3. Identification of Institutional Sectors and Financial Instruments

International Monetary Fund
Published Date:
June 2003
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3.1 In the Guide, as in the 1993 SNA and BPM5, institutional units, and the instruments in which they transact, are grouped into categories so as to enhance the analytical usefulness of the data. Institutional units are grouped into institutional sectors, and financial instruments are classified by their nature into instrument categories. However, the classifications of institutional sectors and financial instruments are determined by the analytical needs of external debt statistics and so can differ from other macroeconomic datasets. For instance, the central bank, an institutional unit, is an institutional subsector in the 1993 SNA but may not necessarily undertake all monetary authority activities (such as currency issuance or international reserve management) in an economy. In the Guide, all the monetary authority-type activities are included together in the monetary authorities sector regardless of whether they are actually undertaken in the central bank or not. Given the importance of ensuring compatibility and consistency across related macroeconomic datasets, the institutional sectors defined in the Guide can be reconciled with those in the BPM5.

3.2 The institutional sector breakdown groups institutional units with common economic objectives and functions: general government, monetary authorities, banks, and other sectors. These sectors are defined in this chapter, as are the subsectors of other sectors: nonbank financial corporations, nonfinancial corporations, and households and nonprofit institutions serving households. BPM5 does not provide definitions of the subsectors of other sectors.

3.3 On the classification of financial instruments, the Guide gives prominence to four categories of instruments in particular: debt securities, trade credit, loans, and currency and deposits. There is also an other debt liabilities category; this would include items such as accounts payable. This chapter explains the nature of these types of financial instruments in the context of the BPM5 functional categories from which they are drawn. Further, Appendix I defines specific financial instruments and transactions and provides classification guidance; it therefore should be consulted in conjunction with this chapter.

Institutional Sectors

3.4 The institutional sector presentations below are consistent with the 1993 SNA except that, in line with BPM5, the Guide has a slightly different definition for the general government and central bank sectors.1

3.5 The monetary authorities sector is a functional concept used in the balance of payments that covers the central bank (or currency board, monetary agency, etc.) and any other operations that are usually attributable to the central bank but are carried out by other government institutions or commercial banks. Such operations include the issuance of currency; maintenance and management of international reserves, including those resulting from transactions with the IMF; and the operation of exchange stabilization funds.

3.6 The general government sector, with the exception noted in the previous paragraph, is defined consistently with the definition of that sector in the 1993 SNA. The government of a country consists of the public authorities and their agencies, which are entities established through political processes that exercise legislative, judicial, and executive authority within a territorial area. The principal economic functions of a government are (1) to assume responsibility for the provision of goods and services to the community on a nonmarket basis, either for collective or individual consumption, and (2) to redistribute income and wealth by means of transfer payments. An additional characteristic of government is that these activities must be financed primarily by taxation or other compulsory transfers. General government consists of (i) government units that exist at each level—central, state, or local—of government within the national economy; (ii) all social security funds operated at each level of government; and (iii) all nonmarket nonprofit institutions that are controlled and mainly financed by government units. Public corporations, and unincorporated enterprises that function as if they were corporations (so-called quasi-corporations) are explicitly excluded from the general government sector and are allocated to the financial or nonfinancial corporate sectors, as appropriate. A quasi-corporation can be owned by a resident or nonresident entity but typically will keep a separate set of accounts from its parent and/or, if owned by a nonresident, be engaged in a significant amount of production in the resident economy over a long or indefinite period of time.

3.7 The banking sector is identical with the “other (than the central bank) depository corporations” subsector of the financial corporate sector in the 1993 SNA.2 Included are all resident units engaging in financial intermediation as a principal activity and having liabilities in the form of deposits payable on demand, transferable by check, or otherwise used for making payments, or having liabilities in the form of deposits that may not be readily transferable, such as short-term certificates of deposit, but that are close substitutes for deposits and are included in measures of money broadly defined. Thus, in addition to commercial banks, the banking sector encompasses institutions such as savings banks, savings and loan associations, credit unions or cooperatives, and building societies. Post office savings banks or other government-controlled savings banks are also included if they are institutional units separate from the government.

3.8 The other sectors category comprises nonbank financial corporations, nonfinancial corporations, and households and nonprofit institutions serving households subsectors.

3.9 The nonbank financial corporations subsector comprises insurance corporations and pension funds, other nonbank financial intermediaries, and financial auxiliaries. These types of institutions are all resident subsectors in the 1993 SNA. Insurance corporations consist of incorporated, mutual, and other entities whose principal function is to provide life, accident, sickness, fire, and other types of insurance to individual units or groups of units through the pooling of risk. Pension funds are those that are constituted in such a way that they are separate institutional units from the units that create them and are established for purposes of providing benefits on retirement for specific groups of employees (and, perhaps, their dependents). These funds have their own assets and liabilities and engage in financial transactions on the market on their own account. Other financial intermediaries consist of all resident corporations or quasi-corporations primarily engaged in financial intermediation, except for banks, insurance corporations, and pension funds. The types of corporations included under this heading are security dealers, investment corporations, and corporations engaged in personal finance and/or consumer credit. Financial auxiliaries consist of those resident corporations and quasi-corporations that engage primarily in activities closely related to financial intermediation but that do not themselves perform an intermediation role, such as security brokers, loan brokers, and insurance brokers.

3.10 The nonfinancial corporations subsector consists of resident entities whose principal activity is the production of market goods or nonfinancial services. This sector is defined consistently with the definition in the 1993 SNA. The sector includes all resident nonfinancial corporations; all resident nonfinancial quasi-corporations, including the branches or agencies of foreign-owned nonfinancial enterprises that are engaged in significant amounts of production on the economic territory on a long-term basis; and all resident nonprofit institutions that are market producers of goods or nonfinancial services.

3.11 The households and nonprofit institutions serving households (households and NPISH) subsector comprises the household sector, consisting of resident households, and the nonprofit institutions serving households sector, consisting of such entities as professional societies, political parties, trade unions, charities, etc.

3.12 In the presentation of the gross external debt position (see below), intercompany lending liabilities under a direct investment relationship are separately identified. Equity liabilities arising from a direct investment, like all equity liabilities, are excluded from external debt. These instruments are described in more detail in paragraph 3.16.

Instrument Classification

3.13 This section defines the types of financial instruments to be included in the presentation of the gross external debt position. They are defined in the context of the BPM5 functional categories—direct investment, portfolio investment, financial derivatives, other investment, and reserve assets—from which they are drawn. This allows the compiler, if necessary, to derive the gross external debt position data from the IIP statement.

3.14 Direct investment (Table 3.1) refers to a lasting interest of an entity resident in one economy (the direct investor) in an entity resident in another economy (the direct investment enterprise), defined in BPM5 as ownership of 10 percent or more of the ordinary shares or voting power (for an incorporated enterprise) or the equivalent (for an unincorporated enterprise).3 Once established, all financial claims of the investor on the enterprise, and vice and versa, and all financial claims on, or liabilities to, related (affiliated) enterprises, are included under direct investment (with two exceptions: financial derivatives and certain intercompany assets and liabilities between two affiliated financial intermediaries—see paragraph 3.18). Of the direct investment components, other capital, when owed to nonresident direct investors or affiliates, is included in the gross external debt position; but the other components are not.

Table 3.1.Standard Components of the IIP: Direct Investment
Direct investment abroadDirect investment in reporting economy
Equity capital and reinvested earningsEquity capital and reinvested earnings
Claims on affiliated enterprisesClaims on direct investors
Liabilities to affiliated enterprisesLiabilities to direct investors
Other capitalOther capital
Claims on affiliated enterprisesClaims on direct investors
Liabilities to affiliated enterprises1Liabilities to direct investors1

Instruments in these categories are debt liabilities to be included in external debt.

Instruments in these categories are debt liabilities to be included in external debt.

3.15Other capital covers borrowing and lending of funds—including debt securities and suppliers’ credits (for example, trade credits)—among direct investors and related subsidiaries, branches, and associates. In the gross external debt position tables, other capital is presented as direct investment: intercompany lending.

3.16Equity capital and reinvested earnings (comprising equity in branches, subsidiaries, and associates—except nonparticipating, preferred shares, which are classified as debt instruments—and other capital contributions, such as the provision of machinery) is not a debt instrument.

3.17 In practice, it is sometimes difficult to distinguish whether the claims of a direct investor on a direct investment enterprise are other capital, which is classified as external debt, or equity capital, which is not. Differentiation is particularly difficult when an enterprise is 100 percent owned by a direct investor, such as when the direct investment enterprise is a branch or unincorporated enterprise. In these situations, the classification of capital could be the same as used in the direct investment enterprise’s accounting records. That is, when a claim of the direct investor on the direct investment enterprise is considered to be equity capital or shareholder funds in the accounting records of the direct investment enterprise, this claim is also considered equity capital for external debt purposes. Subject to this condition: if liabilities are only to be repaid in the event that a profit is made by the direct investment enterprise, then the liabilities are classified as equity capital. Similarly, in some instances the direct investor might fund local expenses directly and also receive directly the income arising from the output of the direct investment enterprise. The Guide regards such payments and receipts as the provision and withdrawal of equity capital, respectively, in the direct investment enterprise by the direct investor.

3.18 The stocks of intercompany assets and liabilities between two affiliated financial intermediaries, including special purpose entities (SPEs) principally engaged in financial intermediation, that are recorded under direct investment are limited to permanent debt (loan capital representing a permanent interest)—classified as direct investment: intercompany lending—and equity capital and reinvested earnings. Other intercompany debt liabilities between affiliated financial intermediaries are classified by type of instrument, such as loans, debt security, etc., and are attributed to the institutional sector of the debtor entity. For this purpose, financial intermediaries are defined as enterprises principally engaged in providing financial intermediation services or services auxiliary to financial intermediation and comprise those corporations and quasi-corporations that are grouped, in the 1993 SNA, into the following subsectors: (1) other depository corporations (other than the central bank); (2) other financial intermediaries, except insurance corporations and pension funds; and (3) financial auxiliaries.

3.19 Portfolio investment (Table 3.2) includes traded securities (other than those included in direct investment and reserve assets). These instruments are usually traded (or tradable) in organized and other financial markets, including over-the-counter (OTC) markets. When they are owed to nonresidents, of the portfolio investment components, debt securities—that is, bonds and notes, and money market instruments— are included in the gross external debt position. Equity securities, including share investments in mutual funds and investment trusts,4 are not included in the gross external debt position.

Table 3.2.Standard Components of the IIP: Portfolio Investment
Equity securitiesEquity securities
Monetary authoritiesBanks
General governmentOther sectors
BanksDebt securities
Other sectorsBonds and notes1
Debt securitiesMonetary authorities
Bonds and notesGeneral government
Monetary authoritiesBanks
General governmentOther sectors
BanksMoney market instruments1
Other sectorsMonetary authorities
Money market instrumentsGeneral government
Monetary authoritiesBanks
General governmentOther sectors
Other sectors

Instruments in these categories are debt liabilities to be included in external debt.

Instruments in these categories are debt liabilities to be included in external debt.

3.20 Debt securities issued with an original maturity of more than one year are classified as bonds and notes, even though their remaining maturity at the time of the investment may be less than one year. Bonds and notes usually give the holder the unconditional right to a fixed money income or contractually determined variable money income (payment of interest being independent of the earnings of the debtor). With the exception of perpetual bonds, bonds and notes also provide the unconditional right to a fixed sum in repayment of principal on a specified date or dates. Included among bonds and notes are so-called asset-backed securities and collateralized debt obligations; that is, securities on which payments to creditors are explicitly dependent on a specific stream of income—for example, future lottery receipts or a pool of nontraded instruments (say, loans or export receivables); see Appendix I for more details.

3.21 Debt securities issued with an original maturity of one year or less are classified as money market instruments. These instruments generally give the holder the unconditional right to receive a stated, fixed sum of money on a specified date. These short-term instruments are usually traded, at a discount, in organized markets; the discount is dependent on the interest rate and the time remaining to maturity. Examples of money market instruments include treasury bills, commercial and financial paper, and banker’s acceptances. Like bonds and notes, money market instruments can be “backed” by a specific stream of income or pool of nontraded instruments.

3.22 Further, where an instrument is provided by an importer to an exporter with such characteristics that it is tradable in organized and other financial markets, such as a promissory note, it should be classified as a debt security—either bonds and notes, or money market instruments depending on its original maturity—in the gross external debt position. Separate identification of the outstanding value of such instruments is also encouraged because of their role in financing trade. (See also the description of trade-related credit in Chapter 6.)

3.23Equity securities cover all instruments and records acknowledging, after the claims of all creditors have been met, claims to the residual value of incorporated enterprises. These securities are not debt instruments and so are not external debt liabilities. Shares, stocks, preferred stock or shares, participation, or similar documents—such as American Depository Receipts—usually denote ownership of equity. Shares of collective investment institutions, e.g., mutual funds and investment trusts, are also included.

3.24 Financial derivatives5 (Table 3.3) are financial instruments that are linked to a specific financial instrument, indicator, or commodity and through which specific financial risks can be traded in financial markets in their own right. As explained in Chapter 2 (see paragraph 2.11), financial derivatives are not debt instruments, but information on them can be relevant for external debt analysis.

Table 3.3.Standard Components of the IIP: Financial Derivatives
Financial derivativesFinancial derivatives
Monetary authoritiesMonetary authorities
General governmentGeneral government
Other sectorsOther sectors

3.25 Under a forward-type contract, the two counterparties agree to exchange an underlying item—real or financial—in a specified quantity, on a specified date, at an agreed contract (strike) price or, in the specific instance of a swap contract, the two counterparties agree to exchange cash flows, determined with reference to the price(s) of, say, currencies or interest rates, according to prearranged rules. The typical requirement under a foreign exchange forward contract to deliver or receive foreign currency in the future can have important implications for foreign currency liquidity analysis and is captured in the table in Table 7.7 in Chapter 7. Under an option contract, the purchaser of the option, in return for an option premium, acquires from the writer of the option the right but not the obligation to buy (call option) or sell (put option) a specified underlying item—real or financial—at an agreed contract (strike) price on or before a specified date. Throughout the life of the contract the writer of the option has a liability and the buyer an asset, although the option can expire worthless; the option will be exercised only if settling the contract is advantageous for the purchaser. Typical derivatives instruments include futures (exchange traded forward contract), interest and cross-currency swaps, forward rate agreements, forward foreign exchange contracts, credit derivatives, and various types of options.

3.26 Other investment (Table 3.4) covers all financial instruments other than those classified as direct investment, portfolio investment, financial derivatives, or reserve assets. When owed to nonresidents, all the components of other investment—trade credit, loans, currency and deposits, and other debt liabilities— are included in the gross external debt position.

Table 3.4.Standard Components of the IIP: Other Investment
Trade creditsTrade credits1
General governmentGeneral government
Other sectorsOther sectors
Monetary authoritiesMonetary authorities
Long-termUse of IMF credit and loans from the IMF
General governmentOther long-term
Short-termGeneral government
Other sectorsLong-term
Short-termOther sectors
Currency and depositsShort-term
Monetary authorities
General governmentCurrency and deposits1
BanksMonetary authorities
Other sectorsBanks
Other assetsOther liabilities1
Monetary authoritiesMonetary authorities
General governmentGeneral government
Other sectorsOther sectors

Instruments in these categories are debt liabilities to be included in external debt.

Instruments in these categories are debt liabilities to be included in external debt.

3.27Trade credits consist of claims or liabilities arising from the direct extension of credit by suppliers for transactions in goods and services, and advance payments by buyers for goods and services and for work in progress (or to be undertaken). Long- and short–term trade credits are shown separately. Trade-related loans provided by a third party, such as a bank, to an exporter or importer are not included in this category but under loans, below (see also the description of trade-related credit in Chapter 6).

3.28Loans include those financial assets created through the direct lending of funds by a creditor (lender) to a debtor (borrower) through an arrangement in which the lender either receives no security evidencing the transactions or receives a nonnegotiable document or instrument. Collateral, in the form of either a financial asset (such as a security) or nonfinancial asset (such as land or a building) may be provided under a loan transaction, although it is not an essential feature. In the gross external debt position, loans include use of IMF credit and loans from the IMF.

3.29 If a loan becomes tradable and is, or has been, traded in the secondary market, the loan should be reclassified as a debt security. Given the significance of reclassification, there needs to be evidence of secondary market trading before a debt instrument is reclassified from a loan to a security. Evidence of trading on secondary markets would include the existence of market makers and bid-offer spreads for the debt instrument. The Guide encourages the separate identification of the outstanding value of any such loans reclassified.

3.30 Reverse security transactions and financial leases are two types of arrangements for which the change of ownership principle is not strictly adhered to.

3.31 A reverse securities transaction is defined to include all arrangements whereby one party legally acquires securities and agrees, under a legal agreement at inception, to return the same or equivalent securities on or by an agreed date to the same party from whom they acquired the securities initially. If the security taker under such a transaction provides cash funds, and there is agreement to reacquire the same or equivalent securities at a predetermined price at the contract’s maturity, a loan transaction is recorded. This is the so-called collateralized loan approach to a reverse securities transaction, with the securities representing the collateral. These transactions include security repurchase agreements (repos), securities lending involving cash, and sale/buy backs. The security provider under a reverse security transaction acquires a repo loan liability and the security taker a repo loan asset. If no cash is provided, no loan transaction is reported. Under the collateralized loan approach, the security is assumed not to have changed ownership and remains on the balance sheet of the security provider. A similar recording procedure is adopted for transactions where gold rather than securities is provided as collateral for cash (so-called gold swaps).

3.32 If the security taker sells the security acquired under a reverse security transaction, they record a negative position in that security. This treatment reflects economic reality in that the holder of the negative position is exposed to the risks and benefits of ownership in an equal and opposite way to the party who now owns the security (see also Appendix II). On-selling of gold by the gold taker, similarly reported as a negative holding, does not affect the gross external debt position because gold is an asset without any corresponding liability.

3.33 A financial lease is a contract under which a lessee contracts to pay rentals for the use of a good for most or all of its expected economic life. The rentals enable the lessor over the period of the contract to recover most or all of the costs of goods and the carrying charges. While there is not a legal change of ownership of the good, under a financial lease the risks and rewards of ownership are, de facto, transferred from the legal owner of the good, the lessor, to the user of the good, the lessee. For this reason, under statistical convention, the total value of the good is imputed to have changed ownership. So, the debt liability at the inception of the lease is defined as the value of the good and is financed by a loan of the same value, a liability of the lessee. The loan is repaid through the payment of rentals (which comprise both interest and principal payment elements) and any residual payment at the end of the contract (or alternatively, by the return of the good to the lessor).

3.34Currency and deposits consists of notes and coin and both transferable and other deposits.6 Notes and coin represent claims of a fixed nominal value usually on a central bank or government; commemorative coins are excluded. Transferable deposits consist of deposits that are (1) exchangeable on demand at par and without penalty or restriction, and (2) directly usable for making payments by check, giro order, direct debit/credit, or other direct payment facility. Other deposits comprise all claims represented by evidence of deposit—for example, savings and fixed-term deposits; sight deposits that permit immediate cash withdrawals but not direct third-party transfers; and shares that are legally (or practically) redeemable on demand or on short notice in savings and loan associations, credit unions, building societies, etc. Depending on national practice, gold that is borrowed (without cash being provided in exchange) from a nonresident could be classified by the borrower as a foreign currency deposit.

3.35Other assets/other liabilities covers items other than trade credit, loans, and currency and deposits. Such assets and liabilities include liabilities of pension funds and life insurance companies to their non-resident participants and policyholders, claims on nonlife companies; capital subscriptions to international nonmonetary organizations; arrears (see below); and accounts receivable and payable, such as in respect of taxes, dividends declared payable but not yet paid, purchases and sales of securities, and wages and salaries. Short- and long-term other liabilities are shown separately as other debt liabilities in the gross external debt presentation.

3.36Arrears are defined as amounts that are past due-for-payment and unpaid. Arrears can arise both through the late payment of principal and interest on debt instruments as well as through late payments for other instruments and transactions. For instance, a financial derivatives contract is not a debt instrument for reasons explained above, but if a financial derivatives contract comes to maturity and a payment is required but not made, arrears are created. Similarly, if goods are supplied and not paid for on the contract payment date or a payment for goods is made but the goods are not delivered on time, then arrears are created. These new debt liabilities should be recorded in the gross external debt position as arrears.

3.37 Payments may be missed for a variety of reasons beyond simply the inability or unwillingness of the debtor to meet its payment obligations. Sometimes arrears arise not from the ability of the original debtor to provide national currency but from the inability of the monetary authorities to provide foreign exchange to a domestic entity, so preventing that entity from servicing its foreign currency debt. These so-called transfer arrears remain those of the original debtor sector. Another circumstance may be when the creditor has agreed in principle to reschedule debt—that is, reorganize payments that are falling due—but the agreement has yet to be signed and implemented. In the meantime, payments due under the existing agreement are not made, and arrears arise—so-called technical arrears.7 Such arrears might typically arise in the context of Paris Club agreements between the time of the Paris Club rescheduling session and the time when the bilateral agreements are signed and implemented. If the agreement in principle lapses before the agreement is signed, then any accumulated arrears are no longer technical arrears.

3.38 Reserve assets (Table 3.5) consist of those external assets that are readily available to and controlled by the monetary authorities for direct financing of payments imbalances, for indirectly regulating the magnitude of such balances through intervention in exchange markets to affect the currency exchange rate, and/or for other purposes.8 By definition, reserve assets are not included in the gross external debt position.

Table 3.5.Standard Components of the IIP: Reserve Assets
Special drawing rights
Reserve position in the IMF
Foreign exchange
Currency and deposits
With monetary authorities
With banks
Bonds and notes
Money market instruments
Financial derivatives (net)
Other claims

Institutional sectors are also described in detail in Chapter IV of the 1993 SNA.

Covering both the deposit money corporations (S.1221) and other (S.1222) subsectors of the 1993 SNA. In the IMF’s Monetary and Financial Statistics Manual (2000d), other depository corporations are defined to include only those financial intermediaries issuing deposits and close substitutes that are included in the national definition of broad money, which may exclude (include) institutional units that are included (excluded) within the 1993 SNA definition. Rather than as banks, these excluded institutional units would be classified as nonbank financial corporations (or vice versa). While it is recommended in the Guide that the definition of banks be consistent with the 1993 SNA and BPM5, it is recognized that countries may rely on data from monetary surveys to compile external debt statistics for the banking sector.

Further information on the methodology for measuring direct investment is available in BPM5, Chapter XVIII, and its related publications, and in the OECD Benchmark Definition of Foreign Direct Investment, Third Edition (OECD, 1996).

A mutual fund or investment trust liability that requires payment(s) of principal and/or interest by the mutual fund or investment trust to the creditor at some point(s) in the future is to be recorded as a debt instrument and, if owed to nonresidents, included in the gross external debt position. The instrument classification would be dependent on the characteristics of the liability—for example, as a deposit (see paragraph 3.34).

The treatment of financial derivatives in the balance of payments and IIP is described in Financial Derivatives: A Supplement to the Fifth Edition (1993) of the Balance of Payments Manual (IMF, 2000c).

Because the IIP does not provide a short-term/long-term attribution, it is recommended that all currency and deposits are included in the short-term category unless detailed information is available to make the short-term/long-term attribution.

If the creditor bills and the debtor pays on the basis of the new agreement, even though it is not signed, no arrears arise.

In addition to BPM5, Chapter XXI, see International Reserves and Foreign Currency Liquidity: Guidelines for a Data Template (Kester, 2001), which also provides guidance on the measurement of official reserve assets.

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