The IMF's Statistical Systems in Context of Revision of the United Nations' A System of National Accounts
Chapter

15 Some Issues in the Balance of Payments Presentation of Arrears and Debt Reorganization

Author(s):
Vicente Galbis
Published Date:
September 1991
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Author(s)
John E. Thornton

This paper addresses some methodological issues in balance of payments accounting for external debt-servicing arrears and for debt reorganization. It attempts to clarify some of the concepts and issues involved in the balance of payments accounting procedures and to supplement the guidelines offered in the fourth edition of the IMF's Balance of Payments Manual (BPM), which was prepared before the emergence of widespread balance of payments difficulties associated with arrears and reorganization of external debt.

The paper begins with a review of the Fund's current balance of payments accounting methodology for the treatment of external arrears and debt reorganization as prescribed by the BPM and as practiced in the Fund's Balance of Payments Statistics (BOPS). It then examines how the use of accrual accounting (that is, recording entries when payment is due) rather than cash accounting (that is, recording entries when disbursement takes place) may allow the identification of arrears and debt reorganization transactions. It is argued that many of the operational problems encountered in identifying these transactions in the balance of payments accounts may be overcome by an increase in the degree of detail, and some suggestions are put forward to this end.

I. The Fund's Treatment of Arrears and Debt Reorganization in the Balance of Payments Statistics

An important purpose of balance of payments accounts is to provide an indication of the need for policy adjustment to rectify external imbalance. The double-entry system used in balance of payments accounting implies that the accounts must be in balance. Therefore, arriving at a surplus or deficit in the balance of payments requires summing a subsection of all external transactions and distinguishing the transactions “above the line” from those “below the line.” The decision on where to draw the line requires a judgment about the set of external transactions that best indicates the need for balance of payments adjustment. A broad approach is to place below the line only transactions undertaken to compensate for balance of payments deficit on net autonomous transactions—that is, to compensate for transactions undertaken for their own sake. This approach gives the deficit for which the central authorities have provided the financing by drawing on their reserves, by engaging in official foreign borrowing, or by inducing other residents to borrow. It therefore focuses on the use of reserves and the short-term constraints that result from the limited availability of balance of payments financing. In the aggregated presentation of the balance of payments employed in the BOPS, this deficit is covered by liabilities constituting foreign authorities' reserves, the total change in reserves, and exceptional financing.

It is exceptional financing that links the concept of balance of payments need to the accounting procedures for dealing with arrears of external debt and debt reorganization. Transactions that are considered appropriate for inclusion under exceptional financing include arrears in payments and deferments of payments of external obligations (including overdue financial obligations to the Fund) resulting from the authorities not providing foreign exchange; any rescheduling arrangements arising from arrears and deferments; drawings on loans or refinancing loans for the purpose of balance of payments support; and debt forgiveness.

In the presentation of the balance of payments, separate practices are followed for the accounting of arrears of interest and amortization, debt rescheduling, debt refinancing, and debt forgiveness. In practice, a debt reorganization package, particularly if it is a multiyear arrangement, may combine elements of each of these. The treatment of the reorganization in the balance of payments accounts may, therefore, include entries in several accounts that may be both above and below the line in the aggregated presentation. In the case of a multi-year arrangement, it is also frequently the case that a rescheduling of obligations due beyond the current accounting period is subject to certain conditions being in place when the obligations fall due. In this case, balance of payments accounting practice is to record entries only in the period when the particular conditions have been fulfilled and the debt reorganization has been concluded. No entries are made in the current period's balance of payments for conditional arrangements affecting future periods, although these arrangements may give rise to future entries. The relevant balance of payments entries for arrears and debt reorganization are summarized in Table 1. The accounting procedures are described below.

Table 1.Balance of Payments Accounting for Arrears and Debt Reorganization
Balance of Payments Presentation
AggregatedDetailed
Type of TransactionCreditDebitCreditDebit
Disbursements and arrears
Disbursed interest paymentsReservesInvestment incomeReservesInvestment income
Interest arrearsExceptional financingInvestment incomeShort-term capitalInvestment income
Disbursed amortization
Short-termReservesShort-term capitalReservesShort-term capital
Long-termReservesLong-term capitalReservesLong-term capital
Amortization arrears
Short-termExceptional financingInvestment incomeShort-term capitalShort-term capital
Long-termExceptional financingLong-term capitalShort-term capitalLong-term capital
Reschedulinga
Payments due
InterestExceptional financingInvestment incomeLong-term capitalInvestment income
AmortizationExceptional financingLong-term capitalLong-term capitalLong-term capital
Payments past due
InterestExceptional financingExceptional financingLong-term capitalShort-term capital
AmortizationExceptional financingExceptional financingLong-term capitalShort-term capital
Payments not yet due
AmortizationLong-term capitalLong-term capitalLong-term capitalLong-term capital
Debt forgivenessa
Payments due
InterestExceptional financingInvestment incomeUnrequited transfersInvestment income
AmortizationExceptional financingLong-term incomeUnrequited transfersLong-term capital
Payments past due
InterestExceptional financingExceptional financingUnrequited transfersShort-term capital
AmortizationExceptional financingExceptional financingUnrequited transfersShort-term capital
Payments not yet due
AmortizationUnrequited transfersLong-term capitalUnrequited transfersLong-term capital

For example, long-term loans.

For example, long-term loans.

Arrears of Interest and Amortization

Arrears are defined as amounts that are past due and therefore unpaid. As in all balance of payments entries, interest and amortization payments on loans are recorded on an accrual basis—specifically, when payment is due. Accordingly, payments in arrears are recorded in the balance of payments as if they had been made, and a new, corresponding liability is created.

Interest Arrears

Table 1 shows that in the aggregated presentation of the balance of payments, if interest payments are not made when they fall due, the arrears are accounted below the line as exceptional financing. The accounting comprises a debit entry in the current account and a credit entry in exceptional financing. In the detailed presentation of the balance of payments, the credit entry is the short-term capital account.

Amortization Arrears

In the aggregated presentation of the balance of payments, if repayments on a short-term (long-term) loan are not made when they fall due, a debit entry is recorded in the appropriate capital account, and a credit entry is made below the line in exceptional financing. In the detailed presentation of the balance of payments, the credit contra-entry is in the short-term capital account regardless of the account in which the debit is recorded—that is, the credit contra-entry is viewed as a short-term liability whether the loan for which the amortization is being recorded was short term or long term.

Debt Rescheduling

In balance of payments statistics, entries arise when a debt reorganization gives rise to a change in the existing contract or to a new contract. In the case of a debt rescheduling, the existing contract is changed to extend the maturity of payments due to lenders. A formal deferment of debt service payments takes place, and new maturities are applied to the deferred amounts. Balance of payments accounting practice with respect to debt rescheduling reflects the accounting period in which the debt service obligations fall due.

Rescheduling Obligations Past Due

Obligations past due are in arrears. When arrears are rescheduled, the accounting reflects a reduction in arrears and the creation of a new loan that is treated as a balance of payments financing item. In the aggregated presentation of the balance of payments, therefore, what is being recorded is a change in the nature of exceptional financing—the repayment of arrears and the drawing of a new loan—and both the debit and credit entries appear below the line in the category of exceptional financing. In the detailed presentation of the balance of payments, the rescheduled debt payment is recorded as a debit entry in the short-term capital account (other loans received) and the credit contra-entry is recorded in the long-term capital account (drawings on loans received).

Rescheduling of Obligations Due

Interest and amortization obligations that fall due in the current accounting period and are rescheduled are viewed as paid on time and financed by the rescheduled loan. The accounting reflects the reduction of payments associated with an existing loan (that is, interest and amortization) and the creation of a new loan, which is treated as a balance of payments financing item. In the aggregated presentation of the balance of payments, the accounting entries are a debit to the current account (investment income, interest) and to the short- or long-term capital account (other loans received) according to the maturity of the original loan, and a credit to exceptional financing (debt rescheduled). In the detailed presentation, the credit entry is in the long-term capital account.

Rescheduling of Obligations Not Yet Due

When obligations that are due beyond the current accounting period are rescheduled, balance of payments entries are required to reflect the change in maturities. Balance of payments need is not attributed to the rescheduling of obligations not yet due and, so as not to distort the measure of the current period's external performance, the entire accounting is above the line, with no distinction in the entries in the detailed and the aggregated presentations of the balance of payments. A distinction is made between a rescheduling that involves the conversion of a short-term loan into a long-term loan and one that involves extending a long-term loan. In the case of the former, a debit entry is recorded in the short-term capital account, and the credit contra-entry is in the long-term capital account. In the case of rescheduling a long-term loan, both entries are in the long-term capital account.

Sectoring

When a debt is rescheduled, it is frequently the case that some resectoring of the debt takes place, typically when private sector debt is assumed by the official sector. When one sector assumes the debt of another sector, the entries in the detailed presentation of the balance of payments are a credit to the capital account of the assuming sector, to reflect the assumption of an obligation, and a debit to the other sector's capital account, to reflect the reduction of a liability. In the aggregated presentation of the balance of payments, the credit entry is recorded as exceptional financing to the assuming sector in the case of obligations due in the current accounting period; both entries are accounted below the line, in exceptional financing, in the case of obligations past due; and there is no distinction between the treatment in the detailed and aggregated presentation in the case of obligations due beyond the current accounting period.

Debt Refinancing

When a debt is refinanced, a new loan is arranged to cover the timely payment of the original debt. Either a rollover of maturing debt obligations takes place, or existing or future debt service payments are converted to a new loan. When a debt is refinanced out of balance of payments need—for example, as part of a multiyear debt reorganization—the balance of payments entries are the same as those described for the rescheduling of obligations due in the current accounting period. That is, the debit entries are to the current account in the case of interest payments refinanced, and to the short- or long-term capital account in the case of amortization payments refinanced (according to the maturity of the original loan); the credit entries are to exceptional financing in the aggregated presentation and to the long-term capital account in the detailed presentation.

When balance of payments need is not the motivating factor behind a debt refinancing, the entire accounting is above the line, and there is no distinction in the treatment in the aggregated and the detailed presentation of the balance of payments. The entries in the balance of payments are the same as those described earlier for the rescheduling of obligations not yet due. That is, the debit entry is in the capital account according to the maturity of the loan, and the credit entry is in the long-term capital account.

Debt Forgiveness

A creditor may forgive all, or part, of the debt of a debtor in a country that is experiencing balance of payments problems. In balance of payments accounting this act of “forgiveness” is treated as an unrequited transfer from the creditor to the debtor—that is, the accounting reflects the reduction of a liability offset by an unrequited transfer. Like other aspects of debt reorganization, the accounting treatment of debt forgiveness differs according to the accounting period in which the debt service obligations fall due.

Forgiveness of Obligations Past Due

When obligations that are in arrears are forgiven, the accounting reflects a reduction in arrears and an unrequited transfer that is treated as a balance of payments financing item. In the aggregated presentation of the balance of payments, just as in the case of the rescheduling of obligations past due, it is a change in the nature of exceptional financing that is recorded, and both the debit and the credit entries appear below the line in the category of exceptional financing. In the detailed presentation of the balance of payments, the debit entries for interest and amortization forgiven are to the short-term capital account, and the credit entries are to the current account, unrequited transfers.

Forgiveness of Obligations Due

When obligations that are due in the current accounting period are forgiven, the accounting reflects a reduction of payments associated with an existing loan and an unrequited transfer that is treated as a balance of payments financing item. In the aggregated presentation of the balance of payments, the debit entries are to the current account (investment income, interest) in the case of interest forgiven and to the capital account (other loans received), according to maturity, in the case of amortization forgiven; the credit entries are to exceptional financing (unrequited transfers). In the detailed presentation of the balance of payments, the credit entries are to the current account (unrequited transfers).

Forgiveness of Obligations Not Yet Due

When obligations due beyond the current accounting period are forgiven, the accounting is above the line, and there is no distinction in the treatment in the aggregated and detailed presentations of the balance of payments. In this case, a debit entry is recorded in the appropriate capital account (other loans received), and the credit entry is recorded in the current account (unrequited transfers).

Debt Write-Offs

In balance of payments methodology debt forgiveness is distinguished from a debt write-off, whereby a creditor may, because of bank supervisory requirements or for prudential reasons, provision against a bad debt without extinguishing the repayment obligation of the debtor. Debt write-offs are treated in the balance of payments accounts in the same way as a valuation change, since no contract with another party disposing of the claim has been made whereby a capital loss could have been realized. Accordingly, debt write-offs are not included in the balance of payments accounts.

II. Derivation of Statistics on Arrears and Debt Reorganization from Balance of Payments Accounts

For those who wish to derive complete data on arrears and the various forms of debt reorganization from balance of payments accounts, a number of difficulties arise that are due to the level of detail at which balance of payments data are currently compiled. Balance of payments categories in which the relevant flows are recorded do not distinguish between transactions associated with arrears and debt reorganization and transactions that are autonomous.

An increase in the degree of detail presented in the aggregated and detailed presentations of the balance of payments would provide a partial remedy to these difficulties. Additional entries would enable data on arrears and debt reorganization to be directly compiled from the balance of payments accounts on an accrual basis and from other sources on a cash or disbursement basis. It is uncertain, from a practical standpoint, to what extent additional detail would be forthcoming from national compilers. With this in mind, an increase in the detail requested could be either in the debit or credit entries. For obligations past due and for obligations due in the current accounting period, the additional detail could be recorded in the capital account in the detailed presentation and in the category of exceptional financing in the aggregated presentation of the balance of payments. In the case of obligations due beyond the current accounting period, for which there are no entries in exceptional financing, the additional detail could appear in the capital account in both the detailed and the aggregated presentations. The suggestions put forward below illustrate some of the possibilities.

Detailed Presentation

National compilers could be requested to distinguish:

  • Recorded capital inflows that are counterparts of interest and amortization arrears

  • Credits entered to reschedule obligations due, past due, and not yet due, specifying the maturity of the obligation rescheduled

  • Credits entered to refinance obligations due and not yet due, specifying maturity of the obligation refinanced

  • Unrequited transfers that are counterparts of interest and amortization forgiven.

Aggregated Presentation

The aggregated presentation of the balance of payments might be expanded such that:

  • For obligations past due and due in the current account period, the entries in exceptional financing would distinguish

    • —credits that counterpart interest arrears

    • —credits that counterpart amortization arrears

    • —debits due to rescheduling debt obligations

    • —debits due to refinancing debt obligations

    • —amortization forgiven

    • —interest forgiven

  • For obligations not yet due, the entries in the capital account would distinguish

    • —amortization forgiven

    • —credits to reschedule short-term loans

    • —credits to reschedule long-term loans

    • —credits to refinance long-term loans

    • —credits to refinance short-term loans.

III. Presentation of Arrears and Debt Reorganization: A Case Study

In this section the expanded accounting procedures for arrears and debt reorganization suggested in Section II are illustrated by a hypothetical scenario of a debtor country whose arrears and debt reorganization result from the central bank's not providing foreign exchange for balance of payments reasons (Tables 24).

Table 2.Scheduled Amortization and Interest Payments of a Hypothetical Borrower (In billions of U.S. dollars)
Item1984198519861987
Debt outstanding60.055.051.047.0
Short-term20.018.016.014.0
Long-term40.037.035.033.0
Amortization5.04.04.0
Short-term2.02.02.0
Long-term3.02.02.0
Interest7.06.06.0
Short-term3.03.03.0
Long-term4.03.03.0
Table 3.Hypothetical Balance of Payments Accounting for Arrears and Debt Reorganization: Aggregated Presentation (In billions of U.S. dollars)
Item198519861987
Current accounta−7.0−6.0−6.0
Investment income, interest−7.0−6.0−6.0
Unrequited transfers
Direct investment and other long-term capitala−3.0−2.0−2.0
Actual repayments−1.0
Repayments in arrears−2.0
Repayments rescheduled−1.5−1.5
Repayments of refinanced debt−1.0
Loans drawn to refinance debt1.0
Repayments forgiven−0.5−0.5
Other short-term capitala−2.0−2.0−2.0
Actual payments−1.0−2.0−2.0
Payments in arrears−1.0
Exceptional financing6.04.00.5
Accrual of arrears
Interest
Long-term2.0
Short-term1.0
Amortization
Long-term2.0
Short-term1.0
Rescheduling of arrears
Interest−2.5
Amortization−3.0
New liabilities5.5
Rescheduling of payments due
Interest1.0
Amortization1.5
Refinancing of payments due
Interest1.0
Forgiveness of arrears
Interest−0.5
Unrequited transfers0.5
Forgiveness of payments due
Unrequited transfers: amortization due0.50.5
Total change in reserves6.06.08.0

Excluding items included in exceptional financing.

Excluding items included in exceptional financing.

Table 4.Hypothetical Balance of Payments Accounting for Arrears and Debt Reorganization: Detailed Presentation (In billions of U.S. dollars)
Item198519861987
Current account−7.0−5.0−5.5
Investment income, interest−7.0−6.0−6.0
Unrequited transfers1.00.5
Interest arrears forgiven(—)(0.5)(—)
Amortization forgiven: long-term(—)(0.5)(0.5)
Capital account1.0−1.0−2.5
Other long-term capital, net−3.07.0−0.5
Drawings on other loans received(—)(10.0)(1.5)
To reschedule: payments arrears5.5
Long-term interest due1.0
Long-term loans due1.5
To refinance
Short-term interest due1.0
Long-term loans not yet due1.0
Repayments on other loans received(−3.0)(−3.0)(−2.0)
Other short-term capital, net4.0−8. 0−2.0
Drawings on other loans received(6.0)(—)(—)
Interest arears
Short-term1.0
Long-term2.0
Amortization arrears
Short-term1.0
Long-term2.0
Repayments on other loans received(−2.0)(−8.0)(−2.0)
Reserves6.06.08.0

The hypothetical position for the resident official sector of a debtor country at end-1984 for total debt outstanding, debt maturity, and projected debt service is represented in Table 2. Faced with a foreign exchange crisis, the debtor country pays in 1985 only US$2.0 billion of the $5.0 billion ($2.0 billion short-term, $3.0 billion long-term) of amortization due and $4.0 billion of the $7.0 billion ($3.0 billion short-term, $4.0 billion long-term) of interest due; in both cases the payments are equally distributed over the maturities. The following events subsequently unfold.

•In 1986 official creditors agree to forgive $0.5 billion of the $2.0 billion of arrears in long-term interest and $0.5 billion in amortization payments of $2.0 billion due on long-term debt. A further agreement is concluded in 1987 to forgive an additional $0.5 billion of amortization payments due on long-term debt.

•The amortization arrears of $3.0 billion and the remaining interest arrears of $2.5 billion are rescheduled in 1986 into long-term debt.

In 1986 the debtor country pays $4.0 billion of the $6.0 billion of interest due, equally distributed over the maturities. In 1986 it reschedules into long-term debt the remaining $1.0 billion of interest due on long-term debt and refinances, with a long-term loan, the remaining $1.0 billion of interest due on short-term debt. Interest payments resume in full in 1987.

•Of the amortization payments due in 1986 and 1987, in each year the annual payments of $2.0 billion due on short-term debt are paid, but the annual payments of $1.5 billion on long-term debt ($2.0 billion less $0.5 billion forgiven by official creditors) are rescheduled to 1988.

In addition to the negotiated debt reorganization later in 1986, to take advantage of lower market interest rates the debtor country decides to refinance $1.0 billion of long-term debt not yet due. To simplify the illustration, it is assumed that no new lending or disbursements take place during the period shown.

By way of example, Tables 3 and 4 illustrate how the case study might be treated if the aggregated and detailed presentations of the balance of payments were expanded in the manner suggested in Section II. The expanded presentation in each case overcomes the potential problems for users of balance of payments statistics that were outlined in Section II. In addition, identifying the individual items in the manner suggested would allow a full debt reorganization package to be presented as a memorandum item to the balance of payments.

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