V Income on Portfolio Investment
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International Monetary Fund
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English
Print Publication Date:
15 Sep 1987
Keywords:
BOOK; debit; balance of payments account; current account; investment; transaction; income debit; investment income; interest income; income flow; interest receipts; Personal income; Credit; Bank deposits; Bonds; Balance of payments statistics; Middle East; Eastern Europe; Global
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Abstract

1. INTRODUCTION AND SUMMARY

1. INTRODUCTION AND SUMMARY

Reported “portfolio investment income” is the fastest growing, and is now the largest, of all individual current account discrepancies. The term as used in this chapter is defined to include all types of investment income, other than income related to direct investments, which is covered in Chapter IV. The two main categories of portfolio investment are bank positions, and investments in bonds and equities. While the official-private breakdown might be useful for some purposes, it will be seen that it is necessary to combine these categories for this study since, for instance, credits on official accounts of one country may appear as debits on private account in the debtor country. However, a discussion of resident official income is given in a later section of this chapter.

a. Discrepancies in Reported Income Data

As a starting point for our analysis we use the numbers published in the Fund’s Balance of Payments Statistics Yearbook, 1985, Part 2, particularly Table C-8, “Other Investment Income.” (For many countries, a more detailed breakdown is published in Part 1 of the Yearbook.) According to that table (summarized in Table 17), reported portfolio investment income debits exceeded the corresponding credits by $32 billion in 1983 and $42 billion in 1984, compared with excess debits of only $7 billion in 1979. Not only have the missing amounts increased, but the quality of reporting has also worsened as measured by the relative size of the gaps. In 1979, reported credits were only 5.5 percent below reported debits. This gap widened to 9 percent in 1981, 13 percent in 1983, and more than 15 percent in 1984. In addition, the quality of information also became worse relative to the reporting of other services. While the portfolio investment income gap accounted for 25 percent of the world services gap in 1979, this share increased to 40 percent in 1983, and to 43 percent in 1984.

Table 17

WORLD SUMMARY OF PORTFOLIO INVESTMENT INCOME

(In billions of U.S. dollars)

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Source International Monetary Fund. Balance of Payments Statistics Yearbook, Vol 36 (Washington. 1985). Part 2.

Calculated from Yearbook data.

b. Methods of Adjusting Reported Data

As noted in Chapter I, the bias in the reporting of portfolio income that results in a rising excess of debits over credits is consistent with the bias in the reporting of capital flows. For 1977–83, reported net capital flows showed a cumulative net inflow of nearly $300 billion, indicating that the countries receiving capital were in a better position to measure the flows than the countries where the creditors resided and were thus better able to record the related investment income flows.

The cumulative discrepancy in recorded capital flows described above indicates the likely sign and magnitude of the world investment income discrepancy. But it is still necessary to identify specific gaps according to the different types of investment and to allocate them geographically to the extent possible. For instance, even if the reporting of credits is less complete than the reporting of debits, it does not necessarily follow that the debits are not overstated. Moreover, the stocks of assets and the income received on them (and the outstanding liabilities and the income paid) may fit together reasonably well, as reported by a given country, but both statistics may be wrong. Also, while comparing debits and credits as reported by pairs of countries might seem a promising way of identifying discrepancies, few countries have such bilateral information, and its validity is limited by the growing tendency to invest via intermediary financial centers. Even if bilateral data exist, it is impossible to decide which country’s amount is correct unless there is some exogenous indication that one country has better information than the other.

Thus the Working Party felt that the only credible basis for checking reported income credits and debits would be to rely on independent information on outstanding stocks of cross-border assets and liabilities, and to use available information on appropriate yields to judge the reasonableness of reported credits and debits. Fortunately, there now exists a comprehensive and detailed body of data on the cross-border assets and liabilities of banks that is published in the Fund’s monthly International Financial Statistics. These data give extensive figures, by country, for interbank positions and for assets and liabilities of nonbanks vis-à-vis banks, based on the records of the banks.

Unfortunately, data for outstanding stocks of other types of assets held by foreign investors are not well organized and estimates must be based on heterogeneous sources. The results of these estimates, and the sources used are shown in Table 18. In addition to using published sources, the Technical Staff prepared its own estimates of outstanding cross-border holdings of bonds and equities, and information on other types of assets (such as trade credits) was derived largely from the replies to the income questionnaire circulated by the Working Party. A description of the estimating procedure for bonds and equities is given in Subsection 2.c of this chapter; a copy of the questionnaire appears in Appendix II.

Table 18

ESTIMATE OF WORLD CROSS-BORDER FINANCIAL POSITIONS,1 1983

(In billions of U.S. dollars)

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Note: For sources and more details, see Appendix V.

Excluding direct investment.

Based on outstanding amounts at beginning of year (totaling roughly $4,250 billion) and cross-border interest rates.

Includes positions between deposit banks ($1,582 billion), claims of deposit banks on monetary authorities ($98 billion), and claims of monetary authorities on deposit banks ($198 billion).

Excluding $110 billion of bonds that are held or issued by banks and included in bank-related accounts, and excluding securities that represent official reserves.

Not included elsewhere but excluding claims on banks and including securities. SDR holdings, and reserve positions in the Fund.

Mostly World Bank and government loans but also including Fund credits.

Roughly 6 percent of world trade, presumably at no or very low interest.

Reported flows plus adjustments derived in this chapter, (See also Table 19).

Another important source of information was the data on the debts of developing countries assembled by the Development Assistance Committee of the OECD. This is described in an appendix in which data on investment positions and debt are assembled and evaluated (Appendix IV).

It is important to note that the estimates of outstanding amounts of cross-border positions cover only those positions recorded by the debtor or creditor country, and often, but not always, both. In particular, the estimates of outstanding amounts are not analogous to the numerous estimates of the amounts of flight capital that may have escaped statistical recording. That may, for instance, be the case if cross-border funds are directly invested in real estate, or if the foreign investor or his intermediary is regarded as a resident. Also funds that are spent, rather than invested, do not add to external assets. The Working Party has taken note of the various estimates of “flight capital” but has not found them useful in calculating income adjustments. (See the discussion in Appendix VI.)

In addition to the revisions based on the general procedures described above, a number of revisions were based on specialized analyses or other sources. These adjustments are described in Section 2 of this chapter.

c. Summary of Results

On the basis of the various types of adjustments made to the reported data, the discrepancy in world portfolio investment income can be reduced to a minor amount. (See Table 19.)

Table 19

PORTFOLIO INVESTMENT INCOME: SUMMARY OF 1983 ADJUSTMENTS

(In billions of U.S. dollars)

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Mainly a U.K. adjustment owing to gross reporting which was not yet incorporated into the Fund’s 1985 Balance of Payments Statistics Yearbook.

Excluding major offshore banking centers.

In the adjustment procedure gross income credits and debits were both raised substantially above the reported amounts, mainly because data for interest received and paid by banks in certain international financial centers were obtained or estimated on a gross, rather than net, basis. However, that change in itself had little effect on the net result. Most of the total net adjustment of $32.8 billion was accounted for by additional net credits attributable to claims on banks by nonbanks in a wide range of countries. Another sizable addition to net credits reflects the return on cross-border investments in bonds and equities. A considerable net credit was also determined to be appropriate for the international institutions themselves, since their accounts had not yet been integrated into the Fund’s Balance of Payments Statistics Yearbook.

The Working Party has also attempted to establish the geographic distribution of the adjustments. (See Table 20.) However, the allocation by country grouping is inherently more conjectural than the overall adjustments, as discussed in Subsection 2.g of this chapter. The main impression that results from this exercise is that the addition of net credits is spread among many country groupings, with the exception of Eastern Europe. Moreover, a substantial amount of the 1983 adjustments cannot be allocated by area because the basic data (in this case the country distribution of banks’ liabilities to foreign nonbanks) contain large unallocated elements. Finally, the adjustment procedures adopted for 1983 were applied to the entire 1979-84 period. As shown in Table 54, the discrepancies for those years could be reduced to minor amounts, except for 1980, where a sizable net credit residual remained. Further analysis also indicates that these results would not be greatly affected by the adoption of a somewhat different range of yields to generate income flows.

Table 20

ALLOCATION OF PORTFOLIO INVESTMENT INCOME DISCREPANCY BY AREAS1

(In billions of U.S. dollars; net amounts)

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For gross amounts (credits and debits separately), see Table 56

2. DERIVATION OF ADJUSTMENTS

The analytical process used in determining the adjustments derived in this chapter is a mixture of the application of the general principles outlined above and the working out of corrections for a variety of special situations. In practice this required approaching the problem from a number of directions, sometimes overlapping. For instance, one focus was on different groups of countries with distinctive reporting problems: industrial countries, oil exporters, other developing countries (especially major debtors), and international financial intermediaries. Another focus was on the separation between direct-investment income and other income, and a third focus was on the two broad types of portfolio assets: banking positions and holdings of securities. The results of following these various avenues of study are presented below in a somewhat simplified way, in order to describe the main lines of research rather than the details of each stage. Nevertheless, the underlying complexities should be borne in mind.

The first stage of research was to establish a credible base for either the debit or credit side of the income accounts—and for reasons already mentioned the debit side was chosen. Thus the Technical Staff began by analyzing the income debits on a country-by-country basis, using all the available information on the liabilities of each country and on the yields appropriate to each kind of debt. The results of that study are not given separately in the following material, but they are implicit in the adjustments shown for the income debits of various country groups and special situations. On balance, the re-estimation of bank-related and other portfolio income debits (excluding some grossing-up) added about 15 percent to the debit amounts included in the Fund’s world income tables. Having established an acceptable total for debits, the main task was to locate the gaps in the income credits as reported, by type and by geographic location, to the extent possible.

a. Revisions and Reclassifications

(1) Revisions Based on Questionnaire

The data that are regularly reported to the Fund and published in its Balance of Payments Statistics Yearbook, which are used as a starting point, are not always sufficiently detailed to permit one to make adequate comparisons with other related data. Consequently, at the beginning of the study, a questionnaire on investment income was sent to 61 countries that either already reported substantial amounts of investment income or were assumed to have substantial cross-border assets or liabilities. (See Appendix II.) Responses to the questionnaire in many cases supplied new or revised data on investment flows and outstanding amounts of cross-border assets and liabilities. On balance, they increased income credits more than debits, as shown in Table 21. Among the larger revisions, the United Kingdom reported interest income related to the Eurocurrency business gross on the questionnaire, rather than net as in their balance of payments reports. While the grossing-up is now recognized in all U.K. balance of payments publications, it had not yet been incorporated into the Fund’s 1985 Balance of Payments Statistics Yearbook. The United Kingdom also revised the data on other private investment income, thereby contributing $1.2 billion of net credits. In addition, adjustments to Canadian data generate a net credit of $0.9 billion, reflecting the elimination of withholding tax from the debits and, to a minor extent, a more precise breakdown between direct and non-direct investment income. The gross transactions were also affected by the inclusion of foreign currency interest transactions of Canadian banks on a gross, rather than a net basis. Other questionnaire responses indicated some reclassifications of data—for example, for Singapore the Fund staff estimates a shift of $1.5 billion from non-direct investment income to direct investment income debits. (For country details, see Table 21.) Unfortunately, it cannot always be determined to what extent revisions reported in the questionnaire represent reclassifications rather than new data.

Table 21

REVISIONS INDICATED BY SPECIAL INVESTMENT INCOME QUESTIONNAIRE1

(In millions of U.S. dollars)

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Differences between responses to investment income questionnaire and the Fund’s Balance at Payments Statistics Yearbook data as published in 1985. Small differences also arise from the conversion of Yearbook data stated in SDRs into US dollars.

Representing a shift from non-direct to direct investment income debits, based on Fund staff estimates.

(2) Reclassification of Direct Investment Income

Certain adjustments to the non-direct investment account reflect the reclassifications set forth in Chapter IV. Correction for misclassifications generates $0.7 billion of net non-direct investment income debits in 1983, and $2.3 billion of net credits in 1979 (Table 23). These shifts do not affect the overall investment income or the global current account. While it is likely that the “other investment income” still includes some “direct investment income” that cannot be identified, such flows are thought to be negligible on a net basis.

Table 22

SUMMARY OF QUESTIONNAIRE REVISIONS, 1983

(In billions of U.S. dollars)

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Table 23

RECLASSIFICATION OF DIRECT/NON-DIRECT INVESTMENT INCOME DATA1

(In billions of U.S. dollars)

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For further details see Chapter IV.

Excluding the revisions in response to the questionnaire, which are already recognized in Table 22.

b. Adjustments Based on Banking Data

(1) Data Sources

(a) International Banking Statistics Data on Outstanding Amounts.

The largest net adjustments to reported portfolio income are based on the data for cross-border bank deposits of nonbanks as reported in the International Banking Statistics (IBS) published by the Fund in its monthly publication, International Financial Statistics. The IBS data cover more than 70 percent of the known world cross-border financial positions (excluding direct investment). The statistics on international (cross-border) banking positions have been developed by the BIS and the Fund. The BIS statistics, published quarterly in International Banking Developments, are based mainly on reports from banks in industrial countries and in offshore financial centers. In addition to that information, the Fund includes information on the cross-border bank accounts of almost all Fund member countries (as a part of the regular money and banking data supplied to the Fund). Moreover, the Fund supplements the data by using information on trustee accounts that are established by nonbanks and channeled through Swiss banks. The comprehensive results are published monthly in the Fund’s International Financial Statistics (IFS); see Table 24.

Table 24

SUMMARY OF INTERNATIONAL BANKING STATISTICS FOR THE END OF 1983, AS PUBLISHED BY THE FUND

(In billions of U.S. dollars)

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Source International Monetary Fund. International Financial Statistics (Washington), Vol. 39 (June 1986). Coverage:

Total cross-border assets and liabilities as reported by deposit banks of individual countries (including deposit banks’ positions vis-à-vis monetary authorities) These tables exclude, however, cross-border positions as reported by monetary authorities This series is used here primarily to check the interest income flows of developing countries.

The “interbank accounts” refer to all cross-border positions between deposit banks and also include all positions between deposit banks and monetary authorities The tables exclude the positions between monetary authorities, however Assets should equal liabilities, and to the extent they do not, data are not yet quite consistent.

Cross-border bank credits to nonbanks as reported by the lending banks. Data are shown separately by residence of lending banks (bank assets) and by residence of the borrowing nonbanks (nonbanks’ liabilities derived from the reports of lending banks).

Cross-border bank deposits of nonbanks as reported by the banks receiving the deposits. Data are shown separately by residence of borrowing banks (bank liabilities) and by residence of depositing nonbanks (nonbanks’ deposits derived from the reports of borrowing banks).

The two main sectors of the banking data are (1) interbank positions and (2) nonbanks’ deposits with, and borrowings from, banks. It appears that reporting by the banks themselves is usually comprehensive, and detailed analysis indicates that interest credits and debits of the banks themselves are fully incorporated into national balances of payments, either gross or net. The only major exceptions are the major offshore banking (MOB) centers, for which adjustments are required (Subsection 2.b.(6) of this chapter). That reporting by banks other than those of MOB centers is essentially accurate can be verified on the basis of the responses to the investment income questionnaire. Cross-border assets of banks in industrial countries reported in the questionnaire totaled $1,583 billion at the end of 1983, and bank liabilities amounted to $1,554 billion. These amounts are consistent with data from other sources (mainly deposit banks’ “total assets” and “total liabilities” as reported in the IBS). Banks’ reported interest income ($146 billion of credits and $136 billion of debits) implies overall rates of return of 9.6 percent on the asset side, and 9.1 percent on the liability side, leaving a spread of 0.5 percent (Table 25). Since these are plausible rates that are based on verifiable amounts outstanding, banks’ interest income and expenditure, as reported in the questionnaires and presumably as reported in national balance of payments accounts, appear to be acceptable.

Table 25

CROSS-BORDER POSITIONS AND INTEREST INCOME OF BANKS OF INDUSTRIAL COUNTRIES,1 1983

(In billions of U.S. dollars)

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Limited to questionnaire respondents, which account for 90 percent of the total cross-border bank positions of industrial countries.

Derived from questionnaire responses.

Interest incomes related to amounts outstanding at the beginning of the year.

While little correction is required for interbank interest flows, a major adjustment is required for interest paid to, and received from, banks by non-banks. In the IBS tabulations, liabilities of banks visa-vis nonresident nonbanks totaled $673 billion at the end of 1983, including trustee accounts channeled through Switzerland and deposits held in MOB centers. Corresponding interest payments amount to approximately $52 billion (Table 26). Using country detail available in IBS tables and rates of return as indicated by market rates (see below), it is possible to check the income of nonbanks reported in balance of payments statements country by country. Since deposits in the banking data are allocated according to the residence principle, their definition is consistent with balance of payments procedures. However, since the banking statistics leave substantial amounts of nonbank accounts unallocated, it is likely that deposits allocated to individual countries and the derived interest attributed to the deposits are minimum amounts.

Table 26

CROSS-BORDER BANK DEPOSITS OF NONBANKS, 1983

(In billions of U.S. dollars)

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Source of Amounts Outstanding: International Monetary Fund, International Financial Statistics, world tables.

Including $83 billion in trustee accounts.

Major offshore banking centers.

See Table 27.

It is convenient, using the same data source, to check simultaneously the interest paid by nonbanks on their borrowing from banks. Nonbanks’ interest payments to nonresident banks seem to be relatively well recorded in national balances of payments, but some adjustments are necessary. As a basis for estimating interest paid to banks by nonbanks, the IFS tables showing $760 billion of bank lending to non-banks at the end of 1983 were used (Table 24).

(b) Derivation of Interest Rates.

To check the reported interest income against estimated actual flows requires not only a solid record of outstanding amounts but also some assumptions about the level and structure of interest rates. Obviously most of the interest flows are determined by market rates, allowing for a certain lag of rate adjustments and of actual payments, and taking into account the currency mix and the special characteristics of some areas (MOB centers). Interest rates related to bank positions are derived from the interbank rates (U.S. dollar, London). A six-month lag is applied, since the actual rates on current positions with borrowers and depositors are only changed at agreed intervals and actual interest payments are usually due at the end of these periods. A further adjustment is made to allow for the currencies. Most of the cross-border positions are denominated in U.S. dollars, but 10 to 12 percent is in currencies that usually bear lower interest rates (deutsche mark, Swiss franc, Japanese yen). Therefore, on average, a downward adjustment of roughly 0.5 percent is necessary. (See Table 27.)

Table 27

STRUCTURE OF CROSS-BORDER INTEREST RATES, 1979–85

(In percent per annum)

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London interbank offered rates on U.S. dollar deposits (six months).

Taking into account that rates vis-à-vis nonbanks are adjusted with a lag and that interest payments are due at the end of each basis period.

Roughly 10 percent of cross-border bank accounts is denominated in deutsche mark, Swiss francs, yen, and pounds sterling.

Positions are almost exclusively in U.S. dollars, and spreads are assumed to be smaller.

For more details, see Tables 42 and 46.

The resulting rate is taken as a basis for calculating the actual bank rates. vis-à-vis nonbank borrowers, a positive spread of 1 percent is assumed, and vis-à-vis depositors, a negative spread of 1.5 percent. Relative to the positions of major offshore banking center banks, it is assumed that the spreads are smaller and that all positions are in U.S. dollars.

Derived rates used for estimates are slightly above the rates of return implied in the questionnaire responses. (See Table 25.) Questionnaire rates may be distorted by some net reporting, and banks of the responding countries (including the Federal Republic of Germany, Japan, and Switzerland) presumably have above-average shares of low-interest currencies in their cross-border positions.

(2) Industrial Countries

While analyzing the interest related to banking positions, it is useful to deal separately with industrial countries and developing countries, which are here divided into Middle Eastern oil exporters, major offshore banking centers, and other developing countries. The overview for the estimated income of industrial countries is given in Table 28; country details are given in Table 29; and similar information on the debit side is shown in Table 30.

Table 28

INDUSTRIAL COUNTRIES: SUMMARY OF NONBANKS’ CROSS-BORDER BANK DEPOSITS AND RELATED INCOME CREDITS, 1983

(In millions of U.S. dollars)

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International Financial Statistics.

Calculated on the basis of details given in questionnaire responses.

Table 29

INDUSTRIAL COUNTRIES: NONBANKS’ CROSS-BORDER BANK DEPOSITS AND RELATED INCOME CREDITS, 1983

(In billions of U.S. dollars)

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Reported in International Financial Statistics. Nonbank deposit data are restricted to geographically allocated deposits, which represent minimums because a considerable part of total deposits cannot be allocated.

Based on outstanding amounts (beginning of year) and cross-border interest rates.

The response to the questionnaire does not give this breakdown, but a maximum allocation to interest received from banks has been made.

Assuming a relatively high share of low-interest-bearing domestic currency.

Includes deposits of Dutch special financial institutions.

Amounts as given in the questionnaire response represent solely the cross-border trustee accounts established by Swiss residents through Swiss banks. These accounts are excluded from the table to make data comparable to the numbers in International Financial Statistics. (See also footnote 7.)

Excluding $11 billion trustee accounts established by Swiss residents. For interest flows related to trustee accounts, see Table 14.

Assuming that almost all deposits are denominated in U.S. dollars.

Table 30

INDUSTRIAL COUNTRIES: NONBANKS’ CROSS-BORDER LIABILITIES VIS-À-VIS BANKS AND RELATED INCOME DEBITS, 1983

(In billions of U.S. dollars)

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Line 57 (if not available, see figures in parentheses on line 56), and line 66. See sample questionnaire in Appendix II.

International Financial Statistics.

Line 26 (if not available there, see figures in parentheses on line 23), and line 14 (if not available there, see figures in parentheses on line 13). Responses to the questionnaire are not sufficiently detailed, and data may include interest payments other than those to nonresident banks.

For Switzerland and the United States, based on amounts outstanding at beginning of period (IFS) and cross-border interest rates. For all other countries, missing debits in total are roughly estimated at 10 percent of reported debits.

Amount presumably included in Balance of Payments Statistics Yearbook data.

Fund staff estimate.

Mainly representing New Zealand.

Cross-border bank deposits of industrial countries’ nonbanks totaled $301 billion at the end of 1983, generating interest income credits of at least $23 billion, calculated on the basis of average outstanding amounts and cross-border interest rates (Table 28). Questionnaire responses indicate that at most $10 billion is reported in national balances of payments. Wherever detailed figures for interest from banks were not shown separately in the questionnaire, an estimate was made of the amount included, assuming for this purpose a questionnaire coverage of bank-related income that was as broad as possible. Consequently, the partly estimated $10 billion of credits shown for the questionnaire responses tends to overstate the actual reported amount of interest receipts on bank deposits, because it may, in fact, include some other portfolio income. Therefore, the indicated adjustment of $13.1 billion is likely to represent a minimum.

The greatest absolute difference occurs for the United States. According to national data reported in the questionnaire, U.S. nonbanks’ cross-border bank deposits totaled $52.8 billion at the end of 1983, generating $5.3 billion of interest credits. However, international banking statistics show $168 billion of U.S. nonbank deposits, which would yield about $13 billion of interest income (Table 29). The indicated credit adjustment of $7.7 billion is partly offset by about $4 billion of underreporting on the debit side (Table 30). Most other countries also understate interest receipts of nonbanks, although to a lesser extent and in most cases by not more than $1 billion. For instance, missing income for Belgium/Luxembourg, France, the Federal Republic of Germany, Italy, and Spain may be estimated at between $0.4 and $0.8 billion each (Table 29), and the adjustment for Switzerland is $1.6 billion. Swiss nonbanks’ deposits with foreign banks (excluding trustee accounts which are channeled through Swiss banks) totaled $23.8 billion at the end of 1983, but corresponding interest receipts are not yet included in the Swiss balance of payments.

In many cases, nonbanks’ interest incomes are omitted by national authorities because the receipts are not recorded by the exchange control system. In other cases underreporting occurs because income estimates are based on domestically reported assets only; the United States, for instance, uses a reporting system that mainly covers large multinational companies that can easily be identified. Still other countries (the Federal Republic of Germany, the Netherlands, and Japan) rely on individual income reports from nonbanks, but even these extensive systems leave gaps.

The underreporting of credits is partly offset by underreporting of interest payments on nonbanks’ borrowing from nonresident banks. Unfortunately, verifying these debits is much more difficult than checking the credits. Questionnaire responses were less detailed on the debit side, and data reported by national authorities systematically differ from information derived from the International Banking Statistics. Banks’ reported cross-border claims on non-banks include claims on official agencies and also include some bonds, so that there may be some overlapping in the estimates. Because of these limitations, it appears that interest payments of industrial countries’ nonbanks to foreign banks are understated by $6-7 billion (Table 30). Again, the largest missing amount is allocated to the United States ($3.7 billion). U.S. nonbanks’ liabilities vis-à-vis foreign banks are reported at $20 billion at the end of 1983 in the national statistics, but the International Banking Statistics show $58 billion. Moreover, Switzerland seems to omit the interest payments of nonbanks to nonresident banks. For all other countries the upward adjustment is estimated at $2.2 billion (i.e., roughly 10 percent of the actual payments), but questionnaire responses do not give a sufficient basis for allocations by country. Part of the debit adjustments may compensate for overadjusted receipts if countries partly report on a net basis—for example, as in the Netherlands. Underreporting on the debit side is clearly on a smaller scale, but here, too, there is probably some evasion of exchange control records, and methods that rely on reports by individuals probably have gaps, especially where there are exemption limits.

(3) Swiss Trustee Accounts

Trustee accounts channeled through Switzerland are mainly established by non-Swiss nonbanks, and the funds are held by Swiss banks as deposits in nonresident banks. While interest rate and exchange rate risks fall entirely on the depositing nonbanks, interest income is free of withholding tax, which is normally 35 percent if deposits are held directly in Swiss banks. The volume of such accounts totaled $94 billion at the end of 1983, of which 12 percent was held by Swiss residents and 88 percent ($83 billion) by nonresident nonbanks (Table 31). The Swiss trustee accounts are fully integrated into the International Banking Statistics that are published by the Fund and that serve as a basis for estimating missing income credits. However, the net adjustment of the world investment income is zero, insofar as Switzerland is concerned.

Table 31

SWISS TRUSTEE ACCOUNTS, STOCKS, AND RELATED INTEREST FLOWS, 1979 AND 1983

(In billions of U.S. dollars)

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Net receipts entered into the Swiss balance of payments. Liechtenstein is considered resident.

Switzerland publishes information on trustee accounts (including a regional breakdown), but since these accounts are not in their balance sheets, Swiss banks do not include them in their regular reports on cross-border positions. On the other hand, banks of other countries fully include Swiss trustee accounts in their reports under “liabilities vis-à-vis Swiss banks,” because they are unable to separately identify those liabilities which are related to the Swiss trustee business. As a result, non-adjusted interbank accounts imply a certain asymmetry, with interbank liabilities vis-à-vis Switzerland approximately $100 billion higher than interbank assets of Swiss banks. However, in the Fund’s International Banking Statistics, the trustee accounts are treated as if they were balance-sheet items of Swiss banks. They are added to the interbank assets reported by Swiss banks and thereby equate these positions with other reporters’ interbank liabilities vis-à-vis Switzerland. Moreover, Swiss banks’ liabilities vis-à-vis nonresident nonbanks are raised by $83 billion to $108 billion by this addition. Correspondingly, these amounts are also reflected in the derived IFS world table on “cross-border bank deposits of nonbanks by residence of depositor.”

Swiss banks’ interest receipts on trustee accounts held with nonresident banks totaled $9 billion in 1983, of which $8.5 billion was passed on to nonresidents and $0.5 billion to Swiss residents. (Residents of Liechtenstein are considered Swiss residents.) The amount of $0.5 billion is entered into the Swiss balance of payments under “investment income” (and commission fees are included under “other services”). As far as Switzerland is concerned, no further (net) adjustment is necessary. The gross amount of interest income which is channeled through Switzerland ($8.5 billion in 1983) may be regarded as a “memorandum item” that is useful when using the International Banking Statistics, since those statistics as published in International Financial Statistics fully integrate the trustee accounts.

The real problem is how to adjust for the nonreported interest income of the beneficial owners of the trustee accounts. This, however, does not affect the Swiss balance of payments, but only those of the creditor countries to which these accounts have to be allocated. This is taken into account in the corresponding discussion of nonbanks’ receipts on deposits with banks.

(4) Middle Eastern Oil Exporters

For purposes of this discussion, this grouping includes Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. It is an analytical grouping used in the Fund’s World Economic Outlook, and it consists of those Middle Eastern countries that, over a relatively long period, had sustained current account surpluses from oil and thereby accumulated a considerable amount of foreign assets. At the end of 1983, total gross assets of this group, emerging from current account surpluses and borrowing from nonresidents, are estimated at $350 billion (Table 32). Reported investment income of Middle Eastern oil exporters (roughly $26 billion) is rather difficult to verify, since these countries do not give much information on outstanding amounts or on the methods of estimating income. However, some data are published in the IFS world tables on foreign exchange and international banking assets of residents of these countries, and valuable estimates have been made by the Bank of England (published, for instance, in its March 1985 Quarterly Bulletin). Moreover, discussions with authorities indicate that most of the Middle Eastern oil exporters do not include in their balances of payments the cross-border investment incomes of private nonbanks.

Table 32

MIDDLE EASTERN OIL EXPORTERS: FOREIGN ASSETS AND RELATED INCOME ESTIMATES, 1983

(In billions of U.S. dollars)

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Estimate based on cumulated current account balances (1972–83) and borrowing from nonresidents.

Saudi Arabian Monetary Agency.

Unidentified securities, property, real estate, and lending to developing countries.

One third of the estimated $350 billion in gross assets can be precisely identified with some confidence: according to IFS data, there is $34 billion in official foreign exchange holdings, $45 billion in assets of banks, and $48 billion in bank deposits of nonbanks. An additional $90 billion is held in securities, according to data for Saudi Arabia published by the Saudi Arabian Monetary Agency (SAMA). Roughly $120 billion is, by implication, held in other assets—that is, securities other than official Saudi holdings, real property, and direct investment, or credits to developing countries. (See Table 32.)

Middle Eastern oil exporters report $26.5 billion of non-direct investment income. Taking into account the fact that Libya, Qatar, and Saudi Arabia report their investment income on a net basis, an appropriate amount has to be added to compensate for the subtracted debits (roughly $1 billion). Resulting receipts ($27.5 billion) related to outstanding assets imply a rate of return of some 8 percent. This is not too low, compared with prevailing market rates and taking into account the fact that lending to developing countries bears interest at concessional rates. Moreover, a country-by-country analysis does not reveal larger inconsistencies (Table 33). However, it is known that interest receipts of private nonbanks are not recorded and that particularly the interest income of the United Arab Emirates seems to be clearly understated ($2.2 billion in receipts, while assets derived from current account surpluses and outstanding liabilities may be estimated at $65 billion). The U.A.E. balance of payments appears to cover neither private capital outflows nor private interest receipts. For the latter, roughly $2 billion has to be added. The overall adjustment for oil exporters’ unrecorded interest receipts (on bank accounts, securities, and other investment) is tentatively estimated at $3.5 billion. However, these adjustments do not attempt to account for the external assets and incomes that may not be shown in these countries’ reported international accounts.

Table 33

MIDDLE EASTERN OIL EXPORTERS:1 CROSS-BORDER ASSETS AND RELATED NON-DIRECT INVESTMENT INCOME CREDITS, 1983

(In billions of U.S. dollars)

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Country grouping according to the Fund’s World Economic Outlook. Country figures do not always add to the totals shown.

International Financial Statistics world tables on reserves and international banking.

Includes purchased SDRs.

Based on cumulated current accounts and borrowing from nonresidents. Includes all kinds of cross-border assets, such as reserves, bank-related assets, lending to developing countries, portfolio investment, direct investment, and real estate.

According to International Monetary Fund, Balance of Payments Statistics Yearbook, Vol. 36 (Washington, 1985), Part 2, and questionnaire revisions.

Based on average outstanding amounts and cross-border interest rates.

Credits are reported on a net basis.

Does not include foreign securities held by the Saudi Arabian Monetary Agency that amount to roughly $90 billion.

Total adjustment is $3.5 billion, of which an estimated $1.5 billion may be related to nonbanks’ bank deposits, $1.6 billion to holdings of securities, and $0.4 billion to other investments.

According to OECD data, Middle Eastern oil exporters’ liabilities total $54 billion, of which $40 billion is bank-related (Table 34). The adjustment of $1.5 billion is the result of estimating reasonable payments in relation to outstanding liabilities. Presumably most of the adjustment represents payments of private nonbanks that are omitted from balance of payments recording.

Table 34

MIDDLE EASTERN OIL EXPORTERS:1 CROSS-BORDER ASSETS AND RELATED NON-DIRECT INVESTMENT INCOME CREDITS, 1983

(In billions of U.S. dollars)

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Country grouping according to the Fund’s World Economic Outlook.

International Financial Statistics world tables on international banking.

OECD estimates, including trade credits.

Vis-à-vis nonresident banks.

According to International Monetary Fund, Balance of Payments Statistics Yearbook, Vol. 36 (Washington, 1985), Part 2, and questionnaire revisions.

Technical Staff estimate based on average outstanding amounts and cross-border interest rates.

Netted against credits (Table 33).

(5) Other Developing Countries18

Balance of payments reporting of nonbanks’ interest receipts is also incomplete in the developing countries, and there is a smaller shortfall in reported debits. While estimates for individual countries, as implicit in Tables 35 and 36, are based on geographically allocated positions, considerably more assets may be included in unallocated bank positions or be implicit in receipts on securities. Taking this into account, the asset base implicit in these calculations may not be very far below some of the estimates of accumulated capital outflows. (See Appendix VI.)

Table 35

OTHER DEVELOPING COUNTRIES:1 OUTSTANDING ASSETS AND ADJUSTMENT OF INCOME CREDITS, 1983

(In billions of U.S. dollars)

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Excluding major offshore banking centers and Middle Eastern oil exporters.

Table 36

OTHER DEVELOPING COUNTRIES:1 OUTSTANDING ASSETS AND RELATED OTHER INVESTMENT INCOME CREDITS, 1983

(In billions of U.S. dollars)

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Excluding Middle Eastern oil exporters and major offshore banking centers.

International Financial Statistics world tables on international banking.

Includes purchased SDRs.

According to International Monetary Fund, Balance of Payments Statistics Yearbook, Vol. 36 (Washington, 1985), Part 2, and questionnaire revisions.

Technical Staff estimate based on outstanding amounts (at the beginning of the period) and cross-border interest rates.

To estimate the missing interest income of developing countries (excluding MOB centers and Middle Eastern oil exporters) the procedure is somewhat different from that used for industrial countries. In the balances of payments, as well as in the questionnaire responses, the income is usually not reported in detail. Therefore, total other investment income of individual countries is compared with the income estimated on the basis of total foreign assets—that is, official foreign exchange, plus bank assets, plus non-banks’ bank deposits (Table 36). It is not likely that developing countries will have large assets in forms other than bank claims for which the host countries might record an income debit. Some additional assets, however, are implied in the calculations for missing income receipts on cross-border security assets. (See Subsections 2.c and 2.g of this chapter.)

Few countries report amounts close to the estimated figures. Mexico employs the IFS world table as a basis for its income estimates, and no sizable adjustment is necessary. Nevertheless, the largest differences occur in Latin America ($3.4 billion). Some unreported receipts can only be allocated by area, not by individual country—for example, “other Asia” (more than $1 billion). Some countries seem to ignore nonbanks’ assets entirely (e.g., Liberia and Greece), while Lebanon does not report them at all. Estimates for Lebanon are incorporated in the Fund’s Balance of Payments Statistics Yearbook, Part 2, but these do not cover income on nonbanks’ deposits in foreign banks. No income data at all are reported for Bermuda, but Bermuda contributes at least $0.9 billion of income credits to the adjustments; banks’ and nonbanks’ foreign assets total $11 billion and seem to be related to offshore businesses. (See Chapter VI.) (In IFS, Bermuda is not classified as a “major offshore banking center.”)

As a result, total interest income of developing countries (excluding MOB centers and Middle Eastern oil exporters) may be estimated at $23.8 billion, compared with a reported income of $15.2 billion. The adjustment of $8.6 billion is almost entirely related to nonbanks’ deposits in foreign banks; a series of case studies established that interest income on official exchange and bank assets is reported rather comprehensively.

Developing countries’ missing income credits are only partly offset by missing income debits. Reported debits generally appear to be accurate; reporting has improved, as attention in recent years has been focused on debt problems, rescheduling procedures, and the interest burden. Outstanding debt of developing countries totaled more than $800 billion at the end of 1983 (Table 37). Interest payments reported to the Fund amounted to $66.9 billion. However, in some individual cases, reporting seems inadequate. For instance, Liberia omits interest paid by nonbanks on their $8 billion liabilities vis-à-vis foreign banks that is probably used to finance shipping investments.

Table 37

OTHER DEVELOPING COUNTRIES:1 CROSS-BORDER LIABILITIES AND RELATED OTHER INVESTMENT INCOME DEBITS, 1983

(In billions of U.S. dollars)

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Excluding Middle Eastern oil exporters and major offshore banking centers.

International Financial Statistics world tables on international banking.

Including trade credits (roughly 11 percent), data for which was supplied by the OECD.

Also includes the amounts by which SDR holdings are below SDR allocations.

Vis-à-vis nonresident banks.

According to International Monetary Fund, Balance of Payments Statistics Yearbook, Vol. 36 (Washington, 1985), Part 2, and questionnaire revisions.

Based on outstanding amounts (beginning of period) and cross-border interest rates.

OECD data cover only part of the liabilities.

Thus, in the case of Liberia, $0.7 billion is added to compensate for nonreported interest debits. In addition, and partly for similar reasons, debits have to be supplemented for Bermuda, Greece, Portugal, Nigeria, and Lebanon (Table 37). As a result, total interest debits of developing countries are increased by $2.6 billion, to $69.5 billion. The implied rate (roughly 9 percent) is below the lending rate of banks, but consistent with other information according to which a substantial part of loans is given at concessional terms.

(6) Major Offshore Banking Centers

Major offshore banking centers are financial centers characterized by extensive external activities of banks that are not really integrated into the domestic economies, and whose external business is usually disregarded for purposes of balance of payments reporting. (See Chapter VI.) According to the IFS definition, there are seven MOB centers: Hong Kong, Singapore, Bahrain, The Bahamas, the Cayman Islands, the Netherlands Antilles, and Panama. The balance of payments reporting of the MOB centers is usually either incomplete or, as in the cases of Hong Kong and the Cayman Islands, nonexistent. Even if nonreported amounts are small in net terms, adjustments of individual categories of income are useful, since the offshore centers transform the character of many transactions and global nonreporting creates discrepancies in various income categories. In addition to the banks, there are nonbank offshore companies that receive income on investments and for insurance and shipping services, and, on the debit side, pay interest on borrowings and transfer direct investment income to their head offices.

Some estimates of investment income can be made on the basis of available banking statistics. Cross-border positions of banks in MOB centers—that is, assets as well as liabilities—amounted to well over $500 billion at the end of 1983 (Table 38). On the basis of average amounts outstanding and prevailing cross-border market rates (Table 27), interest credits of banks in these centers may be estimated at $55 billion in 1983, and interest debits at $51 billion, generating $4 billion of net credits. Probably there is not much net return from the pure interbank accounts, or there may be a net return only to the extent that money is borrowed from, and lent to, smaller banks. On the other hand, business with non-resident nonbanks, roughly one third of the total, is certainly more profitable. Much of the business may be the channeling of funds from the nonresident head offices of banks to nonresident nonbanks, and vice versa.

Table 38

OTHER DEVELOPING COUNTRIES:1 CROSS-BORDER BANK POSITIONS AND RELATED INTEREST INCOMES, 1979–85

(In billions of U.S. dollars)

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Hong Kong, Singapore, Bahrain, The Bahamas, the Cayman Islands, the Netherlands Antilles, and Panama.

Data were take, from International Monetary Fund, International Financial Statistics (Washington), Vol. 39 (June 1986).

Liabilities of Hong Kong banks vis-à-vis nonresident nonbanks are not reported and are therefore not included.

Vis-à-vis nonresident banks.

Based on outstanding amounts (beginning of year) and cross-border interest rates. (See Table 27.)

Balance of payments transactions taken from International Monetary Fund, Balance of Payments Statistics Yearbook, Vol. 36 (Washington, 1985), Part 2, plus, for 1979 and 1983, questionnaire revisions and reclassifications.

There is probably also some net interest income of nonbanks located in the MOB center economies, as well as interest payments for those that are shipping centers. Cross-border bank deposits of offshore non-banks (mainly in Hong Kong and Panama) totaled $54 billion at the end of 1983, and offshore nonbanks’ liabilities to nonresident banks amounted to $32 billion. Taking into account the fact that nonbanks’ deposits bear a lower interest rate than nonbanks have to pay for their borrowings, net interest credits of private offshore nonbanks may be estimated at $0.5 billion ($3.9 billion of credits and $3.4 billion of debits). In addition to the interest receipts of non-banks, there is some interest income on official foreign exchange reserves, which generates $1.0 billion of receipts.

The net total of private non-direct investment income of the seven MOB centers is estimated at $5.6 billion ($4.2 billion for banks, and $1.4 billion for private nonbanks, including $0.9 billion paid on securities). That amount seems plausible if compared with available information on direct investment income. The United States, the United Kingdom, the Netherlands, and the Federal Republic of Germany include a total of $5.0 billion of direct investment income credits received from MOB centers in 1983. Assuming that these four countries account for a direct investment proportion in the MOB centers that is similar to their world proportion (roughly 80 percent), another $1 billion for corresponding income not reported by other recipients can be added, resulting in a total of $6 billion of direct investment income flowing from MOB centers to head offices somewhere else (Table 39). Information made available for the U.S. investments indicates that roughly 40 percent of this income stems from banks and 60 percent from nonbanks. If this proportion is applied to the total, $2.5 billion of direct investment income debits can be allocated to banks, and $3.5 billion of these debits to nonbanks. As a result, net interest income credits of MOB center banks ($4.2 billion) exceed what is credited to head offices ($2.5 billion in direct investment income) by $1.7 billion. This amount would represent local expenses plus the net earnings of those MOB center banks which are not owned by foreigners (20 percent of the total, with a balance-sheet sum of roughly $100 billion, according to data on individual centers published in IFS). On the other hand, net interest income receipts of MOB center nonbanks, estimated at $1.4 billion, are considerably below their direct investment income debits ($3.5 billion). This is consistent with the fact that a large part of nonbanks’ earnings in MOB centers stems from economic activities that are not primarily related to interest income—for example, shipping receipts and insurance premiums. Also, the nonbank “residents” include personal holding companies and other interests of nonresidents. (See also Chapter IV on direct investment income.)

Table 39

MAJOR OFFSHORE BANKING CENTERS: ESTIMATED NET INVESTMENT INCOME FLOWS, 1983

(In billions of U.S. dollars)

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Including reinvested earnings.

Including income on securities ($0.9 billion).

Balance of Payments Statistics.

Adjustments according to questionnaire revisions, $1.4 billion: reclassifications, $0.8 billion; bank-related income, $2.9 billion; and income on securities, $0.9 billion.

Balance of payments reporting by MOB centers is rather limited, depending on what is regarded as “nonresident” by national authorities and whether they report at all. No data are reported by the Cayman Islands and Hong Kong, while reporting by the Netherlands Antilles is limited. Nonreporting is only partly compensated for by some estimates included in the Fund’s Balance of Payments Statistics Yearbook, Part 2, which serves as a starting point for these adjustments. Of the $5.7 billion estimated net non-direct investment income credits related to reserves and bank positions (excluding receipts on securities), only $0.6 billion is entered into the Yearbook; $1.4 billion is captured by questionnaire revisions; and $0.8 billion is captured by reclassifications. (See Subsection 2.a of this chapter.) The remaining $2.9 billion of missing net credits have to be added ($51.6 billion of credits, and $48.7 billion of debits).

(7) Unallocated Banking Positions

The adjustments based on banking statistics given above only cover positions that (in the banking statistics) are allocated to individual countries. Bank reports to the BIS and the Fund do not always give a regional breakdown; considerable and, unfortunately, increasing amounts are not allocated to countries or to country groups. Cross-border bank deposits of nonbanks, unallocated by residence of depositors, totaled $147 billion at the end of 1983, while cross-border claims of banks on nonbanks, unallocated by residence of borrowers, amounted to $92 billion. These positions would yield about $11 billion of interest credits and $10 billion of interest debits. (See Table 40.)

Table 40

UNALLOCATED CROSS-BORDER BANK POSITIONS AND RELATED OTHER INVESTMENT INCOMES OF NONBANKS, 1983

(In billions of U.S. dollars)

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Source: International Monetary Fund, International Financial Statistics, world tables.

Based on outstanding amounts (beginning of year) and cross-border interest rates.

According to the results for industrial and developing countries (excluding major offshore banking centers).

It is not possible to determine to what extent the income on unallocated positions is included in reported credits or debits. However, the reported credits and debits are not large enough to cover much more than the interest flows related to the allocated bank positions. Therefore, it seems reasonable to assume that the coverage of the unallocated credits and debits is less complete than the coverage of the allocated flows. Based on the proportion of nonreporting where country data are available (64 percent on the credit side), it is assumed that 80 percent of the credits ($8.9 billion of $11.1 billion) are not reported and should be added on the credit side. On the debit side, roughly 16 percent of the interest payments related to allocated positions are not reported, and it is estimated that 30 percent of the debits related to unallocated borrowings ($3.0 billion of $10.0 billion) are not reported and should be added. (See Table 40.)

c. Income on Securities

This section covers the estimating procedures for interest on bonds and dividends on equities. While available information is much less complete than for bank-related positions, estimates have been constructed for outstanding amounts of these securities. These estimates are used first to establish the debit side and then to determine how much of the credits may be missing. Analysis is likely to be even more difficult in the future, because expansion of bond markets accelerated considerably in 1984 and 1985, and the forms of debt are changing in ways that obscure the identification of residence that is necessary for balance of payments accounting.

(1) Cross-Border Bonds

A considerable part of the missing world investment income is related to the rapidly expanding international bond markets and the substitution of cross-border bond holdings for syndicated bank lending. Outstanding cross-border bond holdings are estimated at $450 billion at the end of 1983 and almost $700 billion at the end of 1985 (Table 41). New issues of international bonds, or Eurobonds (placed in more than one country), totaled $204 billion for 1977-83. That is the figure for the amount outstanding at the end of 1983, if an average maturity of seven years is assumed. Similarly, the outstanding amount of so-called foreign bonds (issued in a single foreign country) is estimated at $150 billion. In addition, a considerable amount of domestically issued bonds is held by nonresidents. Responses to the investment income questionnaire indicate that such holdings may be in the range of $100 billion. The total of about $450 billion of outstanding “cross-border bonds” conforms well with estimates made by commercial banks.

Table 41

NEW ISSUES AND OUTSTANDING AMOUNTS OF CROSS-BORDER BONDS

(In billions of U.S. dollars)

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Data taken from Organization for Economic Cooperation and Development, Financial Market Trends, March 1984.

International and foreign bonds were estimated on the basis of an average maturity of seven years. Cross-border domestic bonds were estimated on the basis of the investment income questionnaire.

Excluding U.S. Government bonds constituting foreign authorities’ reserves.

To avoid double counting it is necessary to subtract the bonds which are included in reported cross-border positions of banks in the Fund’s International Banking Statistics. Based on data given by the BIS,19 bonds held in bank portfolios may be estimated at $90 billion (of which $30 billion may be interbank positions), and bonds issued by banks and held by nonbanks may total $20 billion. This left $340 billion of bonds, at the end of 1983, which were neither held nor issued by banks.

To calculate the corresponding income flows, appropriate rates of return must be determined. Information on market shares and market yields by individual currencies at the time of issue is readily available. On that basis average yields for any given year can be calculated (Table 42, last column). Applying the average rate of return to the bonds not held or issued by banks produces an income estimate of about $30 billion in 1983.

Table 42

INTEREST RATES ON CROSS-BORDER BONDS

(In percent per annum)

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Sources: Deutsche Bundesbank, Statistical Supplement to the Monthly Report, Series 2. Swiss National Bank; and International Monetary Fund, International Financial Statistics.

Average new-issue yields of preceding years weighted with the amount of bonds that were issued in those years and that are still in the market.

Reporting of debits appears to be relatively good. About three quarters of outstanding bonds are issued by industrial countries, 15 percent by international organizations, and the remainder by developing countries (Table 43, first two columns). Since large banks and other well-known market participants arrange to sell the bonds and to distribute the interest payments, the records of these entities are available and provide a good basis for preparing statistics on interest debits. However, there are some possibilities for errors, especially because it may not always be possible to determine the amount of domestically issued bonds purchased by nonresidents, or the amount of bonds issued abroad purchased by residents. While firm information does not exist, nonreporting of interest debits is likely to be similar to the proportion of nonrecorded outstanding bond liabilities: based on the questionnaire responses, it is roughly 20 percent. (For derivation and details, see Table 44.) This would suggest that debits might be adjusted upward by $5.9 billion (Table 45).

Table 43

COUNTRIES PARTICIPATING IN BOND MARKETS

(In billions of U.S. dollars)

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Breakdown by issuing country, covering “foreign” and “international” bonds. Data are taken from Organization for Economic Cooperation and Development, Financial Market Trends.

Outstanding bond liabilities according to investment income questionnaire Includes domestic issues that are held by nonresidents but excludes bonds included in “official debt.”

Breakdown by markets Data are taken from Organization for Economic Cooperation and Development. Financial Market Trends Geographic breakdown of markets is limited to “foreign issues”.

Outstanding bond assets according to questionnaire. Includes bonds that are domestically issued in other countries but excludes bonds held by monetary authorities.

Published in International Monetary Fund. Balance of Payments Statistics Yearbook, Part 1.

May include equities.

Table 44

CROSS-BORDER BONDS: AMOUNTS REPORTED OUTSTANDING AND ESTIMATES OF NONREPORTED AMOUNTS, 1983

(In billions of U.S. dollars)

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Excluding U. S. bonds constituting foreign authorities’ reserves.

Calculated on basis of the numbers given in Bank for International Settlements. Recent Innovations in International Banking (Basle, April 1986).

Recorded in IBS under “nonbanks’ bank deposits.”

Recorded in IBS under “nonbanks’ bank borrowings.”

See also Table 43.

Correction for bank-related bonds which, in the questionnaire responses, are presumably reported under “bonds,” but are already captured in the IBS numbers. Amounts reported under “bonds” are estimated at half of the total of bank-related bonds.

Included in the actual outstanding amount of $450 billion. Interest payments are recognized in the adjustments for “international organizations”.

Mainly securities held by the Saudi Arabian Monetary Agency (other than U.S. government bonds and equities).

Table 45

INCOME ON CROSS-BORDER BONDS, 1983

(In billions of U.S. dollars)

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See Tables 41 and 44.

See Table 42.

Calculated on the basis of outstanding amount (beginning of period) and average rate of return.

Reporting on the credit side appears to be much less complete. It can probably be assumed that, at best, interest receipts are recorded to the extent that the bond holdings are known to the statistical authorities. Responses to the investment income questionnaire indicate that about 40 percent of all holdings may not be known (derivation in Table 44) and thus cannot be used in compiling interest credits. Moreover, there are indications that the proportion of interest receipts that are missing is even slightly higher than that, suggesting that the nonreporting may be around 45 percent. Accordingly, 1983 credits would have to be adjusted upward by $13.3 billion. (See Table 45.)

Geographical allocation of missing bond income is not possible on a country-by-country basis and can only roughly be estimated for country groups. All available information points in the same direction: most of the bonds are held by creditors in industrial countries (Table 43, last two columns). For instance, 93 percent of all outstanding foreign issues have been sold in the United States, Japan, the Federal Republic of Germany, and Switzerland. In addition, information given in the investment income questionnaire and available balance of payments data indicate that most of the Eurobonds, and also most of domestic issues, is sold in industrial countries. Of course, in many cases, these bonds are only held in custody in these countries, with the ultimate beneficial owners residing elsewhere. At the end of 1983, Swiss banks alone managed several hundred billion dollars of custody accounts. (Estimates vary according to the definition used, which may include equities, Swiss-owned securities, and some items which may not necessarily be regarded as securities.) However, discussions with many bankers and also with the European clearing houses (Euroclear in Brussels and Cedel in Luxembourg) indicate that most of the securities held in such custody accounts belong to residents of industrial countries, a very few to residents of oil exporters, and even fewer to residents of non-oil developing countries. Bond holdings of major offshore banking centers, to the extent they are known, are also often held in custody for third countries or are associated with insurance and other companies using offshore centers as bases. The net result of the bond estimates is summarized in Table 45.

(2) Cross-Border Equities

While procedures to estimate missing dividend income may be similar to those applied to bond interest, the amounts involved are much smaller. Outstanding publicly issued equities held internationally are estimated at $250 billion at the end of 1983, of which (according to questionnaire responses) $110 billion are U.S., $47 billion Japanese, $20 billion Swiss, $11 billion U.K., and $9 billion German (Federal Republic) issues.

The average rate of return on these holdings is far below that on bonds. On the basis of rates of return on U.S., German, and Japanese equities, average earnings may be estimated at 4 percent per annum in 1983. The resulting dividend income flow is in the range of $7-8 billion. (Calculations for 1979 generate an income of $4 billion; see Table 46.) Reporting seems to be about as deficient as reporting for bonds, with 45 percent nonreported credits and 20 percent nonreported debits, yielding an estimated $1.9 billion of missing net receipts that have to be added.

Table 46

INCOME ON CROSS-BORDER EQUITIES, 1979 AND 1983

(In billions of U.S. dollars)

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Based on rates of return of U.S., German (Federal Republic), and Japanese equities.

d. Official and Private Investment Income

The preceding sections give estimates of missing income credits and debits by type of asset, without separating official and private holdings. However, most reporters supply a breakdown between official and private investment income which provides an opportunity for additional cross-checking. While approximately one quarter of total non-direct investment income reported in the Fund’s Balance of Payments Statistics Yearbook is classified as “resident official,” this share is rather different for various country groups (Table 47).

Table 47

OFFICIAL/PRIVATE BREAKDOWN OF REPORTED OTHER INVESTMENT INCOME, 1983

(In billions of U.S. dollars)

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Source: International Monetary Fund. Balance of Payments Statistics Yearbook. Vol. 36 (Washington. 1985).

Including major offshore banking centers and Middle Eastern oil exporters.

Most of the official interest income overlaps with bank-related or securities-related income. Official reserves and other official foreign assets are held in the form of bank deposits, bonds, and treasury bills; a minor part is intergovernmental. On the liability side, outstanding amounts result from bank lending, bond issues, and lending by governments or international organizations. Particularly for official interest paid by developing countries, most of the corresponding investment income receipts seem to have been reported. In addition, there is no reason to suspect that monetary authorities and other official sector debtors or creditors who are usually responsible for balance of payments reporting would overestimate or underestimate their payments or receipts. Still, some additional cross-checking may be useful.

Countries that responded to the special investment income questionnaire report official assets of $437 billion, with corresponding interest receipts of $25 billion, implying a yield of approximately 6 percent (Table 48). There are several reasons why the return on official assets may be low compared with prevailing market rates for private funds. Part of the official assets merely reflect quotas in international organizations; a considerable share of official lending may be at concessional terms (official development assistance); and not all income is appropriately classified. (Canada, for instance, includes interest receipts of the official sector under “non-official investment income.”) Official foreign exchange holdings alone yield more plausible rates of return—for example, 9 percent for the industrial countries and 11.5 percent for the developing countries.

Table 48

OFFICIAL INVESTMENT INCOME: QUESTIONNAIRE RESPONSES FOR SELECTED COUNTRIES, 1983

(In billions of U.S. dollars)

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Source: Responses to the Working Party’s investment income questionnaire, except for outstanding reserves, which are taken from International Financial Statistics. Numbers in parentheses indicate that breakdowns are estimated, since data are not reported separately.

Sector breakdown used in questionnaire response is different for stocks and flows.

Interest payments for official liabilities as reported in the questionnaire responses ($48 billion) are also plausible compared with the outstanding official debt ($527 billion). Deviations for individual countries can be explained by low rates (Japan), concessional terms (India), interest arrears (Argentina), or inappropriate classification (Italy and Canada). Results for individual countries are listed in Table 48.

As a matter of fact, “resident official investment income” for the world as a whole cannot be expected to be zero. As previously explained, cross-border financial positions may be official on one side and private on the other; this makes it impossible to measure any discrepancy on “resident official” account alone.

e. Eastern Europe and International Organizations

(1) Eastern European Countries that Were Not Fund Members

Separate estimates are required for Eastern European countries that were not Fund members. They are included in the Fund’s Balance of Payments Statistics Yearbook, Part 2 only as part of a global current account estimate and are omitted entirely from the published tables for individual transaction categories that are the basis for the published discrepancies. (Hungary and Romania, however, which are Fund members, are included under “European developing countries.”) Since the Eastern European countries are net debtors, adjusting for their omission actually increases the statistical discrepancy on investment income account.

The Eastern European countries that were not Fund members had been net debtors since the early 1970s. Their gross hard-currency debt vis-à-vis the western world (mainly the debts of Poland and the U.S.S.R.) increased to $66 billion through 1979, came to a peak in 1981 ($73 billion), and has declined since then. On the other hand, these countries have always held some deposits with western banks (Table 49).

Table 49

OUTSTANDING DEBT AND INVESTMENT INCOME FLOWS OF FIVE EASTERN EUROPEAN COUNTRIES THAT WERE NOT FUND MEMBERS, 1979-841

(In billions of U.S. dollars)

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Bulgaria. Czechoslovakia, the German Democratic Republic (excluding intra-German debt), Poland, and the U.S.S.R. (including Council for Mutual Economic Assistance (CMEA) banks) Poland has been a member of the Fund since 1986 and thus was not incorporated into the 1985 issue of the Balance of Payments Statistics Yearbook.

For derivation of interest rates, see Table 27. Debit rates are assumed to be relatively low, since a relatively high share of the debt is presumably denominated in low-interest currencies.

Estimated on the basis of outstanding amounts (at the beginning of the period) and cross-border interest rates.

Excluding Poland’s unpaid interest obligations of $1 billion in each year.

Practically no direct information is available on the interest burden of the Eastern European countries. However, statistics show that two thirds of the gross debt is the result of hard-currency borrowing from western banks, and that the remaining one third was incurred in western capital markets, so that some estimates can be made. Interest rates to be paid to western creditors are probably close to market rates, making allowance for some lags in adjusting and an appropriate mixture of currencies (roughly 70 percent U.S. dollars and 30 percent deutsche mark, Swiss francs, and other currencies). Resulting interest burden estimates correspond well with calculations of other international organizations. They are close to OECD estimates and also close to the estimates of the United Nations’ Secretariat of the Economic Commission for Europe (ECE) in Geneva. Poland’s unpaid interest obligations excluded gross interest debits that amounted to $5.0 billion in 1983 (which also remained unrecorded by the creditor countries). Against this, Poland also earned about $1.3 billion of unreported income on foreign assets.

(2) Income of International Organizations

The last adjustment to be made is for the interest received and paid by international organizations. Data for these institutions are not included in the Fund’s Balance of Payments Statistics Yearbook for 1985 but will be collected in the future by the Fund’s Bureau of Statistics (Balance of Payments Division). Accounting information can be derived from published sources (mostly annual reports), supplemented by some minor estimates. In order to keep the project within available resources, only the international organizations with the largest investment income accounts were covered. On this basis the following institutions were included: the African Development Bank, the Arab Monetary Fund, the Asian Development Bank, the BIS, the Caribbean Development Bank, the East African Development Bank, the Eastern Caribbean Central Bank, the European Coal and Steel Community, the EEC, the European Investment Bank, the Inter-American Development Bank, the International Monetary Fund (including administered accounts), the Islamic Development Bank, the Nordic Investment Bank, and the World Bank (including the International Bank for Reconstruction and Development, the International Development Association, and the International Finance Corporation). All these institutions are regularly regarded as “nonresident” by the countries with which they have debtor or creditor relationships (including the countries in which they are located).

Estimates were made for 1979, 1983, and 1984. Data for 1984 were not available for the Caribbean Development Bank, the European Coal and Steel Community, the Arab Monetary Fund, or the Eastern Caribbean Central Bank; in the case of the last institution, data were also unavailable for 1983. Estimates for these institutions were therefore made on the assumption that these debits and credits would move similarly to the average of the institutions for which data were available.

Adjustments for the omitted investment income of international organizations are $13.4 billion for credits and $10.3 billion for debits—that is, a $3.1 billion net credit in 1983 (Table 50).

Table 50

INVESTMENT INCOME OF INTERNATIONAL ORGANIZATIONS, 1979 AND 1983

(In billions of U.S. dollars)

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Source: International Monetary Fund, Bureau of Statistics, Balance of Payments Division.

Including the International Bank for Reconstruction and Development, the International Development Association, and the International Finance Corporation.

Credits: net interest income; debits: dividends paid to participants.

Mostly regional development banks.

f. Adjustments for 1979–84

The same methods described above have been applied to 1979–82 and 1984. However, available information for earlier years is much less detailed than for 1983, although the questionnaire responses in most cases also included 1979 data. In particular, there is no regional breakdown for bank deposits of nonbanks by residence of depositor and also no breakdown for nonbanks’ liabilities by residence of borrower. For lack of better information, the same proportions were assumed as for the end of 1981, the first time for which such a breakdown is available. On that basis, bank-related income flows of MOB centers could be derived (as was shown earlier in Table 38). In addition, bank-related income flows of industrial and developing countries (other than MOB centers) are derived on an aggregated basis. (For details, see Table 51.) Moreover, income on securities is consistently estimated on the basis of outstanding amounts and corresponding rates of return. (See Table 52.)

Table 51

INVESTMENT INCOME RELATED TO NONBANKS’ CROSS-BORDER BANK POSITIONS,1 1979–85

(In billions of U.S. dollars)

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Positions of nonbanks of industrial and developing countries, and unallocated positions. Excluding major offshore banking centers, Eastern European countries that were not Fund members, and international organizations, all of which are treated separately. (See Tables 38, 49, and 50.)

For derivation of interest rates see Table 27.

For derivation see Table 53.

See Table 19, credits, lines 2.1, 2.3, 2.4, and 2.6.

See Table 19, debits, lines 2.1, 2.3, 2.4, and 2.6.

Table 52

INVESTMENT INCOME RELATED TO CROSS-BORDER SECURITIES, 1979–851

(In billions of U.S. dollars)

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For derivation of 1983 data, see Subsection 2.c (“Income on Securities”); for derivation of rates of return, see Tables 27 and 42.

Calculated on basis of the numbers given in Bank for International Settlements, Recent Innovations in International Banking (Basle, April 1986).

Derived in Table 53.

It may be noted that the quality of reporting, measured by the nonreported flows as a percentage of actual flows, obviously worsened since 1979. A comparison of the estimated actual income on bank positions and securities with the numbers reported to the Fund indicates that the proportion of nonreporting was substantially lower in 1979 compared with 1983. (For details, see Table 53.) While this tendency is evident, reported data are not sufficiently detailed to separate precisely the reported income on bank positions and securities. Therefore it has been assumed that reporting of bank-related and security income became similarly worse. For instance, nonreporting of interest receipts on bank deposits may have equaled 50 percent in 1979 (compared with 68 percent in 1983), and nonreporting of income on securities may have equaled 27 percent (instead of 45 percent in 1983).

Table 53

OTHER INVESTMENT INCOME OF NONBANKS: DERIVATION OF 1979 ADJUSTMENTS

(In billions of U.S. dollars)

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Calculated on the basis of outstanding amounts and cross-border interest rates. (See corresponding tables.)

Industrial and developing countries, and unallocated positions. Excluding major offshore banking (MOB) centers, Eastern European countries that were not Fund members, and international organizations.

Estimated on the basis of data reported to the Fund which indicate a 62 percent increase in recorded receipts of private nonbanks (questionnaire data, including dividends).

Estimated on the basis of data reported to the Fund which indicate an 85 percent to 90 percent increase of recorded payments (Industrial countries, according to questionnaire: payments of private nonbanks, including dividends, and payments of official sector to banks and to private nonbanks. Developing countries, excluding MOB centers: total payments according to the Fund’s Balance of Payments Statistics Yearbook, minus estimated payments of banks.)

Estimated by assuming that reporting of bank-related and security income became similarly worse.

Overall adjustments for 1979 through 1984 are shown in Table 54. Results are rather consistent, except for 1980, when the second wave of oil price increases coincided with the beginning of the debt crisis, so that the reporting of capital movements and investment income may have been additionally distorted. Adjustments for 1984 are larger than those for 1983, since the level of relevant interest rates was mainly unchanged (Table 27) but the amount of missing assets increased again. During 1984, almost $100 billion of current account receipts of nonbanks and $80 billion of net capital exports were missing. (See Table 55.) Nonreported capital outflows, probably again mainly bank deposits and securities investments, would add about $8 billion to unreported net interest receipts. This amount almost entirely explains the increase in the non-direct investment income discrepancy.

Table 54

PORTFOLIO INVESTMENT INCOME: SUMMARY OF ADJUSTMENTS, 1979–84

(In billions of U.S. dollars)

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For derivation see Tables 21 and 22.

For derivation see Table 38.

Industrial and developing countries, including unallocated positions. Excluding major offshore banking centers, Eastern European countries that were not Fund members, and international organizations See Tables 51 and 53.

For derivation see Tables 52 and 53.

For derivation see Tables 50 and 51.

Data for 1980 through 1982 are estimated based on procedures of 1979 and 1983 analysis.

Table 55

REPORTED WORLD BALANCE OF PAYMENTS DATA, 1983 AND 1984

(In billions of U.S. dollars)

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g. Geographic Breakdown of Adjustments

Almost all the data available for geographic breakdowns are stated or implied in the preceding tables. Only a few additional assumptions have to be made. For income on securities the available evidence indicates that roughly 80 percent of the missing credits may be allocated to industrial countries, 10 percent to oil exporters, and 5 percent each to MOB centers and non-oil developing countries. (See Subsection 2.c, “Income on Securities.”) As a result, the breakdown emerges as is shown in Table 56.

Table 56

GEOGRAPHIC ALLOCATION OF PORTFOLIO INVESTMENT INCOME DISCREPANCY, 1979 AND 1983

(In billions of U.S. dollars)

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Includes only countries that were not Fund members.

The unallocated adjustments ($1.3 billion and $5.9 billion) could reflect nonreporting of any country group. The remaining asymmetries of $0.2 billion in 1979 and $0.8 billion in 1983 reflect nonreporting which is hard to track down. All income flows subject to major uncertainties have been covered, except loans between nonbanks—mostly trade credits, which are not identifiable in the available data. These are unlikely to generate large discrepancies, although again it is probable that debits are more completely recorded than credits. Some other minor discrepancies may occur due to leads or lags, and some transactions may still be misclassified. A question for further exploration is the discrepancies that may come from differing treatment of interest arrears. Indebted developing countries are estimated to have been in arrears by $2-3 billion in 1983, and Poland by another $1 billion. In most cases, unpaid interest is not included in the balance of payments of the debtors, and creditors probably also report mostly on a cash basis. However, countries, such as the United States, which may continue to estimate income as accruing on a given stock of outstanding loans for some time after arrears have begun to accrue, may still be reporting credits (with an implicit offsetting debit in the capital accounts).

3. EVALUATION OF ADJUSTMENT PROCEDURE

Some of the adjustments suggested in this chapter are probably quite precise (questionnaire revisions, reclassifications, Eastern Europe, international organizations), but a large part results from applying various rates of return to stocks of particular types of assets or liabilities. In the latter case, the question arises as to how much the estimated adjustments would be affected if different interest rates or, in some cases, different amounts outstanding had been used in the exercise. That is, how sensitive are the results to these assumptions?

As a first approximation, the adjustments were re-estimated based on interest rates that were, on average, 1 percentage point lower than those used in the original estimates. It turns out (Table 57) that the net credit adjustments would be lower by almost $6 billion—that is, much of the adjustments, or “improvement” in the reported discrepancy, would be lost. As shown in the table, most of the change in net income shows up in the bank-related income (nonbanks’ bank assets and liabilities) because the nonreported receipts are much larger than the nonreported payments. There are only small net effects for the MOB centers (where positions are closely balanced) or for income on securities (where positions are relatively small and not far out of balance). Moreover, the impact of alternative rates on the estimated interest payments of Eastern European countries that are not Fund members is also negligible.

Table 57

SENSITIVITY OF ADJUSTMENTS TO INTEREST RATES, 1983

(In billions of U.S. dollars)

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Assuming that interest rates are 1 percentage point lower.

Net result of alternative minus net result of original adjustment.

Based on Table 51.

For nonbanks’ borrowings from banks, and for assets and liabilities related to securities, nonreported amounts are unknown but are likely to form a certain percentage of actual flows.

Based on Table 38.

Based on Table 45.

Based on Table 46.

In addition to altering the level of interest rates, the sensitivity of adjustments to different interest spreads of banks has been checked. The bank spread applied in the adjustment procedure was 2.5 percent vis-à-vis nonbanks (lending rate minus deposit rate), implying an overall spread for banks of roughly 0.8 percent, and for MOB center banks 0.6 percent. (See the derivation of interest rates in Table 27.) If the bank-nonbank spread is increased by 1 percentage point, to 3.5 percent, estimated interest receipts of nonbanks are smaller and estimated interest payments are larger, thereby generating a nonbank adjustment which is lower by $3.2 billion (Table 58). However, larger bank spreads would also increase the net income of the banks located in MOB centers and thereby add net credits to the adjustments. Therefore, the overall impact of alternative bank spreads vis-à-vis nonbanks that were larger by 1 percentage point would not exceed $2 billion.

Table 58

SENSITIVITY OF ADJUSTMENTS TO INTEREST SPREADS OF BANKS, 1983

(In billions of U.S. dollars)

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Note: For information on methods of calculation, see Table 57.

Another uncertainty is generated by poor data on some outstanding amounts. The Fund’s International Banking Statistics, for instance, are not yet perfect, and the outstanding deposits of nonbanks may be underestimated by some amount. If these deposits are, in fact, $100 billion larger than assumed, actual receipts and corresponding adjustments would be increased by almost $8 billion (Table 59). On the other hand, an alternative assumption on the outstanding amounts of securities but otherwise unchanged procedures would hardly affect the necessary adjustments. The adjustment for income on bonds is derived from the nonreported amount of bond assets and bond liabilities (Table 44). An alternative total outstanding amount changes the nonreported holdings and liabilities by the same amount but does not alter the nonreported net holdings; the same is true for the equities.

Table 59

SENSITIVITY OF ADJUSTMENTS TO ESTIMATED AMOUNTS OUTSTANDING, 1983

(In billions of U.S. dollars)

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Based on Table 51.

Net of bonds held or issued by banks. (See Table 25.)

The adjustment for the nonreported net receipts is based on the nonreported net assets outstanding of about $70 billion ($140 billion in assets, minus $67 billion in liabilities (Table 25)), which are not affected by a change in the total amount outstanding.

Based on nonreported net assets outstanding.

In addition to an alternative level of interest rates, alternative bank spreads, or different amounts outstanding, results may also be sensitive to some other assumptions. For instance, income on financial positions between nonbanks (other than on securities), which is likely to be small in any case, is assumed to be equally deficient on the credit and debit sides. The marginal impact of those estimates, which are not explicitly analyzed in this chapter, is assumed to be negligible.

However, it is not sufficient to calculate alternative results just by assuming different rates of return, different spreads, or different outstanding amounts wherever such estimates are used in the adjustment procedure. A fully consistent alternative requires changes in a larger set of factors. For instance, an alternative with a modified level of interest rates cannot be based on the assumption that all other elements will remain constant. Particularly in an alternative with lower rates, a substantial amount of reported debits that had been accepted as correct would have to be lowered to maintain a reasonable spread between rates paid and charged by banks and others. Otherwise the bank spread would have to be changed, or outstanding amounts would have to be modified. As a result, adjusted net flows again would be close to zero because several adjustments would have to be altered simultaneously as part of a consistent estimation procedure.

The question remains: What level of interest rates can be supported by evidence from the market or other sources? The interest rates used in this chapter are carefully based on a set of available actual rates and do not leave much room for alternatives. As shown earlier in this chapter, all bank-related rates are based on the London interbank offered rate (LIBOR), allowing for a certain lag or adjustment and an appropriate mix of currencies. (See particularly Table 27.) Resulting rates have been cross-checked against the implied rates derived from the questionnaire responses with which they are consistent. As far as bonds are concerned, rates are a mixture of actual market rates (Table 42), and equity returns are estimated on the basis of U.S., U.K., German (Fed. Rep.), and Japanese equities.

Even if the set of estimated factors that were necessary to adjust for the reporting gaps was slightly different from the one actually applied, it is very likely that the results and conclusions would be mainly unchanged. In particular, alternative assumptions would not alter the conclusions that most of the missing receipts represent income on bank deposits and security holdings of private nonbanks, and that the addition of net credits is spread among many country groups.

4. CONCLUSIONS AND RECOMMENDATIONS

The main result of analyzing the gaps in portfolio investment income reporting is that the discrepancy results mainly from the understatement of receipts by the private nonbank sector and that this deficiency is widespread across countries. Moreover, none of the methods for collecting such data directly from private nonbanks seems likely to be capable of covering these missing credits. Compilations based on exchange control systems do not capture transactions that bypass controls, and compilations based on reports of transactors do not capture the numerous transfers of individuals who either do not know of any reporting obligations or conceal their transactions deliberately. Moreover, estimates based on outstanding stocks of assets are likely to be inadequate if national authorities rely on stock data obtained from domestic sources only.

The procedures applied in this chapter to reduce the discrepancies in the world portfolio investment income account can serve as a framework for a set of recommendations for actions that can be applied immediately, as well as over the longer run. National authorities and international organizations will share responsibility for improving the data, so that most recommendations involve participation and cooperation at both levels.

(1) National authorities should give careful consideration to the revisions of their data for portfolio income indicated in the Report and should be prepared to apply the estimating procedures described by the Working Party unless other procedures are demonstrably superior. Revisions made in response to the investment income questionnaire should be maintained and support the view that a critical look at existing figures can lead to improvements.

(2) Specifically, national compilers should take advantage of the data base on outstanding banking positions published by the Fund to create improved estimates of their portfolio income debits and credits, along the lines demonstrated in this chapter. Wherever possible, countries should also relate income debits and credits to other forms of outstanding cross-border assets and liabilities. Existing income estimates should be tested for reasonableness against all available stock data.

(3) The Fund should continue its very useful program for extending and refining the banking data reported regularly in international financial Statistics (IFS). Such data are essential for the estimating process recommended in the Report, and the Fund should make sure that they are brought to the attention of all national compilers. Moreover, the potential role of these data in computing international capital flows should also be highlighted. The Fund, together with national compilers, should study the reasons for differences between national banking data and the data published by the Fund and should aim at using the data that are most comprehensive and consistent on a worldwide basis. It might be useful for the Fund to introduce some of the International Banking Statistics data on the country pages of IFS.

A very important facet of the refinement of the International Banking Statistics would be the availability of greater geographic detail on the cross-border positions of nonbanks, especially from those economies that now supply only global aggregates.

(4) An increasingly serious gap in the information available on the international financial situation is the lack of reasonably comprehensive data on cross-border holdings of securities, including securities issued in home markets as well as bonds issued in international markets or in particular foreign markets. The Fund, the BIS, and the OECD should continue their efforts to improve this information, in collaboration with industry groups and national statistical offices. As an immediate goal, greater efforts should be made to obtain information from banks on their own holdings and liabilities in the form of securities, and to identify those items separately in their reports to the BIS or the Fund. Moreover, it is likely that information on a large part of the publicly held stock of securities could be developed from the custody records of banks or other financial institutions. Developing such data should be a medium-term goal of the Fund and other concerned organizations.

(5) The Fund should establish a process for advising and encouraging countries to revise their portfolio income estimates in the light of the results in the Report. In some cases the Fund may prepare alternative estimates for countries or groups of countries to demonstrate the differences that result and also as part of the process for introducing correction factors into regional or global summations of world portfolio income accounts. Individual national compilers should be made aware of the necessity for establishing consistent estimating procedures across countries.

(6) The Fund should enter estimates of transactions of economies which do not report to the Fund more explicitly into its Balance of Payments Statistics Yearbook, Part 2. With respect to the income accounts, this is required mainly for the Eastern European countries that were not Fund members and also for international organizations and some smaller economies (MOB centers plus Bermuda) which are not yet clearly incorporated in Part 2. Even though the world current account would not be greatly affected in net terms, such entries would be helpful for reconciling the individual accounts, including the investment income account.

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Cover Report on the World Current Account Discrepancy
Report on the World Current Account Discrepancy
ISBN:
9780939934904
Publication Date:
15 Sep 1987
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9780939934904.071
Pages:
203