The Balance of Payments Textbook, like the Balance of Payments Compilation Guide, is a companion document to the fifth edition of the Balance of Payments Manual. The Textbook provides illustrative examples and applications of concepts, definitions, classifications, and conventions contained in the Manual and affords compilers with opportunities for enhancing their understanding of the relevant parts of the Manual. The Textbook is one of the main reference materials for training courses in balance of payments methodology.
Such transactions are included for pragmatic reasons and to increase the analytical usefulness of the statistics. For additional discussion on this topic, see paragraphs 454–455 of chapter 8 of the Textbook.
This is a simple calculation of the interest. In practice, the calculation of interest in each period will be based on the outstanding liability during the period. By comparison with those for later years, higher interest payments (and lower repayments) will be due in earlier years.
Such revaluations should be undertaken at regular intervals. Any unrealized gain or loss in the value of the loan outstanding would be reflected in the international investment position but not in the balance of payments. However, if the lease contract specified that the lessor could purchase the goods for a fixed value at the end of the lease and the fixed value was equal to the written-down value of the good, the lessee’s liability at any point during the lease would be the written-down value of the good. This result may seem to violate the market price principle; however, it is the lessee’s financial liability, which is not necessarily the same as the value of the good being leased, that is being valued.
This recommendation could be a source of asymmetry. The partner countries to transactions involving regional central banks are likely, in their BOP statements, to allocate these transactions to notional countries representing regional central banks rather than apportioning the transactions to member countries of regional central banks.
Certain leases not satisfying this rule of thumb can be considered financial leases if the leases are accounted for as financial leases in the accounting records of the transactors or if, in the compiler’s opinion, most of the benefits and risks of ownership have passed from the lessor to the lessee.
Timing errors will occur because, in the period in which the goods are consigned, entries for the initial consignment will not be offset by entries in the financial account. Instead, the offsetting entries will be recorded in a subsequent period when the goods are actually sold (or returned to the exporter).
Subtracting claims from premiums to determine a proxy for the insurance services item is more likely to result in the calculation of a “negative” service charge for life insurance than for nonlife insurance—even if the calculation is made with average premiums and claims from a number of years.
Furthermore, BOP compilers in Domestica would generally not have access to this information. However, customs authorities in Nostaw may include these fees in their valuation of Nostaw’s imports, in which case the fees should be deducted by Nostaw’s BOP compilers.
In rare circumstances, a nonresident may rent land from a resident. For example, a traveler could rent land while traveling in an economy other than his or her own or an enterprise operating temporarily in another economy could rent land as part of the temporary operation. In these cases, the rental would be recorded in the balance of payments as part of the services component; the rent from the traveler would be recorded under travel; and the rent from the enterprise would be recorded under miscellaneous business, professional, and technical services.
An exception to the netting of income flows between a direct investor and a direct investment enterprise occurs when each enterprise is considered a direct investor in the other. In these cases, income flows between the two enterprises should be recorded on a full gross basis.
The total profit from the project is equal to the value of output (100,000 units) less costs incurred in producing the output (62,000 units). As costs are equally incurred in both years, the 38,000–unit profit is equally attributable to both years. Were two-thirds of the cost incurred in year 1 and one-third in year 2, two-thirds and one-third—respectively—of the profit would be attributable to year 1 and year 2.
Direct investment income can only relate to operating profits (described in chapter 6) earned in either the current or the previous period. When remittances exceed earnings, a withdrawal of capital should be recorded in the balance of payments.
It is useful to recall the treatment of embassy land, etc. According to conventions presented in the BPM, such land is considered part of the territory of the government using the land rather than part of the territory of the host country.
For many of these short-term securities, interest income will be accrued and paid—whether by way of the difference between redemption and issue price or by way of coupon—in the same accounting period. In practice, therefore, the recording of interest on money market instruments closely approximates the due-for-payment basis on which investment income is recorded.
Pokolbin owned the shares in the Cromanian enterprise prior to the exercise of the option contract. Otherwise, Pokolbin would have to purchase these shares (at market value) in order to deliver the shares to Coonawarra. Such a purchase could result in the recording of additional transactions in Pokolbin’s balance of payments.
An exception is derivatives (such as interest rate swaps and forward rate agreements) associated with interest rates. Transactions in these instruments are recorded in the investment income component of the current account.
Interest accrued but not paid on direct investment should be offset by an increase in non-equity direct investment, and interest accrued but not paid on portfolio securities should be “reinvested” in the securities.
Other holders include the Bank for International Settlements, the International Bank for Reconstruction and Development, the International Development Association, the Andean Reserve Fund, the Arab Monetary Fund, the Central Bank of West African States, the Bank of Central African States, the Eastern Caribbean Currency Authority, the International Fund for Agricultural Development, the Nordic Investment Bank, the Swiss National Bank, the Asian Development Bank, the East African Development Bank, and the Islamic Development Bank.
In formal terms, a country’s reserve position in the Fund equals the country’s quota, minus the holdings in the Fund’s Number 1 Account, of the country’s national currency (or equivalent in securities), minus any outstanding purchases of Fund credit made by the country.
A transaction consists of the transfer of economic value from one economic unit to another. As the creation and extinguishment of SDRs and monetary gold do not involve such transfers, no transactions take place. In the fourth edition of the BPM, creation and extinguishment of these instruments were considered transactions. However, to preserve the double entry nature of the system, corresponding and offsetting notional counterpart entries were required.
For the sake of simplicity, it is assumed that the increase in the market value of the securities is not attributable to interest accrued but not due for payment. Such interest would be recorded as a transaction in the balance of payments; see chapter 6 of the Textbook for further details.
The exchange rate prevailing on the date that a valuation change occurs should theoretically be used to convert a valuation change denominated in one currency to another currency. In practice, it is unlikely that the compiler will have access to such detailed information on the timing of valuation changes. Therefore, period average exchange rates are used in the example.
A number of countries cross classify debt instruments by residual, as well as original, maturities, although no such classification is shown in the BOP standard components. Residual maturity comprises the time remaining from the date of an IIP statement to the expiration of a financial instrument.
When such an approach is used to measure direct investment, it will probably be necessary to adjust the price increases observed in related investments for the component of the price increase attributable to reinvested earnings, which are recorded as transactions in BOP statistics.
For any period t, the value of a discount (or premium) amortized for that period can be calculated as:
ADt = ((Discount * i) / ((1 + i)n – 1)) * ((1 + i)(t–1)) in which
ADt = amortized discount applicable to period t
n = number of periods in life of security
i = (percentage interest rate prevailing at time of issue) / 100
Therefore, an estimate of the value of a security could be derived by summing the discount (or premium) amortized for each period and adding this amount (plus any non-discount income accrued but not due for payment) to the issue price.
A country’s reserve position in the International Monetary Fund equals the country’s quota, minus holdings of the country’s national currency in the Fund’s Number 1 Account (or equivalent in securities), minus any outstanding purchases of Fund credit that the country has made.