Abstract

492. Transportation services include passenger, freight, and other transportation services provided by residents of one economy to residents of another economy.88 The BPM recommends that transportation services be classified by mode of transport (namely, sea, air, and other, which includes rail, road, inland waterway, and space) and, in turn, that these categories be classified by type of service (namely, passenger, freight, and other transportation services).

Transportation

Introduction

492. Transportation services include passenger, freight, and other transportation services provided by residents of one economy to residents of another economy.88 The BPM recommends that transportation services be classified by mode of transport (namely, sea, air, and other, which includes rail, road, inland waterway, and space) and, in turn, that these categories be classified by type of service (namely, passenger, freight, and other transportation services).

493. To record transportation and associated services correctly in the BOP, it is necessary to distinguish between the owner of mobile equipment and the operator of the equipment. Both entities may be the same, but often they are not. In fact, for some items of equipment, a chain of leasing arrangements may separate the owner from the operator.

494. The owner is generally the enterprise that has legal title to the equipment. Because a change of ownership is presumed in the case of financial leases, the lessee of mobile equipment is considered the owner for BOP purposes. If a parent enterprise transfers mobile equipment to a branch located abroad, the branch is—for BOP purposes—considered the owner if the equipment is recorded, for tax purposes, in the books of the branch. Ships registered under flags of convenience should be attributed to the legal owners.

495. The enterprise that controls the operation and movement of the equipment is regarded as the operator. The operator is usually responsible for supplying a crew; maintaining equipment in proper working order; and deciding when, and to which location, equipment will be moved.

496. An owner and an operator may be the same or different entities. As separate entities, they may be residents of different economies. In this case, the compiler should record operational lease payments, which are made by the operator to the owner, in the operational leasing item under services.

497. Owners may enter into a number of leasing or chartering arrangements. Various terms are used to describe these arrangements, but a broad description should suffice for purposes of the Guide.

498. There are bare boat or bare bottom charter arrangements whereby an owner leases a vessel to an operator, who is responsible for equipping the vessel and supplying the crew. These leases usually cover long periods. The compiler should be satisfied that the leases are operating leases and not financial leases. If, for example, a vessel is owned by a bank or other type of financial institution, the compiler should, for BOP purposes, regard the vessel as being owned by the lessee.

499. There are time charter arrangements whereby a vessel is leased to an operator who provides a crew. The bare boat or bare bottom charter is a form of time charter. A time charterer may also lease a vessel from a bare boat charterer. For BOP purposes, the time charterer should be regarded as the operator although, if there are several time charters involved, the charterer supplying a crew is regarded as the operator.

500. In addition, there are voyage charters. For example, an exporter or an importer may hire, for a single voyage, a vessel to ship a bulk commodity such as wheat or minerals. The voyage charterer has no responsibility for operation of the vessel and is not, therefore, considered the operator. A variation of the voyage charter, the space charter or slot charter, consists of an arrangement in which space on the vessel, rather than the whole vessel, is hired. Payments for voyage, space, and slot charters should be recorded as freight.

501. It is the transport operator who supplies services involving the movements of goods, persons, and mail—that is, freight, passenger, and other transportation services. For freight, the compiler should distinguish among freight on imports, freight on exports, and other freight. With regard to transport of persons, the compiler must distinguish between international services (included in passenger services) and domestic services (included in travel).89 Other forms of services may be provided by mobile equipment and, if these services involve transactions between residents and nonresidents, such services should be included in the BOP. For example, drilling services provided by a mobile oil rig would be recorded in agricultural, engineering, and technical services.

502. The operators of mobile equipment visiting ports will incur various port charges and acquire goods and services, such as fuel (bunkers), provisions and catering services, repairs (all included in goods), and loading and unloading services (included in other transportation services).90 In addition, if an agent looks after an operator’s affairs while the vessel is in port, the operator will be charged for the agent’s services (included in other transportation services). Other port expenses may also be incurred by operators and by owners; these should be identified and recorded in the BOP as appropriate. While in port, the crew may make various expenditures that should be identified and included in business travel.

503. In addition to expenses incurred in port, other expenses, such as commissions paid to selling agents for sales of passenger fares and freight services (other transportation services) may be incurred by nonresident operators.

504. Table 12.1 sets out items in transportation services and outlines data sources and methods that could be used to compile them. Data on mode of transport should be readily attainable from any of the sources. The sources and methods summarized in the table are subsequently explained in more detail.

Table 12.1

Compilation of Items in Transportation Services

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Freight and Insurance on Imports

505. The BOP compiler should measure international freight services provided by nonresident transport operators on imports of the compiling country as these services comprise part of freight debit items. However, when it is not possible to measure these services directly, the compiler may measure total international freight on imports and deduct those services (if any) provided by resident transport operators. (It may also be necessary to measure total international freight in order to adjust imports of goods that have been measured on a c.i.f. basis to the preferred f.o.b. basis.)91

506. While insurance premiums on international freight are not part of transportation services, there is a close relationship between these premiums and the freight services themselves.92 Because of this relationship, it is often convenient to estimate these two items at the same time.

507. The compiler may use several methods to estimate freight and insurance on imports, and these are set out in table 12.2 (on pages 119-120). Many of these methods require detailed collection and/or assembly of data, and it may not be possible to undertake the work required on a regular or timely basis. Therefore, until data become available, the compiler may have to estimate freight and insurance premiums on imports by: (a) calculating ratios of freight and insurance premiums to total imports (or to groups of commodities imported) from a detailed analysis and (b) extrapolating ratios for more recent periods. Factors such as changes in freight and insurance rates, capacity, and the commodity composition of imports should be taken into account.93 This method of extrapolation may also be used to make BOP projections of freight and insurance on imports.

Table 12.2

Methods for Estimating Freight and Insurance on Imports

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Alternative Bases for Collection of Passenger Fares

508. To measure passenger fares, which will typically be the largest component of passenger services, the compiler has two broad options: to collect information on the basis of travel revenue or on the basis of ticket sales. Regardless of the basis used, the data provider should report revenue or sales before the deduction of commissions.

509. It is common for an airline ticket sold by one airline to be used by a passenger on a number of airlines when segments of the journey are traveled on airlines other than the airline issuing the ticket. Therefore, for BOP purposes, the compiler should—when possible—obtain data on revenue earned by an airline from residents of other countries rather than data on sales by an airline to residents of other countries. It is possible to collect such data as airlines keep records on revenue generated by point of sale. The compiler must make a simple, but not altogether unreasonable, assumption that tickets sold in a particular country are sold to residents of that country. (The validity of this assumption can sometimes be tested, and adjustments made to estimates as necessary, by using surveys of travelers.) However, as not all airlines earning revenue from residents of a particular country will have offices in that country, it may be difficult for the compiler to obtain complete coverage of passenger fare revenue earned by nonresident operators from residents of the home country.

510. An alternative means of measuring passenger fare revenue earned by nonresident operators is to collect information on the total value of tickets sold in the compiling country and deduct from this total value the earnings of resident carriers. It should be possible to approach airlines with offices in the compiling country and travel agents who place business directly abroad with nonresident carriers to obtain data on total ticket sales—but this measure should be used with caution. Many tickets are purchased and not used; therefore, allowance should be made for refunds as well as for the time lag between ticket purchase and revenue generated. In some cases, passenger fares may be a component of package tour payments, and the compiler may, in consultation with travel industry representatives, have to separate passenger and travel components.

Transportation Activities of Resident Transport Operators

511. Information on BOP transactions of resident transport operators will often be available, through ES or an ITRS, from the operators themselves. An ITRS (as discussed in Chapter 3) would measure transactions made by these enterprises through the banking system. In addition, these entities are likely to have numerous BOP transactions that bypass an ITRS or are recorded on a net basis. Proper measurement of these transactions typically requires a direct approach to operators. Such an approach would be similar to the approach, which is outlined in Chapter 5, used in ES. Also, payments by nonresidents to resident operators for transportation of the compiling country’s imports should be deducted from freight debits rather than recorded as freight credits.

512. It may also be necessary to approach resident transport operators for information on non-BOP transactions. For example, freight (paid by both residents and nonresidents) on imports could be deducted from total freight on imports to estimate the services provided by nonresidents.

513. When actual data on BOP transactions is unavailable, data models utilizing related information could be established. For example, data on passenger fare earnings of resident operators could be estimated by multiplying appropriate fares by numbers of nonresident passengers carried by resident carriers and classified by country of origin/destination combinations. After a total earnings figure is determined, BOP expenses, such as commissions on ticket sales and port charges associated with these earnings could then be determined by applying ratios of expenses to earnings. Such ratios could be determined in consultation with industry representatives or by an analysis of historical data.

514. Freight services provided by resident transport operators on exports could be based upon an analysis of exports (from ITS) carried by the operators and classified by commodity, country, and mode of transport. Various freight rates could be applied in a manner similar to the method outlined in option 4 of table 12.2. Associated data on port expenditure and commissions abroad could be determined by using expense-to-earnings ratios established in consultation with the industry.

515. Until data from operators or data models become available, it may be necessary for the compiler to extrapolate the relevant transportation series. The extrapolation could be accomplished by establishing the historical relationship between transportation series and other aggregates (for example, passenger fares to nonresident arrivals or freight services to exports). Similar methods could be used to project transportation. Volumes and prices should be projected separately. Extrapolations and projections should take into account factors affecting the demand for services, known changes in capacity, and changes in prices.

Transportation Services Associated with Nonresident Operators

516. BOP transactions of nonresident transport operators with the compiling country are typically more difficult to measure than BOP transactions of resident operators. Nevertheless, by using a well-designed ITRS, ES of agents and branches of nonresident operators, certain official sources, data models, or a combination of these approaches, it should be possible to compile reliable estimates for relevant components in the BOP.

517. Data on import freight services that are provided by nonresident transport operators could be obtained from agents and branches of nonresident operators or from importers themselves. ES or an ITRS could be used for either approach. However, if an ITRS is used, it would be necessary to estimate the value of international freight services included in amounts paid by importers to nonresident exporters. Such amounts, which may be available from importers, should be added to freight debits actually measured in an ITRS.94 Data on payments made by nonresidents to resident operators for transportation of imports should be deducted from freight on imports rather than recorded as freight credits. Also, it would be important to identify in the ITRS, or through a supplement to the ITRS, any payments made in domestic currency by importers to nonresident transport operators,95 If, on the other hand, ES of agents and branches of nonresident operators are used, the compiler should be satisfied that coverage is adequate and that branches and agents are fully aware of relevant BOP transactions of enterprises for which they act. If this is not the case, alternative strategies should be investigated.

518. An alternative method for estimating import freight services provided by nonresidents is to estimate total freight on imports (as previously described) and to deduct from the estimate freight services provided by resident transport operators. The latter could be collected through a supplement to an ITRS or through ES. This may be the most effective way to measure freight on imports.

519. In some countries, customs records provide information, such as name and Lloyd’s number, on vessels carrying the country’s imports. From this information, it should be possible to identify vessels operated by nonresidents.96 If customs data can also be used to measure freight on imports—for example, by taking the difference between imports c.i.f. and imports f.o.b. and deducting an estimate for insurance—this data could be matched with information on the vessel to determine freight services provided by vessels operated by nonresidents.

520. Data on passenger fares could be collected by approaching branch offices and ticket selling agents of nonresident operators. Alternatively, total ticket revenue earned from the transportation of residents by nonresident operators could be estimated by: (a) multiplying, by average fares, the number of resident passengers (classified by destination of travel and mode of transport) who are leaving and entering the compiling country and (b) deducting earnings by resident operators. Data on the number of passengers may come from migration statistics or from other statistics, such as reports by airports or airline operators, on arrivals and departures.97 Data on average fares could, with allowances made for different fare structures, be obtained from travel agents or airline companies.

521. Other earnings for services provided by nonresident operators could be measured by using an ITRS, ES of resident users of the services, or ES of local agents and branches of nonresident transport operators.

522. Data on services provided to nonresident transport operators could be collected through an ITRS, through ES of resident providers of the services or of local agents and branches of nonresident transport operators, or through official sources (such as port records). Alternatively, for some or all of the services, a data model could be developed. The compiler could establish a set of cost ratios (such as agent fees, loading and unloading services, and various taxes and charges) to freight on imports and/or exports. Such analyses should be performed on the basis of commodity and mode of transport. Historical data could be used to establish ratios, or local agents and branch offices of nonresident transport operators could be approached on a selective basis. Next, shares of freight on imports and exports carried by nonresident operators should be established. Information for imports should be available from the relevant BOP item. For exports, information may be available from ITS, or an estimate could be made on the basis of discussions with, or a collection from, a representative group of importers and exporters.

523. After nonresident shares of freight on exports and imports are established, relevant ratios would be applied to these shares for the purpose of estimating values of services provided to nonresident operators.

524. Alternatively, for some services (such as port charges) provided to nonresidents, the value could be obtained by: (a) estimating the value of total services provided to all operators and (b) deducting from this estimate the value of services provided to resident operators. (Data on the latter could be collected from resident operators.)

525. Some of the methods previously outlined will require collection and/or assembly of detailed data, and it may not be possible to undertake the work required on a frequent or timely basis. Therefore, until data become available, the compiler may have to extrapolate certain transportation services.

526. Passenger fares and related services could be extrapolated by using ratios that reflect the historical relationship between passengers fares (in constant prices) and arrivals and departures. Results should be inflated by using a price index for passenger fares. This approach also applies to projections of this item. Factors such as projected changes in disposable income of travelers, possible changes in industry capacity, government policy changes that may have an impact on the number of arrivals and departures, and other aspects of travel should also be considered.

527. Other transportation services could be extrapolated by using ratios of services to various aggregates (such as import and/or export volumes) and adjusting for price changes. This approach also applies to BOP projections for which it would be necessary to project trade volumes, industry capacities, and prices of services.

Travel

Description and Classification

528. Travel covers expenditure by residents of one economy who are traveling in another.98 These expenditures should be classified to business and personal travel because, in the national accounts, the former represents an intermediate expenditure of business and the latter represents final consumption expenditure.99

Data Sources and Methods

529. Four broad approaches could be used to measure travel expenditure, and these are summarized in table 12.3. One approach measures instruments used to pay for travel. The most common instruments are travelers’ checks, credit and debit cards, prepaid tours and advances, and currency notes and coin. Another approach measures the types of goods and services acquired by travelers. A third approach uses partner country data, and a fourth uses a data model.

Table 12.3

Compilation of Travel Services

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530. An ITRS could be employed to measure instruments used by travelers to pay for travel. These instruments include travelers’ checks that pass through the banking system or through nonresident bank accounts of other resident entities, credit and debit card payments, payments for prepaid package tours and advances for travel, foreign currency notes and coin surrendered to the banking system or to foreign exchange dealers (for travel credits), and domestic currency repatriated from abroad (for travel debits). In respect of travelers’ checks, the compiler should ensure that data are reported on a gross basis—that is, before the deduction of commissions on travelers’ check sales that should be included in financial services. Collection rules should be designed to ensure that there is no overlap or duplication of the information captured.

531. One problem with relying solely on an ITRS is that it could be difficult to determine the breakdown between business and personal travel (and between travel and certain other services). Using some other criterion, the compiler must subclassify total travel expenditure. An ITRS may have to be supplemented by other sources to obtain such data as expenditure financed from income earned in the host economy and travel services provided in kind—particularly in respect of nonresident workers and students.

532. ES may employ an approach similar to that taken in an ITRS, which measures instruments used to pay for travel, or ES may collect information from enterprises that provide services to nonresident travelers. The latter only applies to the measurement of travel credits. These ES may have to be supplemented by other sources to obtain such data as expenditure by short-term, nonresident workers and students. Paragraphs 152-160 of Chapter 4 contain a discussion on the use of ES to measure travel services.

533. Surveys of travelers, which are discussed in Chapter 7, paragraphs 315-324, can be used as the primary source of information for the travel item, as a supplement to ES or an ITRS, or as input for a data model. When surveys of travelers are used as primary sources of information on travel, information could be collected on instruments used for payment or on actual goods and services acquired by travelers. The former approach tends to work best when travel debits are measured by surveying resident travelers some time after they have returned to their home economies; the travelers are likely to retain appropriate financial records of their trips or are able to provide reasonable estimates. The latter approach works best when travel debits are measured by surveying returning resident travelers upon or shortly after their return, or when travel credits are measured by surveying nonresident travelers as they depart from the compiling country.

534. In some countries, certain groups of travelers (such as students and medical patients) may be significant. As the expenditure of these travelers may be substantially different from the expenditure of other travelers, it may be necessary to conduct separate surveys of travelers in these special categories.

535. The use of partner country data to compile travel items is outlined in Chapter 9, paragraph 378, which describes the United States-Canada exchange of data on travel.

536. A data model to measure travel could be constructed from a number of sources, including data on numbers of travelers and estimates of per capita expenditure. Data on numbers of travelers are typically available from migration statistics, which are discussed in paragraphs 304-313 of Chapter 7. Alternatively, various transport operators, such as airline and bus companies, may be able to provide information in respect of at least part of the total number of travelers. Estimates of per capita expenditure could be obtained from occasional surveys of travelers or from historical relationships (adjusted for inflation, exchange rate changes,100 and any other factors considered relevant) between total travel expenditure and numbers of travelers.

537. When data from these sources are not available in time to compile travel series for the most recent periods, extrapolation methods may be used. Data models of the type described previously are often used in extrapolations (and interpolations). Projections use similar models; for these, the impact of economic activity and promotions on numbers of travelers must also be considered.101 Information from the travel industry should be helpful in this regard.

Other Services

Introduction

538. Other services include communications; construction; insurance; other financial services; computer and information services; royalties and license fees; other business services; personal, cultural, and recreational services; and government services n.i.e. provided by residents of one economy to residents of another economy. The complete list recommended by the BPM is set out in table 12.4.102

Table 12.4

Compilation of Items in Other Services

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539. Sources and methods that could be used to compile items in other services are described subsequently, and a discussion follows on some of the more complex transactions recorded in these items—that is, those involving construction services, insurance services, foreign exchange services (part of financial services), and government services n.i.e.

Data Sources and Methods

540. Table 12.4 summarizes data sources and methods that could be used to compile items in other services. An ITRS can provide a comprehensive source of most BOP transactions in services. ES and official sources could also be used—either instead of, or as a supplement to, an ITRS. Whatever approach is adopted, collections should be well designed.

541. In an ITRS, some inherent problems require attention if the compiler is to measure transactions in other services accurately. Many international services do not necessarily involve cash payments and merely give rise to entries in intercompany accounts. Such situations are more likely to occur when transactions in other services take place between enterprises in a direct investment relationship. The compiler should ensure that transactions settled through these accounts are reported in the system and that the gross entries giving rise to these transactions are recorded. Reporters may record certain transactions on a net basis—that is, after certain costs, such as finance charges and commissions, have been deducted. Clear rules are required to ensure that reporters supply data according to BOP requirements—that is, on a gross basis. Classification of transactions may be a problem as persons completing an ITRS form may be somewhat overwhelmed by the level of detail requested in the form. A well-designed ITRS should address these issues.

542. A specialized type of ITRS relevant to government services n.i.e. is a survey of banks to report on the value of transactions passing through accounts of foreign governments and international institutions.

543. ES can be selective (for example, concentrating on members of a particular industry, such as insurance) or broadly based (for example, covering all enterprises that may provide or use international services). Paragraphs 167-168 of Chapter 4 discuss ES of transactions in other services. To overcome problems inherent in ES, the compiler should set an objective of obtaining complete coverage and develop a clear set of reporting rules to avoid omission or duplication of data. Good survey design, which is discussed in Chapter 18, is essential.

544. Official sector data (essentially government accounting records) could be used to measure expenses of diplomatic and other representation abroad; defence expenditure abroad; and other services acquired abroad.

545. For measuring the expenditure of nonresident government entities and international institutions located in the compiling country, partner country data obtained from BOP compilers in partner countries or surveys of foreign embassies and international institutions could be used. Alternatively, some form of estimation based on a data model may be used.

546. Projections of items in other services are typically made by extrapolating historical data and taking into account expected changes in quantity and price or by relating the series to some other economic aggregate. For example, there may be a good relationship between financial service debits and the value of drawdowns on loans from nonresidents. If projections of the latter are available, projections of the former could be derived by using this relationship.

Construction Services

547. As discussed in paragraphs 452-455 of Chapter 10, construction services should be recorded in the BOP when an enterprise undertakes construction activity in an economy other than the one in which it is resident. (Chapter 10 discusses issues that should be addressed to determine the residency of construction enterprises.) The value of construction services recorded in the BOP should equal the gross value of output by the producing enterprise.

548. An example should help clarify the recording of construction services in the BOP. An enterprise from country B undertakes a construction project in country A for a period of six months. The total value of the project is 20,000, and the following costs are incurred by the construction enterprise:

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549. The following transactions should be recorded in the BOP of country A:

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Materials purchased in country A

550. Table 10.15, which shows the range of BOP entries that should be recorded for construction activity, should be consulted for further details.

Insurance Services

551. According to the SNA, on which the BPM treatment of insurance is based, the elements of the insurance industry are:

Gross premiums earned + Net income from investments = Claims due + Change in actuarial reserves + Service charge

Each of these items should exclude capital gains and losses.

552. Gross premiums earned cover risks incurred during an accounting period and may be payable during current or previous periods. Net income refers to income from investment of reserves. Claims refer to claims that become due for payment during an accounting period. Actuarial reserves cover reserves against outstanding risks and reserves for with-profits insurance (such as life insurance, prepayments of premiums, and reserves against unsettled claims). The service charge, which implicitly covers administrative costs, is output by the insurance industry and is included as part of production in the national accounts.

553. While the equation in paragraph 551 holds true (in the absence of any capital gains or losses) for providers of insurance services, it does not hold true for acquirers of the services. For the acquirer (or policyholder), the service charge payable should be calculated by applying the ratio of total service charges to total premiums to the premium payable by the policyholder. For each nonlife insurance policy, the difference between premiums payable (plus, when measured, policyholder shares of net income from investments) and the estimated service charge (net premiums) is considered a current transfer, as are all claims due on the policy. For life insurance policies, net premiums and claims reflect transactions to be recorded in the financial account as other investment—other assets/liabilities.

554. The BPM adopts a simplified treatment and assumes that, for international insurance transactions, changes in actuarial reserves and net income from investments may be ignored. In practice, life insurance transactions between residents and nonresidents are usually negligible and income on actuarial reserves associated with reinsurance flows is also likely to be negligible. Therefore, the previous equation may be rewritten as:

Gross premiums earned = Claims due + Service earned

555. However, the compiler could prepare a more comprehensive set of accounts, if this were considered desirable. The compiler could, in conjunction with the national accounts compiler, estimate various flows that were omitted from the simplified treatment.103

556. When a resident acquires insurance services from a nonresident, the compiler will probably be unable to approach the nonresident insurer to establish the ratio, which is necessary to calculate BOP transactions, of service charges to total premiums. Accordingly, the BPM recommends that an appropriate ratio from the domestic insurance industry be used. If this ratio cannot be obtained easily—for example, if there is no domestic industry—the compiler should estimate the ratio by using the long-term (five years or more) relationship between premiums earned by nonresidents and claims due from nonresidents. Alternatively, if the majority of services are provided by insurers in one or a few countries, the BOP compiler could contact his or her counterparts in these countries to establish an appropriate ratio.

557. Data on premiums earned and claims due may not be readily available, and the compiler may use premiums paid and claims paid as proxies. These substitutions may be satisfactory in many instances, but cash-based data should be adjusted to an accrual basis if cash-based data prove to be unsatisfactory proxies.104

558. The following example illustrates the treatment of insurance in the BOP. Insurance enterprises in the economy receive, in respect of casualty insurance, premiums of 100 from nonresidents and pay 85 in claims. Residents pay nonresident insurance enterprises premiums of 60 and receive 20 in claims. The net foreign exchange earnings by resident insurance enterprises are 15 (premiums minus claims); the net foreign exchange payments to nonresident insurance enterprises abroad are 40. The following transactions should be recorded in the BOP:

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As the reference is to services provided, premiums received (100) less claims paid (85) is a good proxy for this item.

The service ratio (15 percent) for the domestic industry is applied to premiums paid to nonresident insurers (60) to calculate this item.

Net premiums and claims on casualty (nonlife) insurance are not shown explicitly in the BOP but would be recorded as part of item x392, current transfers—other sectors. Net premiums and claims in respect of life insurance are not shown explicitly in the BOP but would be recorded as items in other investment—other assets/liabilities of the financial account.

559. In a second example, residents pay nonresident insurers 40 in premiums and receive 70 in claims in respect of casualty insurance. There is no equivalent domestic industry. For this reason, it is necessary to calculate the service ratio by using the long-term relationship between claims received and premiums paid. During the past 10 years, claims have averaged 80 percent of premiums—a fact that implies a service ratio of 20 percent. The following transactions should be recorded in measure transactions, a distortion would be recorded in the BOP:

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The long-term service ratio (20 percent) is applied to premiums paid to nonresident insurers (40) to calculate this item.

560. Exporters of insurance services may encounter situations in which claims due exceed premiums earned—typically because of catastrophic events or natural disasters. In these instances, it is inappropriate to measure exports of insurance services by subtracting claims from premiums as no “negative services” have been provided. Instead, the service should be calculated by applying to current period premiums the long-term, average service charge ratio.

561. It can be seen from the examples that the key to correct measurement of BOP transactions relating to insurance is information on premiums and claims; BOP entries simply reflect manipulations of this information.105 Such information is typically collected by using an ITRS or ES. Data from an ITRS will be on a cash, rather than the preferred accrual, basis; however, in most instances, the cash basis should be an acceptable proxy. Through ES, a compiler could request information on a more conceptually correct basis—that is, premiums earned and claims due—as well as any supplementary data that may be required. Paragraphs 161-166 of Chapter 4 contain further details on measurement, via ES, of insurance transactions in the BOP.

Foreign Exchange Services

562. As stated in paragraph 22 of Chapter 1, transactions denominated in foreign currencies should be converted at midpoint rates applicable at times of transaction. When a transactor sells or buys foreign currency to or from a foreign exchange dealer (or bank), the dealer will buy at the buy rate and sell at the sell rate. Dealers derive income from the difference (or spread) between buy and sell rates. The BPM recommends use of the midpoint rate because the spread reflects the provision of services. If actual buy and sell rates were used to measure transactions, a distortion would be recorded in BOP numbers.

563. For example, a dealer sells 100 units of foreign currency to importers (to pay for imports) for 101 units of domestic currency, buys 100 units of foreign currency from exporters for 99 units of domestic currency, and thereby makes a profit of 2 units of domestic currency. If importers and exporters converted their transactions by using the relevant sell and buy rates, the following transactions would be recorded in the BOP:

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In this example, it is assumed that the dealer converted transactions at the midpoint rate; if the dealer also used the buy and sell rate, the offsetting item would be recorded as a transaction in external financial assets. Nevertheless, an apparent deficit in goods would be recorded in spite of the fact that the country paid, in foreign currency terms, exactly the same amounts for both imports and exports.

564. The problem is avoided if both exporter and importer convert transactions by using the midpoint rate.

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565. If foreign exchange dealers and their counterparts are residents of different countries, service transactions equal to differences between actual buy or sell rates and the midpoint rate should be recorded in the BOP of transactor countries. For example, if a foreign exchange dealer in country A sells 100 units of currency to a resident of country B for 102 units of domestic currency, and a dealer in country A buys 100 units of foreign currency from residents of country C for 98 units of domestic currency, the following transactions should be recorded in the BOP of country A:

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Country B is assumed to purchase the foreign exchange with funds held in accounts with banks in country A.

Country C is assumed to deposit the domestic currency received into accounts with banks in country A.

566. Dealers may also earn profits because they take speculative positions. For example, they may buy and hold currencies because they expect the value to rise. However, this speculative profit is capital in nature and should not be recorded as income in either the BOP or the national accounts.

567. The direct collection of information on BOP transactions attributable to foreign exchange trading may be difficult. Resident consumers of the services are unlikely to know the values of those services implicitly purchased from nonresident dealers and, in many cases, resident dealers will be unable to supply information on services provided to nonresidents. A data model, which would enable the compiler to calculate estimates of foreign exchange services by multiplying the average spread between midpoint and buy/sell rates by the volume of foreign exchange transactions with nonresidents, may have to be used.106 Information on spreads could come from discussions with dealers. Information on volumes of foreign exchange transactions could be obtained either from the institution responsible for supervising and regulating the foreign exchange market or from market participants.

568. In practice, many transactions in BOP collections may be reported at buy and sell rates; thus, errors are introduced into the accounts. Such errors may not have a significant impact in the current account unless the country is a major provider of foreign exchange services to nonresidents. However, in the financial account, such errors could have a significant impact in countries where the turnover of transactions is high. Therefore, compilers should examine reporting practices and make adjustments to the accounts (or publish findings) when serious misreporting occurs.

Government Services n.i.e.

569. The BOP treatment of, and sources for information on, the three main types of transactions recorded in this item are described subsequently.

Government Expenditure Abroad (Debits)

570. Data on government expenditure abroad should be available from an ITRS or from official sources (see Chapter 8, paragraphs 338-340).107 Should the data be untimely, it may be necessary to extrapolate certain series—in which case government expenditure policies, budget decisions, and trends in historical data should be considered. Projections of these series would require a similar approach.

571. Local expenditure of diplomats and other government personnel posted abroad should also be recorded as debits for government services n.i.e. Data recorded on this expenditure could be based on the wages, etc.—details of which should be available from government records—paid to these persons. However, allowance should be made for the part of wages not used for such expenditure.

Expenditure by foreign Governments and International Institutions located in the Compiling Country (Credits)

572. This expenditure could be measured by using an ITRS or ES of nonresident bank accounts or by using a survey of foreign embassies and international institutions. (See paragraphs 380-383 of Chapter 9 for details on surveys of foreign embassies and international institutions.) In each case, source data may only provide broad aggregates or partial data. Therefore, the compiler may have to establish a data model that uses data from these and other sources.

573. For example, from analyzing historical data, the compiler may observe a relationship between numbers of foreign embassy staff and expenditures by foreign governments. Timely information on staff numbers, which may be available from a country’s ministry of external relations, could be multiplied by the historical relationship in order to derive current estimates of expenditure. Allowances should be made for such factors as inflation. Alternatively, a sample survey of cooperative embassies may provide information on the relationship between staff numbers and expenditures, which could be multiplied by total staff numbers to derive an overall estimate. Similar approaches can be used to project this item.

574. As with the compiling country’s government expenditure abroad, wages and salaries paid by foreign governments and international institutions to local staff should be classified as compensation of employees. In certain sources, such as an ITRS, it may be difficult to separate these wages and salaries from related expenditures. However, it may be possible to determine, either from an occasional analysis of data from other sources or from discussions with certain embassies, a ratio for dividing total expenditure into appropriate components.

575. Local expenditure of diplomatic and similar personnel stationed in the compiling economy should also be recorded in government services n.i.e.108 Previous observations about measuring the expenditure of compiling country officials stationed abroad are also pertinent here.

Services Associated with the Provision of Aid

576. The BPM includes in the value of foreign aid the administrative costs incurred in the donor country as a result of providing the aid. The BOP compiler of the donor country could obtain information on these costs from official sources, such as records of the central aid agency. In the recipient country, the BOP compiler could obtain information from the embassy or the BOP compiler of the donor country. An alternative would be to use DAC records, which show these costs unclassified by recipient country. A particular recipient country’s share of the domestic administrative costs of a particular donor country could be calculated by applying to total administrative costs the ratio of the recipient country’s grants to total grants provided by the donor country.