 474, 562rates of return and, 476–477relation to external debt, 474uses of data, 7–10valuation of components, 467–473

International Monetary Fund (IMF)credit and loans from, 413, 415, 419grants from subsidy accounts, 453, 535

International organization(s), 88contributions to, 298, 303employees or staff, 67, 246nonmonetary, subscriptions to, 422, 432payments for salaries, 298residence, 497

International transactions in services classificationscope, 518structure and coding system, 519–520

Inventories, 214

Investment. See also Direct investment; Portfolioinvestment

classification, 332, 412–413, 465coverage, 411cross-border, 330definitions and recording, 414–423domestic sectors, 333in equity and debt securities, 330functional types, 330infrastructure, 578long-term, 336–339other, 176, 179, 274, 330, 411–423profitability of, 564reverse, 371short-term, 336–339types of, 332

Investment grants, 349, 357

Investment income, 5, 170, 190, 267, 268, 316classification, 275, 281definition, 274and international investment position, 475–476time of recording, 282–284types of, 274

Investment trusts, 388

Issue price, 283

Issues, placements of, 258

Joint enterprises, 82

Joint military arrangements, 266

Labeling. See Processing

Labor income. See Compensation of employees

Land, 214, 358ownership of, 316

Land transactions, 51, 312for noncommercial purposes, 273

LCFARs. See Liabilities constituting foreign authorities’reserves

Leases, 312, 358financial, 206, 239, 258, 267, 417

goods transferred under, 93, 119, 316

INDEX

179

nonfinancial, 209operational, 80, 209, 239, 263resident/nonresident, 263

Legacies, 357

Legal services, 264

Letters of credit, 258

Liabilities, 372, 413, 423assets and, 331direct investment, 371external, 505financial, 149financial external, 133, 136foreign, 313intercompany, 270other, 413reclassification of, 32stocks of

regional allocation principles, 484valuation of, 107–108

Liabilities constituting foreign authorities’ reserves(LCFARs), 340, 446, 447n, 447–450

classification of, 448identification of, 445, 450

License fees, 165, 260, 300

Licensing agreements. See Intangible assets; Royalties

Life insurance, 257. See also Insurance servicesreserves, 388

Lighterage, 240. See also Distributive services

Lines of credit, 258

Liquidating dividends, 290

Livestock, 215

Loading charges, 233

Loading services, 225

Loan drawings, 123

Loan repayments, 123

Loans, 413, 415, 423. See also Debtcancellation of, 472classification of, 316

direct, long-term, 432forgiveness of, 472from IMF, 413, 415, 419recording, 416rescheduling, 472valuation of, 471

Local governments. See General government

Locally recruited staff, 67

Long-term investment, 336–339

Losses, 285

Lost or destroyed goods, 208, 209

Lotteries, 303

Machinery, 349

Mail, 160, 253

Maintenance, 201, 240

Managed floats, 559

Management consulting services, 264. See also Businessservices

Marine insurance. See Insurance services

Marine products, 208

Market exchange rate(s), 132, 133, 137–138, 503

Market price, 98, 99, 376, 377, 444, 467n, 501concept, 91definition, 92equivalents, 95–96, 98, 102, 103transactions and, 92

Market research services, 264

Market transaction, 92

Market valuation, 97, 220

Maturities, 337, 390, 391, 396

Medical patients, 71, 159, 243, 244

Membership dues, 298, 303

Merchandise. See General merchandise; Goods


180

Merchanting, 213, 262

Midpoint spot rate, 503

Migrants, 272, 302effects, 215transfers, 352–355

Migration, 29–30

Military agencies and establishments, 85, 86, 87bases, 59personnel, 70, 159, 243Military equipment, 349gifts of, 298

Military shipments, 209

Mining, 264, 383

Mobile equipment, 80–82, 208, 209. See alsoTransportation equipment

Monetary authorities, 333, 514foreign assets held by, 432, 433

Monetary gold, 180, 214, 330, 424, 431classification, 438definition, 438, 438nregional allocation, 489valuation, 444, 473

Monetary policy, 579, 580, 584–585objective of, 579

Monetization/demonetization of gold, 3, 310, 436, 439

Money. See also Currency; Depositspaper and coin, 214, 215, 420

Money market funds, 389

Money market instruments, 387, 442

Money market securities, 391

Mortgages, 390, 415

Motor vehicles. See Mobile equipment

Multilateral settlements, regional allocation, 491–492

Multiple exchange rate system, 131

Multiple official exchange rates, 134–136, 138, 504

Multi-year arrangements, 454

Mutual funds, 388

National accounts. See System of National Accounts

National frontiers, 203

National wealth, 55

Natural resourcesdepletion of, 285exploration of, 264, 383

Navigational aid services, 240

Need, balance of payments. See Balance of paymentsneed

Net capital transfers, 50

Net creditor (label), 474

Net debtor (label), 474

Net equity in life insurance reserves, 388

Net errors and omissions, 146–148

Net foreign investment, 53

Net international investment position, 55, 462, 474, 562

Net lending/net borrowing, 510

Net recording, 319–320, 324–327, 375, 511, 527

Net worth, 55, 462

New financial instruments, 177

New money facilities, 548–549

Newspapers, 212

NIFs. See Note issuance facilities

Noncommercial transactions, 104–105

Nonfinancial assets, 214

Nonfinancial corporations, 517

Nonfinancial leases, 209

Nonmonetary gold. See Commodity gold

Nonmonetary international organization(s),subscriptions to, 422, 432

INDEX

181

Nonproduced, nonfinancial assets. See Acquisition ordisposal of nonproduced, nonfinancial assets

Nonprofit institutions (NPIs), 76nonresident, 357private, 517residence of, 84

Nonprofit organizations, 86

Note issuance facilities (NIFs), notes issued under, 391,399, 400

Notes, 387, 389, 390, 420, 442issued under NIFs, 391, 399, 400recording, 400short-term, 391, 398, 399

NPIs. See Nonprofit institutions

Obsolescence, 285

OECD Detailed Benchmark Definition of Foreign DirectInvestment (BMD), 360, 363

Official exchange rates, 137, 138multiple, 134–136, 138, 504

Official resources, for financing, 572

Official transactions, 266

Official travel, 246, 248

Offshore enterprise(s), 79, 381

Offshore installations, goods consumed in resident-owned, 208

Oil, 588n

Oil drilling rigs, 208, 209. See also Mobile equipment

Omissions. See Net errors and omissions

On-site processing, 199, 264, 524

Operational earnings, 285

Operational leases, 80, 209, 239, 263

Option price, 401

Options, 258, 315, 389, 392, 401, 402 valuation, 470

Other business services, 166, 212, 230, 254, 261, 267

Other investments, 176, 179, 274, 330, 411–423. Seealso specific types of instruments

recording, 414–423

Other services, 189, 252–266

Overall balance, 566n

Ownership. See Change of ownership

Packaging. See Processing

Packing, 240

Paper, financial, 391

Paper money, 214, 215

Parallel market rates, 137–138

Parcel post, 215

Passenger fares, 232

Passenger services, 232

Passport fees, 300

Patents, 312, 358

Payments agreements balances, 432

Peacekeeping forces, transactions associated with, 266

Penalties on late tax payments, 300

Pension funds, 86, 388, 517

Pension payments, 299

Pension plans, 303

Periodicals, 212

Personal, cultural, and recreational services, 167, 244,265

Personal effects, 232

Personal travel, 249

Personnel. See also Employeesgovernment, 159, 215, 243military, 70, 159, 243

Pilotage, 240


182

Placements of issues, 258

Policy. See Monetary policy

Portfolio investment, 6, 178, 330, 339, 385–410benefits, 361classification, 176, 332, 387–394, 465coverage, 385–386definitions, 387–394domestic sectors, 333income, 170, 280recording, 395–408valuation, 409–410, 468

Ports, goods procured in, 156, 195, 201, 230

Port services, 240

Position. See International investment position

Postal and courier services, 160, 253

Post office savings banks, 516

Postpayments, 118

Precious metals and stones, 215

Preferred stock(s) or share(s), 388, 390

Premium price, 400

Premiums, for non-life insurance, 304

Prepayments, 118

Prices. See Market price; Transfer prices; Valuation

Primary incomes, external account for, 507, 509

Principal rate, 135

Private corporations, 517

Private enterprise(s), 76

Private funds for financing, 572

Private nonprofit institutions, 517

Processing, 198, 199. See also Goodson-site, 199, 264, 524

Production, attribution of, 78–79

Professional services, 166, 264

Profitability, 564

Profits. See also Earnings; Reinvested earningsdistributed, 277

Promissory notes. See Securities

Property income, 274, 509

Public corporations, 77, 517incorporated, 76

Public enterprise(s), 76, 362

Public relations services, 264

Purchase price, 402

Purchases abroad, 208

Put option, 401

Quasi-corporation(s), 74, 517

Railway facilities repairs, 230

Railway rolling stock, 208. See also Mobile equipment

Rates of returnfactors affecting, 564and international investment position, 476–477

Real estate investment. See also Direct investmentprivate, non-business, 382

Real resources, 18

Reclassification, 32, 374of gold, 439

Recording. See also Time of recordinggross, 192–193, 271, 325, 511net, 319–320, 324–327, 375

Recreational services. See Personal, cultural, andrecreational services

Redemptions, 258

Refinancing, 457, 545–547. See also Exceptionalfinancing

Refunds, tax, 299

Regional allocation, 485–492, 496–498analytical implications, 493–495multilateral settlements, 491–492

INDEX

183

principles, 481n, 481–484problems and limitations, 485–492

Regional central banks, 90

Regional statements, 478–498

Reinsurance, 255, 257

Reinsurance services, 162. See also Insurance services

Reinvested earnings, 31, 277, 278, 321, 369recording, 284, 288

Rentals. See also Leasesof transportation equipment with crew, 239of transportation equipment without crew, 230, 263

Repacking, 240

Repairs, 524on goods, 155, 195, 200of railway facilities, harbors, and airfield

facilities, 230of transportation equipment, 230

Repayment(s), 454advance, 454, 544of arrears, 453debt, 316loan, 123

Repos. See Repurchase agreements

Repurchase agreements, 391, 415, 418

Rescheduling, 457, 545–547. See also Exceptionalfinancing

Research and development services, 264

Reserve assets, 32, 180, 181, 330, 339, 424–445adjustments, 436availability for use, 431classification, 432–435, 437–443, 450, 465concept and coverage, 424–425effective control of, 428–430for financing, 571, 572identification, 426–435, 445, 450interpretation of changes in, 445liabilities. See Liabilities constituting foreign

authorities’ reservesother claims, 442reclassifications, 310second-line, 425

special cases, 432–435valuation, 310, 436, 444, 473

Reserve position, 180, 330, 424, 431, 441valuation of, 473

Reserve tranche purchases, 441

Residence, 21–22, 496concept of, 57–58considerations for, 565, 565ndefinition of, 58of enterprises, 73–83, 231of households and individuals, 66–72of nonprofit institutions, 84

Resident individuals, 67, 69

Resident/nonresident leasing, 263

Resident/nonresident transactions, 312, 358

Resident units, 39, 57–90, 500

Residual items. See Net errors and omissions

Rest of the world account, 36and balance of payments accounts, 499–511

linkages, 506–511

Returned exports and imports, 209

Returns, trade, 215

Revaluation. See Reclassification

Reverse investment, 371

Risk, factors affecting, 564

Royalties, 165, 260

Salaries, 298. See also Compensation of employees

Salvaged goods, 208

Salvage operations, 240

Samples, 209

Saving, domestic. See Gross saving

Savings and loan associations, 516

Savings banks, 516


184

Savings deposits, non-transferable, 421

Scholarships, 244

Scientific stations, 59

SDRs. See Special drawing rights

Seasonal adjustments, 433

Seasonal workers, 67

Secondary instruments, 389, 392

Sectors, 333, 512–517banking, 516domestic, 333–335foreign, 334other, 351–357, 517

Securities, 214, 215, 268, 387. See also Bonds; Debtsecurities

domestic, 485, 487foreign, 486, 487index-linked, 397net recording of, 324regional allocation of transactions, 485–488reserve assets, 442

Seizures. See Expropriation

Service charges, 258, 258n, 402, 410indirectly measured financial intermediation, 508,

509

Services, 121, 152, 158–168, 185, 186, 252–266. See alsospecific types

classification, 212–213, 252, 518–520coverage, 252definitions, 253–266external account of, 507international, 518–520other, 189, 252–266regional allocation principles, 481time of recording, 502

Settlements, cash, 530

Shares, 388, 421. See also Equity securitiespreferred, 388, 390

Shipboard expenditures, 232

Shipments, 158, 187, 224, 226military and diplomatic, 209unrecorded, 215

Shipping services, 224

Ships, 208, 217, 262flying flags of convenience, 81

Short-term investment, 336–339

Silver bullion, 215

Sinking funds, 314

Smuggled goods, 215

SNA. See System of National Accounts

Social benefits, 299

Social security, 86, 304

Souvenirs, 251

Special drawing rights (SDRs), 180, 330, 424, 431, 440allocation/cancellation of, 3, 310, 436regional allocation of, 489valuation of, 102, 473

Special purpose entities (SPEs), 79, 365, 372transactions through, 373

SPEs. See Special purpose entities

Staff. See also Employees; Personnelof international organizations, 67locally recruited, 67

Stage and circus equipment, 209

Standard components, 143–145

State government. See General government

Statistical discrepancy (label), 147

Stock(s), 388. See also Equity securitiesof assets and liabilities, 35, 505

regional allocation principles, 484valuation of, 444

conversion of, 133, 136of goods abroad, 207, 213preferred, 388, 390valuation of, 107–108, 376–377

Stock dividends, 274, 290

Stock warrants. See Warrants

Storage, 201, 240

INDEX

185

Strike price, 401

Structures, 214ownership of, 316

Students, 71, 159, 244

Subscriptions to international organizations, 432capital, 422

Subsidiaries, 362, 384

Subsidies, 134, 453

Subsidy accounts, grants from, 453, 535

Subsoil assets, 312, 358

Supplementary information, 384, 446–460

Supporting services, 240

Support remittances, 303

Surplus. See Current account surplus

Swaps, 258, 405, 434currency, 392, 405, 434, 470debt/bond, 536–538debt/equity, 456, 539–543gold, 434interest rate, 392, 405recording, 406

System of National Accounts (SNA), 4, 34–56accumulation accounts, 45, 47balance sheet accounts, 45, 54, 55capital account, 47, 50, 510comparison with balance of payments, 38–44current (transactions) accounts, 45, 46financial account, 47, 50, 52, 511financial intermediation charge indirectly

measured, 258n, 508, 509integrated economic accounts, 45–56rest of the world account, 36

and balance of payments accounts, 499–511

System of National Accounts 1993 (SNA), 5, 23, 24, 360,362

T-accounts, 45

Tax(es), 300, 304analysis of higher taxes, 555on capital transfers, 350, 357considerations, 564gift, 350, 357

on income, 122inheritance, 350, 357refunds, 299side effects of, 578

Tax payments, 93fines, penalties, or interest charges on late

payments, 300

Teachers’ fees, 244

Technical services, 166, 264

Telecommunications, 160, 253

Temporary exports and imports, 209

Territoryeconomic, 21–22, 39, 59–61enclaves, 59, 60, 61geographic, 21, 59

Theatrical equipment, 209

Time charters, 239

Time deposits, 421

Time of recording, 41, 109–127, 502. See also Changeof ownership adjustments

to goods, 114–118, 204, 216–218other, 124–127to other transactions, 121–123to transportation services, 233–238capital and financial account, 341–342current account, 194of current transfers, 307of investment income, 282–284principle of, 24, 109–113

Tourism, definition of, 241n

Tourists, 243

Towing, 201, 239, 240

Trade. See also Goods; Servicesdirect transit, 209

Trade credits, 413, 414, 416

Trademarks, 312, 358

Trade-related services, 262. See also Merchanting

Trade returns, 215


186

TRANB. See Current transfer balance

Transaction(s), 3, 13, 318. See also specific typesclassification, 43definition, 13imputed, 31and market price, 92types, 25–31valuation, 91–106

Transactor principle, 482analytical implications, 493–494

Transferable contracts, 358. See also Leases

Transfer prices, 97–103, 99

Transfers, 13, 18, 28, 150, 171. See also Capitaltransfers;

Current transfersregional allocation principles, 481unrequited. See Grants

Transit trade, direct, 209

Transportation, 156, 187, 227, 230–240conventions for recording, 233–238definition and coverage, 230–231supporting and auxiliary services, 240

Transportation equipment, 209, 349. See also Mobileequipment

maintenance and cleaning of, 240rentals

with crew, 239without crew, 230, 263

repairs of, 230

Transportation fuels, 156, 201

Transportation services, 158, 159, 200, 224

Travel, 159, 188, 192, 212, 241–251, 524business, 246–248definition of, 241n, 242–244goods and services covered, 250–251nature of, 241official, 246, 248personal, 249types of, 245–249

Traveler(s), 67, 159, 241business, 246definition of, 241n, 243same-day, 243

Treasury bills, 391

Trusts, investment, 388

Underwritings, 258

Undistributed profits. See Reinvested earnings

Unitary rate, 135

Unit of account, 128, 129–131

Valuation, 40, 501in absence of market price, 93–94capital and financial account, 341–342current account, 194of current transfers, 306of debt/equity swaps, 543of debt forgiven, 534of direct investment, 376–377, 467of financial derivatives, 469of financial items, 106of goods, 219–229of international investment position components,

467–473market, 97, 220point of, 221–229of portfolio investment, 409–410, 468principles of, 23–24of reserve assets, 444of SDR, 102of stocks, 107–108of transactions, 91–106

Valuation changes, 33, 466in assets, 310of portfolio investment, 409in reserves, 310

exclusion of, 436

Value date, 123, 342

Visitor(s), 67. See also Traveler(s)definition of, 241n

Wages. See Compensation of employees; Salaries

Warehousing, 240

Warrants, 392, 403valuation, 470

Water, 215

INDEX

187

Wealth, national, 55

Workers, 67. See also Employees; Migrantsborder, 67income of, 267, 269remittances by, 302seasonal, 67

Working balances, 433

World Bank obligations, 432

World current account discrepancy, 581n

Write-offs, 285, 310. See also Debt forgiveness

Zero coupon bonds, 283, 390, 396


188

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