Abstract

Like the balance of payments manuals issued by the IMF in 1948, 1950, 1961, and 1977, the fifth edition of the Balance of Payments Manual (BPM5; IMF, 1993) serves as the international standard for the conceptual framework underlying balance of payments and international investment position (IIP) statistics. This framework assists countries in systematically collecting, organizing, and comparing these statistics across countries.

Like the balance of payments manuals issued by the IMF in 1948, 1950, 1961, and 1977, the fifth edition of the Balance of Payments Manual (BPM5; IMF, 1993) serves as the international standard for the conceptual framework underlying balance of payments and international investment position (IIP) statistics. This framework assists countries in systematically collecting, organizing, and comparing these statistics across countries.

In drafting the BPM5, the authors took great care to harmonize it with the 1993 SNA. In particular, as was done for the national accounts, they extended the balance of payments framework to encompass transactions, other economic flows, and stocks of external financial assets and liabilities (the IIP).

The international financial crises in the 1990s underscored the importance of reliable and timely statistics, particularly on stock data, as a critical element for assessing a country’s external vulnerability. To complement the IIP and to provide specialized but IIP-linked frameworks for analyzing stock positions, the IMF issued the Coordinated Portfolio Investment Survey Guide (IMF, 1996b),20 the Data Template on International Reserves and Foreign Currency Liquidity, Operational Guidelines, Provisional (IMF, 1999),21 and External Debt Statistics: Guide for Compilers and Users (BIS and others, 2003).

The following sections review the balance of payments and the IIP. Further, they review several data sets that complement the balance of payments and IIP statistics—external debt statistics and direct investment, portfolio investment, and international reserves.

Table 7.

Balance of Payments and International Investment Position Framework

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Balance of Payments

Structured similarly to the national accounts, the balance of payments covers all economic events with nonresidents. This section illustrates the three types of balance of payments accounts: the current account, recording transactions with nonresidents in goods and services, income, and current transfers; capital account, recording transactions in capital transfers and nonproduced nonfinancial assets; and financial account, recording transactions in external financial assets and liabilities. The section also throws some light on the terms surplus and deficit, expressions frequently used in public debate. Further, the section provides examples of the two balance of payments presentations: standard and analytic.

For the relationship between the balance of payments and the IIP, see Table 7. The IIP statement integrates the opening and closing stocks of external financial assets and liabilities with transactions, revaluations, and other economic flows.

Table 8.

Current Account: Standard Components

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Not included elsewhere.

Current Account

The current account’s standard components are goods and services, income, and current transfers. The components, discussed below, are also set out inTable 8. The current account is also closely related to the national accounts.

Goods and services

In the goods and services account, goods cover principally exports and imports—as shown in external trade statistics—adjusted for timing, valuation, and coverage in accordance with the change of ownership requirements of the system. Goods include general merchandise, goods for processing, repairs on goods, goods procured in ports by carriers, and nonmonetary gold. The goods accounts value both exports and imports of goods free on board (f.o.b.) from the country of export, providing for symmetrical valuation.

Statistics on International Trade in Services

The statistics on international trade in services (ITS) provide internationally comparable statistics to meet the needs of private and public sectors, including for globalization studies and trade negotiations and agreements. Countries collect ITS information through a coherent conceptual framework within which they can organize the statistics.

ITS statistics take a much broader and detailed view of international trade in services than the conventional balance of payments perspective outlined in BPM5. In particular, they (1) classify the services delivered through conventional trade between residents and nonresidents in more detail than is contained in BPM5, (2) include a treatment of local delivery of services through a foreign commercial presence, and (3) provide some link between the two systems.

ITS statistics cover four modes through which services may be traded internationally:(1) cross-border supply—where suppliers of services in one country supply services to consumers in another country without either party moving into the territory of the other; (2) consumption abroad—where a consumer in one country moves to another country to obtain a service; (3) commercial presence—where enterprises in an economy supply services through the activities of their foreign affiliates abroad; and (4) presence of natural persons—where an individual moves to the country of the consumer to provide a service on his own or employer’s behalf.

For guidance on compiling ITS statistics, users may refer to the Manual on Statistics of International Trade in Services, issued by an international task force in 2002 (UN and others, 2002).

For services, the transportation and insurance service items in the accounts record the costs of shipping the goods between the exporting country and importing country, performed by residents for nonresidents, and vice versa. Other services cover a range of activities, including transportation of passengers, travel, communication, construction, and so forth. For a broader view of trade in services, readers are advised to view statistics on international trade in services (ITS), as summarized inBox 10.

Income

The second component of the current account, income, creates a separate category, as in the national accounts, for transactions in primary incomes. These transactions comprise compensation of employees (labor income) and investment income—the latter identifying separately direct investment income, portfolio investment, and other investment. The difference between direct investment, portfolio investment, and other investment is discussed below in the context of the financial account.

Current transfers

The third component, current transfers, identifies separately, as in the national accounts, the transfers involving the resident general government sector and those involving other resident sectors. In the latter, workers’ remittances make up a major component.

The current account balance in particular mirrors the saving and investment behavior of the domestic economy in the national accounts. More information on the linkage between the balance of payments and national accounts aggregates and balances is provided in the chapter on linkages at the end of this pamphlet.

Capital Account

Similar to the capital account of the national accounts, the balance of payments capital account records transactions in capital transfers and non-produced, nonfinancial assets. Moreover, when recorders draw a balance to take account of the balance of payments current account and capital account transactions, then that balance equals NL/B with the rest of the world.

The high-level components of the capital account, along with the financial account, are presented in Table 9.

Financial Account

The financial account records all transactions in financial assets and liabilities between residents and nonresidents.22 It records, therefore, the form in which the net lending/borrowing with the rest of the world takes place.

Table 9.

Capital and Financial Accounts: Standard Components

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Although the scope of the transactions covered in the financial account is the same as in the national accounts, the classification differs. The financial account transactions are classified using criteria as follows:

  • 1. By function (that is, distinguishing the purpose of the investment). The functional categories are direct investment, portfolio investment, financial derivatives, other investment, and reserve assets:

    • a. Direct investment is characterized by the investor’s having an effective voice in the management of an enterprise, identified using a 10 percent equity ownership rule.

    • b. Portfolio investment refers to investment in debt and equity securities (both usually traded) other than those included in direct investment and reserve assets.

    • c. Financial derivative instruments are linked to a specific financial instrument, through which specific risks can be traded in their own right in financial markets.23 They include options, futures contracts, and swaps.

    • d. Other investment comprises instruments not covered by the other categories, including trade credits, loans, currency and deposits, and other assets/liabilities.

    • e. Reserve assets consist of external assets readily available to and controlled by the monetary authorities for addressing payments imbalances. The category comprises monetary gold, SDRs, reserve position in the IMF, foreign exchange assets (consisting of currency and deposits, securities, and financial derivatives), and other claims.

  • 2. By whether the instrument is an asset or liability.

  • 3. By the nature of the instrument involved—equity, debt, trade credit, loans, currency and deposits, and so forth.

  • 4. By the domestic sector (in the case of portfolio investment and other investment) acquiring the assets or incurring the liabilities. The sectors are monetary authorities, general government, banks, and other sectors.

  • 5. Further by long- or short-term investment (in the case of other investment and the debt securities component of portfolio investment) according to the original maturity of the instrument.

The high-level components of the financial account, along with the capital account, are presented in Table 9. Readers are referred to pages 43–48 in the BPM5 for the full standard-component listing of the balance of payments.

Regarding the holdings of reserve assets by the monetary authorities, factors other than the transactions in those assets may affect them. For example, the IMF’s allocation of SDRs to its member countries increases each country’s holdings of reserve assets, but the allocation has no counterpart in economic transactions. Similarly, other factors that are not transactions are the monetization or demonetization of gold by the monetary authorities or the change in the value of reserve assets arising from exchange rate movements. These nontransactional changes in reserve assets are shown as other economic flows.

Surplus or Deficit

In public debate, the expressions surplus or deficit in the balance of payments are frequently used. They are often left undefined and may have different meanings in different countries. Broadly, a surplus refers to a positive balance for a set of transactions (that is, when the sum of the credit entries exceeds the sum of the debit entries), whereas a deficit refers to a negative balance of the set of transactions (that is, when the sum of the debit entries exceeds the sum of the credit entries).

At one time IMF staff endeavored to precisely define the concept of overall surplus or deficit, but it soon became clear that this approach gave rise to a number of difficult borderline cases. More recently, countries have used a more flexible approach, recognizing that sound policy cannot be based on a single figure but must involve analyzing the balance of payments as a whole, in the context of economic developments at home and abroad. For policy purposes, countries now use analytic statements involving several balances. These balances may include the goods and services balance, the current balance, and the financial account balance.

Balance of Payments Presentations

Two types of balance of payments presentations are the standard presentation and the analytic presentation.

Standard presentation

Table 10 shows a worked example of a balance of payments standard presentation, which includes in summary form the standard components shown in Tables 8 and 9. The table shows the data in a conventional two-column credit and debit format, based on data examples in the 1993 SNA. The balance of payments framework is fully harmonized with the national accounts,24 and the net lending (+)/net borrowing (–) in the 1993 SNA is equivalent to the sum of current and capital accounts in the balance of payments.

Table 10.

Balance of Payments Standard Presentation

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Analytic presentation

Table 11 provides an example of an analytic presentation.25 Analytic statements strategically regroup the balance of payments standard components to focus on particular analytic issues. In this case,Table 11 rearranges the entries fromTable 10 into a single-column format with credits shown as positive entries and debits as negative entries.

The table reclassifies certain entries with reserve assets and introduces various balances. Analysts have derived several balances by distinguishing above-the-line components from below-the-line components and including a measure of overall balance that distinguishes autonomous transactions (that is, total: groups A through D in the table) from accommodating transactions (that is, those that are included in group E: reserves and related items). Thus, the table shows reserve assets and selected liabilities as financing the overall surplus or deficit.

Table 11.

Balance of Payments Analytic Presentation

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Excludes components that have been classified in group E.

The selected liabilities in the table are those that can be incurred—in conjunction with, or as an alternative to, the use of reserve assets to finance payments deficits—or extinguished to absorb surpluses. They consist of use of IMF credit and loans and other arrangements (denoted exceptional financing) made by the national authorities (or by other sectors fostered by the authorities) to deal with payments imbalances. Exceptional financing transactions range widely from bond issuance, grants received, and debt forgiveness, to temporary accumulation of payments in arrears.

International Investment Position

The IIP is the balance sheet of financial assets and liabilities for an economy with respect to the rest of the world. It provides information on the stock of those financial assets and liabilities at the beginning and end of the period; it also describes the changes in those stocks in terms of transactions, revaluations, and other economic flows. Revaluations separately identify price changes for the asset/liability from exchange rate changes.26 The net IIP—external financial assets minus external liabilities—shows the difference between what an economy owns in other economies in relation to what it owes. The net IIP, combined with the stock of an economy’s nonfinancial assets, constitutes the net worth of that economy.27

The IIP is classified in the same way as the financial account of the balance of payments. Also, the key concepts guiding the compilation of IIP statistics—residence, valuation, and time of recording—are the same as for the balance of payments and national accounts. The items constituting financial assets and liabilities are financial claims on and liabilities to nonresidents, equity assets and liabilities, financial derivative instruments, monetary gold, and SDRs. The financial instruments making up the assets and liabilities could be grouped according to the functional type of investment—direct investment, portfolio investment, financial derivatives, other investment, and reserve assets.Table 12 provides a worked example of the IIP framework, based on the data examples in the 1993 SNA.

The IIP provides a picture of the portfolio of external assets and liabilities for an economy at a point in time: this portfolio is normally the result of past external transactions measured according to current market values (current market prices and exchange rates) and other factors (such as writeoffs or reclassifications).

Table 12.

International Investment Position

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A country can use an IIP to analyze the appropriateness of its external asset portfolio against its debt profile. It can also use a set of IIPs for a number of periods to assess developments in the portfolio over time. Indeed, the IIP provides a meaningful basis for countries to analyze rates of return of their external investments. Often, they can use net IIP of an economy to analyze developments and trends in the performance of an economy with the rest of the world. The IIP differs from measures of gross external debt by including information on financial assets and nondebt liabilities (such as equity and financial derivatives).

External Debt Statistics

For measuring and presenting external debt statistics, the External Debt Statistics: Guide for Compilers and Users, published by the IMF in 2003 (BIS and others, 2003), aims to comprehensively guide users, advising on compiling and analyzing the data. The IMF and other international organizations developed the Guide in response to concerns of markets and policymakers to have better data to help assess external vulnerabilities at a time when increasing international capital flows are resulting in greater market interdependence.

Data Template on International Reserves and Foreign Currency Liquidity

The data template on international reserves and foreign currency liquidity is designed to integrate the concepts of international reserves and foreign currency liquidity within a single framework. It covers not only the authorities’ foreign currency resources on a given date but also inflows and outflows of foreign exchange over a future one-year period. This provides a broader framework for assessing countries’ foreign currency liquidity, considered necessary at a time of increasing complexity and importance of such information.

The template provides a comprehensive account of country authorities’ foreign currency assets and the drains on such resources resulting from various foreign currency liabilities and commitments of the authorities. It reports the amount and composition of official reserves and other foreign currency assets by the monetary authorities and the central government. It also reports foreign currency obligations of the monetary authorities and central government coming due in the short term, including those related to their financial derivative positions and guarantees extended for quasi-official and private sector borrowing.

To assist countries that are compiling the template to report accurately, the IMF issued in 2001 the International Reserves and Foreign Currency Liquidity: Guidelines for a Data Template (Kester, 2001), replacing a provisional 1999 issue (IMF, 1999).

A previous guide on external debt, published in 1988, used a measure of debt commonly known as disbursed and outstanding debt valued in nominal terms. Largely, this measure reflected the traditional focus on borrowing from banks and government sources, often by the public sector.

For many countries, the growth in the 1990s in cross-border private capital flows led to a need for a broader focus. The Guide introduced a comprehensive framework based on the 1993 SNA for measuring the gross external debt position. Under this framework, gross external debt includes all liabilities (other than equity and financial derivatives) owed to nonresidents. The framework is consistent with the balance of payments and IIP.

Foreign Direct Investment Statistics

Direct investment, a category of international investment, reflects the objective of a resident entity in one economy obtaining a lasting interest in an enterprise resident in another economy. The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the investor over the management of the enterprise.

Growing international linkages through direct investment are an important feature of globalization. The integration of capital markets and the consequent rapid growth in direct investment have brought increased scrutiny of the activities of multinational enterprises. In scrutinizing these activities, analysts widely use two sets of statistics:

  • Direct investment statistics, which measure cross-border positions and flows between entities in direct investment relationships; and

  • Statistics that measure the operations of foreign affiliates of multinational enterprises—such a as sales, employment, and assets—and thus provide a measure of the impact of the direct investment on the economy. These statistics are often referred to as foreign affiliates trade statistics.

The direct investment statistics form components of the balance of payments and IIP. They provide data for balance of payments forecasting, economic surveillance, and vulnerability analysis. To facilitate analysis, countries often extend direct investment statistics to provide geographical information on transactions and positions by partner country and region and to provide breakdowns by industrial sector. Harmonized international statistical guidelines are provided in the BPM5 and, in more detail, in the OECD Benchmark Definition of Foreign Direct Investment, third edition (OECD, 1996).

The priority that individual countries give to compiling data series going beyond gross external debt, presented in the Guide, will vary depending on circumstances. However, the Guide strongly recommends that countries compile data on the debt-service schedule (the timing and magnitude of future payments) and currency composition of external debt (an indicator of exposure to exchange rate movement). These data reveal essential information on the external vulnerabilities facing an economy.

Similarly, the Guide advises on how to measure the net external debt position—gross external debt less external assets in the form of debt instruments. For economies whose private sector is active in financial markets, the net external debt concept, like the net IIP, is particularly relevant in assessing the sustainability of the external position.28

Coordinated Portfolio Investment Survey

The coordinated portfolio investment survey (CPIS) is an international survey of the holdings of portfolio investment assets. The survey provides data on holdings of equity and debt securities (both short- and long-term) from the perspective of security holders. It brings together data on the type of issue, country of residence of issue, and country of holder. It also contains some information on the sector of holder and currency of issue.

Countries also collect a similar breakdown of securities in the reserve assets of many of the major economies holding reserve assets, and securities of international organizations, but these data are published in aggregate from the asset side.

Because countries provide the data on a bilateral basis, the survey provides information about the counterparty security liabilities of debtor countries, which could use this information to estimate their own outstanding liabilities. It also helps other users understand the magnitude of cross-border exposure of countries. The CPIS complements the IIP data by providing a more detailed view of portfolio investment activity.

To help jurisdictions undertake the survey, the IMF published a Survey Guide (Coordinated Portfolio Investment Survey Guide; IMF, 1996b) and a second edition of the Survey Guide (IMF, 2002a).

Direct Investment, Portfolio Investment, and International Reserves

Three other data sets complement balance of payments and IIP statistics by providing a more detailed view of activities encompassed within, or linked to, these frameworks. These data sets, described inBoxes 11 (page 58),12 (page 59), and13, are the data template on international reserves and foreign currency liquidity, the foreign direct investment statistics, and the coordinated portfolio investment survey.