Chapter

VII. Current Transfers and the Capital Account

Author(s):
International Monetary Fund
Published Date:
April 1996
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415. Chapters 4, 5, and 6 have dealt with three components of the current account: goods, services, and income. Chapter 7 focuses on transactions recorded under current transfers, which constitute the remaining component of the current account. Components of the capital account (part of the capital and financial account) are also examined. Recorded in the capital account are capital transfers, which are closely related in concept to current transfers, and transactions concerning the acquisition or disposal of non-produced, nonfinancial assets (such as patents and copyrights). However, before these items are discussed in detail, consideration will be given to topics relevant to the recording, in the balance of payments, of both current and capital transfers.

General Information on Transfers

Definition

416. Transfers are defined in the BPM as offsetting entries for real resources or financial items provided, without a quid pro quo, by one economy to another. Whenever an economy does not receive or supply recompense—in the form of real resources or financial items—for goods, services, income, or financial items supplied to or received from another economy, a transfer is recorded in the BOP statement. For example, if Domestica provides, as a gift, goods valued at 100 units to Longa, the BOP statements of the two countries should reflect the following transactions:

DomesticaLonga
CreditDebitCreditDebit
Goods100100
Current transfers100100

417. In addition to reflecting transfers for economic values provided by one economy to another without a quid pro quo, the BOP statement also reflects increases or decreases that occur in a country’s real and financial resources as a result of migration.

418. If a country’s real resources or financial assets and liabilities increase or decrease because of a change in economic territory, the increases or decreases are not recorded in the BOP statement. For example, if Bushland cedes some territory to Clintonstan, the transfer of real resources and financial items owned by the inhabitants of the ceded territory are not recorded as BOP transactions between the two countries. This convention is based on the recognition that changes in the territories of countries occur infrequently and that attendant changes represent coverage changes for the reporting economies rather than transactions.

419. For purposes of BOP recording, it is important to determine whether a transfer is current or capital. Current transfers are recorded in the current account; capital transfers are recorded in the capital account, which is a component of the capital and financial account. This distinction, which was first presented in the fifth edition of the BPM (see paragraph 294), is necessary to harmonize the balance of payments with the national accounts. (Previous editions of the BPM made no such distinction.) A capital transfer is transference of the ownership of a fixed asset or the forgiveness of a liability. A cash transfer (for example, an investment grant) is a capital transfer when the cash transfer is linked to, or conditional upon, the acquisition or disposal of a fixed asset by one or both parties to the transaction. According to BOP convention, migrants’ transfers are also capital transfers. While capital transfers are generally large and irregular, such transfers cannot always be defined in terms of size or frequency. All transfers not considered to be capital are current.

420. Some cash transfers may be regarded as capital by one party to the transaction and as current by the other. To prevent different treatments of the same transaction by the donor and the recipient, the BPM recommendation is that cash transfers be classified as capital by both parties even if a transfer is linked to the acquisition or disposal of a fixed asset by only one party. If serious doubt exists as to whether a transaction should be classified as capital or current, the BPM recommendation is that the transfer be classified as current.

Valuation

421. Transfers are offsetting entries for real resources or financial items provided without a quid quo pro. The values recorded in the transfer entries are the same as those of the real and financial resources to which the transfers are offsets. Real resources involved in transfers are valued by reference to the prevailing market price for the resource being transferred. In the absence of a prevailing market price, real resources being transferred are valued according to the donor’s cost of production or acquisition. For example, the government of Cromania purchases, for 90 units per ton, 100 tons of surplus wheat from Cromanian farmers. The prevailing world market price of wheat is 100 units per ton. The surplus wheat is donated to drought-stricken Madornia. The transfer would be valued—in the BOP statements of both Cromania and Madornia—at 10,000, rather than 9,000, units.

Time of Recording

422. In principle, transfers are recorded when the resources to which the transfers are offsets change ownership. Taxes, fines, and other current transfers imposed by one party on another are recorded upon the occurrence of underlying transactions or other events that give rise to the liabilities. A deferred tax payment is recorded on the basis noted in the preceding sentence rather than on the actual payment date, and an offsetting entry is made in the financial account. For example, in 1989, a resident of Urangastan must pay, to the government of Coonawarra, a tax of 50 units on income earned in that year. The resident of Urangastan defers the payment until 1990. The BOP statement of Urangastan would show these entries:

1989CreditDebit
Current transfers50
Other investment-liabilities-other liabilities50
1990CreditDebit
Other investment-liabilities-other liabilities50
Reserve assets (or other appropriate financial account item)50

Thus, the actual payment, in 1990, of the tax related to 1989 is treated as a repayment of the liability to the Coonawarra government.

Current Transfers

423. In the standard components of the balance of payments, current transfers are divided into two sub-components: general government and other sectors. The current transfers of other sectors are further divided into workers’ remittances and other transfers.

General Government

424. The general government sub-component consists of current transfers made between the government sector (as defined in paragraphs 127–140 of chapter 2) of the compiling country and nonresidents. This item includes current transfers between the government of the compiling country and foreign governments and current transfers between the resident government sector and nonresident, nongovernment entities. This component does not, however, include, current transfers between resident nongovernment entities of the compiling economy and foreign governments. Such transfers are classified as current transfers- other sectors-other transfers.

425. The current transfers -general government item includes subsidies or grants to current budgets (except for subsidies or grants relating to additions to the capital stock of the recipient country); gifts of food, clothing, medicine, etc.; gifts of military equipment that has no civilian uses; technical assistance; indemnities imposed under peace treaties (reparations); casualty insurance premiums minus service charges and casualty insurance claims; and government contributions to the administrative budgets of international organizations. However, capital subscriptions to organizations such as the World Bank are not treated as transfers but as increases in financial assets that are recorded in the financial account. Also classified as current transfers -general government are—on the credit side—taxes other than those (such as inheritance taxes) on the transfer of assets, contributions to social security schemes, fines, licenses to fish, and fees for carrier registration, and—on the debit side—scholarships and similar grants given to nonresident individuals for on-the-job training or to finance education or training in the donor’s country or abroad, refunds on taxes, membership fees paid to nongovernmental organizations, grants to nongovernmental entities, and noncontractual pensions and other benefits. Taxes and subsidies implicit under a multiple official exchange rate scheme are also recorded, when it is appropriate, as current transfers -general government. (See paragraph 37 of chapter 1.)

426. Grants exchanged, in a specific period, between the government sectors of two economies are recorded on a gross, rather than a net, basis.

427. Taxes levied by the government of a compiling economy on property located in the compiling economy and owned by a nonresident are not transfers and are not recorded in the balance of payments. Such taxes are payable by the notional resident enterprise construed to be the owner of the property in the compiling economy. These taxes represent resident-resident transactions, although the taxes do have an impact on the direct investment income attributable to the nonresident owner of the notional enterprise. The taxes most commonly recorded as current transfers are those on income. Taxes on income can consist of taxes on labor income or taxes (such as withholding taxes) on investment income (such as dividends).

428. The total cost, including costs incurred in the donor country, of technical assistance is recorded as a current transfer. (This method of valuation is, of course, consistent with the general principle of valuing transfers in the balance of payments.) Some elaboration is necessary for the treatment of transactions that are offset by technical assistance transfers. In the BPM, production associated with technical assistance is attributed to the recipient economy, not the donor economy. Therefore, resources consumed in the provision of technical assistance are treated as resources acquired by the recipient economy; the acquisition of these resources is financed by the donor economy.

429. The following example illustrates the BOP treatment of technical assistance. Keatingland provides Nostaw’s government with technical assistance, which is valued at 1,000 units, during a six-month period. Costs associated with the provision of this technical assistance are:

Salaries paid to residents of Nostaw150
Salaries paid to residents of Keatingland
who are working in Nostaw700
Goods and services purchased in Nostaw
as part of the technical assistance project50
Administrative costs incurred in Keatingland100
1,000

These entries would be made in Nostaw’s balance of payments:

CreditDebit
Government services n.i.e.100
Income
Compensation of employees700
Current transfers-general
government1,000
Reserve assets (or other appropriate
financial account item)200

The entry for government services n.i.e. reflects administrative costs incurred in the donor country. Keatingland residents working in Nostaw are working for the government of Nostaw, which is considered the producer of output from the provision of technical assistance. The salaries of these staff members, who are not residents of Nostaw, reflect the provision of labor to the Nostaw government and thus are shown in the balance of payments, even though these salaries are actually paid by Keatingland. The labor provided by Nostaw residents and the acquisition of goods and services in Nostaw constitute transactions, which are not included in the balance of payments, between the Nostaw government and Nostaw residents. However, the financing for these transactions is provided by Keatingland, and the impact of this financing is shown as an increase in Nostaw’s holdings of foreign exchange.

Other Sectors

Workers’ Remittances

430. Workers’ remittances consist of goods or financial instruments transferred by migrants living and working in new economies to residents of the economies in which the migrants formerly resided. However, money remitted by a migrant for the purpose of making a deposit in his or her own account with a bank located abroad represents a financial investment, which is recorded in the financial account, rather than a transfer.

431. Workers’ remittances include only those transfers made by workers who stay in foreign economies for at least one year (that is, migrants). If workers remain in foreign economies less than one year, they are not regarded as residents of those economies and remittances to their home countries represent distributions of labor income earned from nonresident employers.

432. Workers’ remittances are transfers made by migrants who are employed by entities of economies in which the workers are considered residents. If a migrant operates her or his own business in the new country—that is, if she or he is self-employed—her or his transfers abroad are not classified as workers’ remittances but as current transfers -other sectors- other transfers. This distinction is made because workers’ remittances, according to the BOP convention, arise from labor and not from entrepreneurial income.

433. The following example illustrates the BOP treatment of transactions associated with foreign workers. U.S. citizen A migrates to Canada and works for an enterprise in Canada. Citizen A has a contract for three years. His salary is 300 units. U.S. citizen B works for the same enterprise in Canada but retains his abode in the United States. Citizen B’s salary is 250 units. Citizens A and B make and receive these payments in Canadian dollars.

Migrant A
Deposit in a bank in Canada120
Deposit in a bank in the United States20
Expenditure for food and clothing in Canada120
Cash gift sent to a relative in the United States10
Income tax paid to Canadian government30
Border worker B
Deposit in a bank in the United States180
Deposit in a bank in Canada35
Consumer loan received from a bank in Canada40
Expenditure for food and clothing in Canada50
Income tax paid to Canadian government25

The balance of payments of the United States would show the following entries:

CreditDebit
Travel50
Compensation of employees250
Current transfers-other sectors
Workers’ remittances10
Other transfers25
Other investment
Assets-currency and deposits
Banks210
Other sectors35
Liabilities
Currency and deposits-banks20
Loans-other sectors40

From the viewpoint of the United States, citizen A is a nonresident and citizen B is a resident. Expenditures for food and clothing made by citizen A in Canada, taxes paid by citizen A to the Canadian government, and the deposit made by citizen A in a Canadian bank represent transactions between nonresidents and are not recorded in the BOP statement of the United States. The entry for compensation of employees reflects the salary received in Canada by citizen B; his personal expenditure in Canada is recorded under travel. The entry for workers’ remittances covers the cash gift sent to the United States by citizen A. The entry for other transfers covers the tax payment made by citizen B to the Canadian government. The entry for bank liabilities reflects the deposit made by citizen A in the United States. The entry under assets-currency and deposits-other sectors reflects the deposit made by citizen B in Canada. The entry under liabilities-loans-other sectors covers the loan liability incurred by citizen B in Canada. There is no entry for the deposit made by citizen B in a U.S. bank because the transaction occurs between U.S. residents.

Other Transfers

434. Current transfers, other than workers’ remittances, may be made (1) between resident, nongovernment entities and foreign governments and (2) between resident, nongovernment entities and nonresident, nongovernment entities. Such transfers include gifts; alimony and other support remittances; lottery ticket sales and prizes won from lotteries; noncontractual pensions from nongovernmental agencies; casualty (nonlife) insurance premiums minus service charges and casualty (nonlife) insurance claims; grants made for purposes other than investment; contributions to religious, scientific, cultural, and charitable organizations; and membership fees paid to nonprofit associations. Also included, on the credit side, are scholarships and similar grants received from foreign governments to finance on-the-job training or education in the donor’s country or abroad, tax refunds, and noncontractual pensions and other benefits received from foreign governments. Also included, on the debit side, are taxes, fines, contributions to social security schemes, licenses to fish, and fees payable to foreign governments for carrier registration.

435. Remittances (such as those sent by parents to children who are studying in other countries) sent abroad by residents of an economy for the purpose of financing other residents who are staying abroad for less than one year are excluded from the BOP statements of the donor economies because the parties to these transactions are residents of the same economies. Expenditures incurred abroad by residents staying for less than one year in foreign countries are recorded as travel expenses.

436. The following example illustrates the treatment of transactions related to the current transfers- other sectors- other transfers item. A resident of Hughesavia makes these payments and receives these receipts.

Payments
Contribution to a charitable organization in Longa50
Cash remittance to a relative staying for six months in Longa30
Payment of house insurance premium to an enterprise in Longa*10
Payment of life insurance premiums to an enterprise in Longa*20
Cash gift to a relative living and working for two years in Longa40
Receipts
Prize won from a government lottery in Longa5
Cash remittance from a relative living and working in Longa for three years25
Claim received from insurance enterprise in Longa for bush fire damage to a home100

The insurance service charge is considered to represent 10 percent of gross premiums for both life and nonlife insurance.

The insurance service charge is considered to represent 10 percent of gross premiums for both life and nonlife insurance.

The BOP statement for Hughesavia would show the following entries:

CreditDebit
Travel30
Insurance services3
Current transfers-other sectors
Workers’ remittances25
Other transfers10599
Other investment-assets
Other assets-other sectors
Equity in life insurance policies18
Reserve assets (or other appropriate
financial account item)20

The entry for travel reflects cash sent to the relative staying abroad for six months; it is assumed that this money is spent on goods and services acquired by the traveler in Longa. The entry for insurance services represents 10 percent (the service charge) of premiums. The entry for workers’ remittances reflects cash received from the relative living abroad for three years. The credit entry for other transfers consists of the insurance claim (100 units) plus the lottery prize (5 units). The debit entry for this item consists of nonlife insurance premiums minus the service charge (9 units) plus the contribution (50 units) to the charitable organization in Longa plus the cash gift to the relative living abroad for two years. The life insurance premiums minus the service charge are recorded, in the financial account, as an increase in assets.

Capital Transfers

437. Like current transfers, capital transfers are divided into two sub-components—general government and other sectors—in the BOP standard components. Capital transfers of general government are further disaggregated into debt forgiveness and other; capital transfers of other sectors are disaggregated into migrants’ transfers, debt forgiveness, and other. Criteria for determining whether a capital transfer should be classified under general government or other sectors are similar to criteria for distinguishing current transfers -general government from current transfers -other sectors. Therefore, in subsequent paragraphs, capital transfers are discussed in terms of type rather than sector.

Debt Forgiveness

438. Unless the cancellation of a debt occurs by mutual agreement of debtor and creditor, the cancellation is not a capital transfer; the write-off of debt reflects a capital loss, which is not recorded in the balance of payments. For example, in 1988, the government of Clintonstan extended a long-term loan of 100 units to the government of Algornia and a long-term loan of 200 units to an enterprise in Bushland. In 1989, the Clintonstan government agreed to the request of the Algornian government for forgiveness of one-half of the loan. In Bushland, the deteriorating economic situation led to the bankruptcy of the enterprise that had borrowed from Clintonstan’s government. The Clintonstan government subsequently recorded repayment of one-half of the loan made to Algornia and wrote off, as a bad debt, the loan made to Bushland. Clintonstand’s BOP statements for 1988 and 1989 would show these entries:

1988CreditDebit
Other investment
Assets-loans-general government300
Reserve assets (or other
appropriate financial account item)300
1988CreditDebit
Capital transfers
General government
Debt forgiveness50
Other investment
Assets-loans-general government50

The forgiveness of one-half of the 100-unit loan in 1989 is shown as a partial repayment of that loan, and an offsetting entry is shown under capital transfers. The write-off of the 200-unit loan represents a capital loss that should not be recorded in the BOP statement. However, the capital loss would be reflected in the market value of the stock of loan assets shown in the IIP statement prepared as of December 31, 1989.

Migrants’ Transfers

439. In the BPM, migrants are defined as individuals (other than students; medical patients; or diplomatic, military, or similar personnel) who move to new countries and are expected to remain in the new countries for at least one year. The term migrants’ transfers refers to the household and personal effects and the financial claims and liabilities transferred by migrants from former to new countries. In the strictest sense, these are not transfers between two parties but contra entries to flows of goods between economies and changes, which arise from migration, in the financial items of economies. These contra entries are equal to the net worth of migrants.

440. The value of the household and personal effects of migrants and the movable capital goods that they actually transfer to new countries are recorded as transactions in goods, and offsetting entries are made under migrants’ transfers. Migrants’ financial claims on or liabilities to (for example, bank deposits, shares, bonds, and loans extended or received) countries of former residence are recorded under various components of the financial account; offsetting entries are made under migrants’ transfers. Land and structures owned by migrants and located in former countries of residence and movable capital goods not transferred by migrants to their new countries are treated, according to conventions presented in the BPM, as financial investments made by migrants in notional enterprises that own these assets. In the BOP statements of the countries to which the migrants have migrated, these financial investments are recorded as increases in direct investment-abroad, and offsetting entries are made under migrants’ transfers. A migrant’s claims on or liabilities to residents of the country to which he or she has moved are treated, in the balance of payments of that country, as if the external claims (liabilities) have been extinguished.

441. A resident of Domestica is migrating to Essendonia. At the time of migration, he has these assets and liabilities.

Assets
Household effects200
Automobile100
Jewelry50
Bank deposit in Domestica30
Bank deposit in Essendonia60
Bonds issued by the government of Domestica110
Real estate in Domestica300
Real estate in Essendonia150
5 percent of the shares of an enterprise in Daniherland70
Total assets1070
Liabilities
Consumer loan owed to bank in Domestica40
Net worth1030

The BOP statement of Domestica* would reflect the following entries:

CreditDebit
Goods350
Capital transfers-other sectors
Migrants’ transfers1,030
Direct investment
Abroad (Essendonia)-
equity capital150
In reporting economy
(Domestica)-equity capital300
Portfolio investment
Assets-equity securities-
other sectors70
Liabilities-debt securities
Bonds-general government110
Other investment
Assets-currency and deposits-
other sectors60
Assets-loans-banks40
Liabilities-currency and deposits-banks30

Essendonia’s BOP statement would show reversed entries.

Essendonia’s BOP statement would show reversed entries.

The goods entry represents the value of the migrant’s personal effects. The net worth (assets minus liabilities equals 1,030 units) of the migrant is shown under migrants’ transfers. The financial account entry under direct investment-abroad shows a decrease in Domestica’s direct investment capital abroad and reflects the fact that the Essendonian real estate is now owned by a resident of Essendonia rather than Domestica. The entry under direct investment in Domestica shows an inflow of direct investment capital because the Domestican real estate is now owned by a resident of Essendonia rather than Domestica. The equity securities entry under portfolio investment shows a decrease in external assets consisting of shares in the enterprise in Daniherland. The entry for bond liabilities of the general government indicates that bonds issued by the Domestican government are now owned by a nonresident and therefore represent liabilities of Domestica to Essendonia. The entry under other investment for the deposit assets of other sectors reflects a decrease in Domestica’s deposits with nonresident banks because these deposits are now owned by a nonresident. The entry for the loan assets of banks shows an increase in external assets and reflects the fact that a loan formerly owed by a resident is now owed by a nonresident. The entry for the deposit liabilities of banks shows an increase in the external liabilities of banks.

Other Capital Transfers

442. Other capital transfers relate mainly to investment grants. Investment grants are used for adding to or financing the gross fixed capital formation of the recipient economy. Such grants can be provided in kind or in cash. For example, an investment grant could comprise financing provided through a foreign aid program for the construction of a dam. Although grants for large capital projects may be paid in installments over extended time periods, each installment is recorded as a capital transfer. General grants made to foreign governments and used for purposes other than financing capital investments are recorded as current, rather than capital, transfers. Inheritance taxes, gift taxes, other taxes on the transfer of assets, and compensation payments (other than those resulting from insurance claims) are also recorded as other capital transfers. Transfers of military equipment that also has civilian uses are recorded as other capital transfers.

Transactions in Non-Produced, Nonfinancial Assets

443. Non-produced, nonfinancial assets are a component of the capital account. Under this item, are recorded purchases (debit) and sales (credit) of assets such as copyrights, licenses, patents, etc. The essential characteristics of these assets are that (1) such assets are not produced, and (2) such assets do not satisfy the definition of financial assets. By comparison, transactions in produced assets are recorded in the current account, and transactions in financial assets (which are generally evidenced by a claim that one party has on another) are recorded in the financial account. Transactions in the fees, royalties, etc. associated with patents, copyrights, etc. must be recorded separately (in the royalties and license fees item under services) from transactions in the underlying assets, which are recorded in the capital account.

444. Land satisfies the criteria for non-produced, nonfinancial assets. According to conventions presented in both the BPM and the SNA, land must be owned by a resident of the economy in which the land is located. Most transactions in land take place between two parties who are considered residents of the economy in which the land is located; therefore, such transactions are not recorded in the balance of payments. However, acquisitions or disposals of extraterritorial land associated with embassies or with other government activities in foreign countries are BOP transactions and, as such, are recorded under acquisition/disposal of non-produced, nonfinancial assets.

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