XI. Other Investment
- International Monetary Fund
- Published Date:
- April 1996
584. Other investment is a residual category that includes all financial transactions not considered direct investment, portfolio investment, or reserve assets. Like portfolio investment, other investment is primarily divided into investments that represent the financial assets and liabilities of an economy. Within these asset and liability classifications, other investment transactions are further divided by instrument and resident institutional sector. Five types of instruments are identified in the BOP standard components: (1) trade credits, (2) use of at Fund credit and loans from the Fund, (3) other loans, (4) currency and deposits, and (5) other assets and liabilities. Each type of instrument is discussed in more detail in subsequent paragraphs.
585. Loans, deposits, and similar transactions between enterprises in a direct investment relationship are generally recorded as direct, rather than other, investment. However, as noted in chapter 9, when banks and other financial intermediaries are in a direct investment relationship, only those transactions relating to permanent debt and equity investment are recorded as direct investment. Therefore, the loans and deposits of such institutions are generally recorded as other investment, even if a direct investment relationship exists between the creditor and the debtor.
586. Other investment transactions include offsets to interest accrued but not paid on other investment.27 Such interest is reflected as increased investment in the underlying instrument on which the interest has been earned. When an accrued amount becomes due for payment, this amount is reflected as a decrease in investment in the underlying instrument and offset by a transaction in foreign exchange or a similar instrument. If actual payment is not made, the decrease in the underlying instrument is offset by increased investment in the other assets or other liabilities items of other investment.
587. Trade credits are to assets and liabilities that arise from the direct extension, during the normal course of trading, of credit from a supplier to a buyer—that is, when payment for goods and services is made at a time that differs from the time when ownership of the underlying goods or services changes. Trade credit arrangements usually contain pre-specified limits on the amounts involved and the times at which payments must be made. Trade credits do not involve the issue of securities. Tradable securities (such as import and export bills) used to finance international trade should be classified as portfolio investment, rather than other investment, in the balance of payments. While the dividing line between trade credits and loans is not always clear, trade credits are ordinarily the result of ongoing or open book arrangements between purchasers and suppliers, whereas loans are specific agreements tailored to particular circumstances. Funding provided by an enterprise other than the supplier for the purpose of purchasing goods or services is generally regarded as a loan and not as trade credit.
588. There are two types of trade credit assets: (1) prepayments on imports and (2) trade credit extended on exports. Assets represented by prepayments on imports are extinguished upon delivery of the goods or services and assets represented by trade credit on exports are extinguished by actual payment (postpayment). Trade credit liabilities arise from the prepayment of exports or trade credit received on imports. Delivery of exports extinguishes the former and actual payment (postpayment) extinguishes the latter.
589. The following example illustrates the treatment of trade credit in the balance of payments. In a particular period, Clintonstan exports goods worth 1,000 units. Of this amount, 100 units were paid last period, 500 units are paid this period, and 400 units will be paid in the next period. Furthermore, payments of 130 units are received for exports that will be delivered in the next period, and payments of 280 units are received for exports delivered in the previous period. The following entries would be made in Clintonstan’s balance of
|Reserve assets (or other appropriate financial account item)||910|
590. Trade credits can be measured directly or indirectly. Direct measurements can be made by approaching enterprises receiving or extending trade credits. Indirect measurement methods include the use of official records if, for example, trade credits are registered with a government organization for the purpose of monitoring foreign exchange. Another way of indirectly measuring trade credits in the balance of payments is to calculate the difference between actual imports and exports (as measured by customs authorities) and payments for imports and exports (as measured through the banking system). The disadvantage with the latter method is that it will not always be clear what part of the calculated trade credit transactions represents transactions in an economy’s assets and what part represents transactions in an economy’s liabilities.
Use of Fund Credit and Loans from the Fund
591. Membership in the International Monetary Fund provides countries that are experiencing BOP difficulties with opportunities to use credit extended by the IMF or to borrow money from the IMF. Generally, these arrangements with the IMF are conditional in nature; that is, a member country accessing IMF resources agrees to meet a set of conditions that are negotiated with the organization. Both Fund credit and loans from the Fund are denominated in SDRs.
592. Economically, the use of Fund credit and the use of loans from the Fund result in the same outcome—that is, the country entering into these agreements has access to foreign exchange in return for agreeing to meet a set of conditions. However, the two types of arrangements are actually executed in somewhat different ways. A loan from the Fund is simply an agreement by which the member country borrows foreign exchange with a commitment to repay. On the other hand, when a country uses Fund credit, the country “sells” its national currency to the IMF in return for foreign exchange. If the value of the country’s national currency changes in relation to the SDR, “maintenance of value payments” are made in the country’s national currency to maintain a constant SDR liability. Liabilities under Fund credit arrangements are extinguished when the country uses foreign exchange to “repurchase” its national currency. In the balance of payments, the IMF is not shown as having a claim on a country in the form of that country’s national currency. Instead, the requirement for the national authorities to pay back the foreign exchange is recognized by a BOP presentation that shows the economic nature of these transactions. Furthermore, as this requirement is denominated in SDRs, the maintenance of value payments are not entered as transactions in the balance of payments because such payments simply represent the manner in which amounts converted to national currencies are revalued when these currencies depreciate or appreciate in relation to the SDR.
593. Loans are financial assets (1) created through the lending of funds by a creditor (lender) directly to a debtor (borrower); the lender receives no security evidencing the transaction or receives a non-negotiable document or instrument.28 Included are loans (different from trade credits) to finance trade, mortgages, and other loans and advances. Financial leases and repurchase agreements are also considered loans.
594. Financial leases are included under loans as such leases are, in essence, a method of financing the purchase of goods. (Refer to chapter 4 for elaboration of the nature of financial lease arrangements.) The BPM recommendation on financial leases is that a change of ownership of the good being leased be imputed at the inception of the lease. In the BOP of the economy of the lessee, the entry for imports will be matched by an entry under financial account-loans for the increase in financial liabilities. The value of the equipment, which should be the market value, and the value placed on the loan will be the same. The value of the loan will not necessarily equal the discounted value of future lease payments.
595. The lease payments contain two elements:
(1) interest on the outstanding liability and
(2) repayment of the loan liability. Upon termination of the lease, an entry is recorded for the extinguishment of any remaining liability. This entry is offset by a transaction in goods (if the leased goods are returned to the lessor) or a transaction in some other financial item (if the goods are legally acquired by the lessee).
596. The following example illustrates the treatment, in the balance of payments, of a financial leasing arrangement. At the commencement of a lease, the market value of the equipment being leased is estimated at 1,000 units. Lease payments are to run for nine years at an annual rate of 100 units. Ten percent of the first annual lease payment is estimated to be the interest, which declines as a proportion of total lease payments in subsequent years. The lease contract calls for the lessee to purchase the goods, at written-down value, at the termination of the lease. In the first year, entries for the balance of payments would be:
|Investment income-other investment||10|
|Reserve assets (or other appropriate financial account item)||100|
In the second year, the entries would be:
|Investment income-other investment||9|
|Reserve assets (or other appropriate financial account item)||100|
At the end of the lease, the written-down value of the asset is 155 units (the difference between the original 1,000 units and the repayment total of 845 units). The lessee pays this amount in foreign exchange to acquire legal ownership of the asset. Hence, BOP entries for the final period would be:
|Reserve assets (or other appropriate financial account item)||155|
597. A repurchase agreement consists of the sale, made with the intention that the transaction will be reversed at a specified future date, of a security (such as a government bond) by one institution to another. In the balance of payments, repurchase agreements are treated as a form of securitized lending and not as transactions in the underlying securities. The economic nature of the transaction takes precedence over the legal form, and repurchases are classified as part of the loans item under other investment in the financial account.
598. Loan repayments are recorded when due. If actual payment is not made upon the due date, the offset to the loan repayment is the creation of a short-term asset (from the creditor’s point of view) or liability (from the debtor’s point of view) to reflect the payment arrears. This asset or liability is recorded under the other assets or other liabilities items in the other investment component of the financial account and is extinguished when payment is finally made or when alternative arrangements are made between the creditor and the debtor.
Currency and Deposits
599. Currency consists of notes and coins in circulation. In this regard, an economy’s external assets consist of notes and coins issued by foreign governments and held by residents. These notes and coins represent claims that holders have on issuing governments. An economy’s external liabilities, in respect to notes and coins, consist of notes and coins that are issued by the economy’s government and held by nonresidents.
600. For example, a Canadian shopkeeper accepts U.S. notes for purchases, and a U.S. traveler in Canada spends $100 with the shopkeeper. The Canadian resident has a claim on the U.S. government for the notes that she receives in the transaction. This transaction would be recorded in Canada’s balance of payments as:
|Currency and deposits-other sectors||100|
In the balance of payments of the United States, the following transactions would be recorded:
|Currency and deposits-|
601. In practice, it will be often difficult for a country to determine the extent of nonresident holdings of its notes. This difficulty could lead to net errors and omissions in the balance of payments.
602. Deposits consist of transferable deposits and other deposits; however, negotiable certificates of deposit, which are classified as part of portfolio investment because of their tradable nature, are excluded from this item. Transferable deposits (or demand deposits) are exchangeable on demand at par without restriction or penalty and are freely transferable. Checking accounts generally satisfy the criteria for transferable deposits. Other deposits include: nontransferable savings deposits; time deposits; and deposits in savings and loan associations, credit unions, building societies, etc. These deposits are generally redeemable on demand or on short notice but cannot be readily transferred to another party by way of check or similar payment order. “Deposit accounts” that cannot be redeemed on demand or on short notice should be classified in the balance of payments as loans, rather than deposits, as their economic behavior is more akin to the former.
603. Deposits may be denominated in the domestic currency of the compiling country or in foreign currencies. The currency classification is not relevant for determining whether or not the deposits are recorded in the balance of payments. What is relevant is that a nonresident must hold a deposit with a resident financial institution (liability of the compiling economy) or a resident must hold a deposit with a nonresident financial institution (asset of the compiling economy) in order for transactions in deposits to be reflected in the balance of payments.
604. The following example illustrates the treatment of deposits. An importer in Cromania purchases goods worth 500 units from an exporter in Longa. Payment for these imports is made by a check drawn on the importer’s bank account with a Cromanian resident bank. When the check is presented by the exporter, the funds are transferred to the exporter’s bank account with the same bank. The transfer increases Cromania’s deposit liabilities to nonresidents. The transaction would be recorded in Cromania’s balance of payments as:
|Currency and deposits||500|
Other Assets and Liabilities
605. Other assets and other liabilities are residual items that include all external financial assets and liabilities not recorded elsewhere in the financial account. Among the types of assets and liabilities recorded in these items are:
household equity in life insurance and commercial pension funds;
miscellaneous accounts receivable and payable (for example, accounts relating to interest payments in arrears, loan payments in arrears, wages and salaries outstanding, prepayments of insurance premiums, taxes outstanding, etc.);
capital subscriptions to international nonmonetary organizations.
606. With regard to household equity in life insurance and commercial pension funds, premiums payable—minus the estimated service charge—are recorded as increases in policyholder claims on life insurance and pension funds; claims payable are recorded as withdrawal of investment. While most investments of this type are held over long periods, policies may also be “surrendered” prior to maturity. Such “surrendering” of policies is treated as withdrawal of investment as well. Life insurance and pension fund policyholders generally receive income (often referred to as bonuses) on their policies, and this income is reflected as an increase in the holder’s investment in the fund. In the balance of payments, such bonuses are recorded as income receivable by the policyholder and offset by an increase in the policyholder’s claim on the fund.
607. The treatment of life insurance and investment in commercially operated pension funds is discussed in chapter 5. However, another example may serve to elaborate this treatment. During a particular period, Hughesavian residents receive bonuses of 500 units on life insurance policies held with a fund that is resident in Namdarb, and claims of 200 units became payable on these policies. Entries would be recorded thus in Hughesavia’s balance of payments:
|Portfolio investment income-equity||500|
|Reserve assets (or other appropriate financial account item)||200|
609. With regard to capital subscriptions to international nonmonetary organizations, amounts paid to international organizations in the form of grants should be recorded as transfers rather than as assets of the providing economy.