Abstract
The Way in which initial allocations of special drawing rights (SDR’s) in the Fund, if and when such allocations were made, would be recorded in the balance of payments is, naturally, not provided for specifically in the current, third edition of the Fund’s Balance of Payments Manual, which was issued in July 1961; moreover, even the general principles underlying the Manual suggest no obvious solution to the problem. Yet reserve creation and destruction in itself is not a new phenomenon, as attested by the fact that the outstanding amount of international liquidity in existence is changing continually, and many of these changes are already reflected in the balance of payments.
The Way in which initial allocations of special drawing rights (SDR’s) in the Fund, if and when such allocations were made, would be recorded in the balance of payments is, naturally, not provided for specifically in the current, third edition of the Fund’s Balance of Payments Manual, which was issued in July 1961; moreover, even the general principles underlying the Manual suggest no obvious solution to the problem. Yet reserve creation and destruction in itself is not a new phenomenon, as attested by the fact that the outstanding amount of international liquidity in existence is changing continually, and many of these changes are already reflected in the balance of payments.
No difficulty arises in applying the over-all principles of the Manual to the type of reserve creation that comes about when reserves are earned, bought, or received as grants in transactions between the domestic economy and the rest of the world. Such transactions can be entered according to the normal rules governing resident/foreigner transactions, and their special character as reserve creation does not result in a need for a special recording procedure. The Manual also provides for the recording of some reserve changes that reflect creation or destruction but that do not stem from resident/foreigner transactions. Such entries are regarded, however, as exceptions to the general principles and are specified on a case-by-case basis. None of the exceptions set out in the present Manual deal, of course, with the creation of SDR’s. Furthermore, the process by which SDR’s are to be created has no close analogy among existing forms of reserves, with the result that none of the Manual’s specified exceptions could be readily applied to SDR’s by extension.
The main argument of this paper is that, instead of adding another exception to the list to cover the recording of SDR’s, it would be more satisfactory to incorporate into the balance of payments system a new concept that not only would be applicable to the entries for SDR’s but also would eliminate the present need for making such exceptions to the Manual’s principles, either to include or to exclude certain other forms of reserve creation. The concept can be formulated as follows: The balance of payments includes all changes in the outstanding amounts of official reserves; changes other than those resulting from an exchange of real or financial resources with the rest of the world are conceived as having the counterpart they require under the double-entry system of balance of payments accounting in a basic category described as “net unilateral reserve creation.”1
A balance of payments statement is intended as a systematic presentation of as many as possible of the statistical series that are needed “for analyzing the economic relations between the domestic economy and the rest of the world.” 2 Most of the individual series are in themselves interesting for studying such questions as trade flows, international transportation and travel, development aid, and capital movements. The collection of this scattered information into a unified statement has served an additional purpose that is of great significance, since the comprehensive assemblage of these data permits the measurement of surplus and deficit concepts and the analysis of their underlying causes and the means by which they are financed. Such measurement and analysis are a basic guide in formulating economic policy for a country.
Balance of payments statements have thus focused on presenting those figures that show how surpluses and deficits come about and how they are financed. Therefore, the categories in the presentations published by the Fund are chosen with a view to providing the basic elements required for constructing various generally accepted alternative measures of imbalance. The basic tables in the Balance of Payments Yearbook include these elements in a uniform presentation; other tables in the Yearbook and elsewhere are in an analytic form, providing one or more specific measures of imbalance.
Discussions on the management of international liquidity, culminating in the proposals for the creation of SDR’s, have highlighted another analytic purpose that balance of payments statements can and should be made to serve. These statements already embody the statistics on some of the creation and destruction of international liquidity that takes place. However, under the present treatment, the figures are not shown separately and in some instances cannot even be segregated from items with which they have been combined. This paper describes how the balance of payments system could be modified to make reserve creation or destruction a category that is identified separately. With the changes proposed, the balance of payments statement becomes a more satisfactory tool for economic policy determination in regard to the management of reserves, as distinct from and in addition to the financing of imbalances.
Little reference will be made in the following discussion to reconciling the revised treatment of individual items with the concepts and definitions of the current Balance of Payments Manual. There would be ample precedent, in any case, for interpreting the present Manual’s concepts flexibly enough to permit any exceptions that were required to make the balance of payments a more useful aid to analysis. However, it appears likely that the changes that will stem from incorporating the concept of reserve creation, together with other changes being considered as a consequence of revisions in the UN System of National Accounts, will actually lead to a somewhat simpler and more elegant formulation of the rationale of the balance of payments system. These modifications will be included eventually in a fourth edition of the Fund’s Balance of Payments Manual.
I. Reserve Creation as a Balance of Payments Category
The basic premise of this paper is that a new main category, reserve (or international liquidity) creation and destruction,3 is to be identified separately in balance of payments statements. The most prevalent approach to balance of payments analysis is to regard all transactions as divisible into two main categories, those creating a surplus or deficit and those financing it. While no objective criteria for determining whether certain items contribute to imbalance or constitute its financing have been universally agreed, the financing items always include, at a minimum, changes in official reserve assets. However, the question may be raised as to whether there are any changes in reserves that cannot be usefully regarded as financing items, specifically where reserves are created rather than earned.
Under existing balance of payments practices, this question about created reserves has been answered sometimes affirmatively, sometimes negatively, and sometimes has been left open. Changes in foreign exchange assets owing to their revaluation are uniformly omitted from the balance of payments and thus neither create an imbalance nor supply a financing item. Conversely, changes in monetary gold holdings reflecting release or absorption of gold by the nonmonetary sectors are always recorded as the financing of an imbalance on goods and services account. Finally, the problem of whether a transfer of foreign assets between the commercial banks and the monetary authorities creates an imbalance and supplies its financing or, instead, gives rise to neither an imbalance nor a change in reserves is left for the analyst to resolve.
The identification of a separate category for reserve creation is not intended to settle the question of whether reserve changes stemming from this source represent the financing of imbalances. On the contrary, it eliminates those elements of prejudgment that are now incorporated into the system and subjects all changes owing to reserve creation to the need for analytic scrutiny. At the same time, it provides a way of escaping the sometimes illogical consequence of regarding all reserve changes as financing items, namely, that some reserve changes must then either be omitted from the balance of payments or be shown as creating imbalances. By identifying reserve creation, in addition to imbalances, as a source of reserve change, it becomes logically possible to record all reserve changes. Since a country’s economic policy may be directed toward adjusting the level of reserves as well as to financing (or overcoming) imbalances, the balance of payments will be all the more useful when it provides a tool for the joint analysis of both aspects.
The category “reserve creation” is defined above as the counterpart of reserve changes that occur without a transaction taking place between the domestic economy and the rest of the world. Any changes of this kind that are recorded under the present system have hitherto been construed as transactions the treatment of which forms an exception to the regular rules of balance of payments accounting because they take place between residents. Such transactions have comprised the net additions to the stocks of the monetary authorities of gold produced or held by the nonmonetary sectors and the changes in foreign exchange assets resulting from transactions between the domestic monetary authorities and other domestic sectors. Changes in reserve assets resulting from revaluation are not considered to be transactions and thus have been omitted under the present system, as have changes in potential availabilities of conditional reserve assets, and no provision has been made in that system for recording the initial allocation of SDR’s. All of these changes affect the level of reserves, but none of them comes about through transactions with foreigners. With the introduction of an item for reserve creation, they can all be shown, together with the counterpart that they require under the double-entry system of balance of payments accounting. It is all the more important to distinguish these counterpart items separately, since they might be regarded by different analysts and for different purposes as contributing to an imbalance, as financing it, or as affecting reserve levels without serving either of those purposes.
For the world as a whole, the total change in international liquidity will not necessarily be equal to the sum of reserve creation that is recorded as such in individual countries’ balance of payments statements. Only reserve changes that come about without transactions between residents and foreigners are to be given a counterpart in the reserve creation item, and international liquidity may also be created through resident/foreigner transactions. For example, an increase in a country’s officially held claims on a reserve center creates international liquidity for the world as a whole, when the assets in question have not been simply transferred from official holdings in another country. The failure of the reserve creation item for individual countries to reflect all changes in international liquidity can, however, scarcely be regarded as a drawback to the concept. In individual country statements, the question of whether a reserve increase resulting from a transaction between a resident and a foreigner also creates international liquidity is not especially relevant, since a reserve change of this sort can only represent the financing of an imbalance. The country whose foreign exchange reserves increase can hardly be expected to care that the previous holder of these claims was not a foreign official holder and thus that international liquidity has been created for the world as a whole.
Liquidity creation through resident/foreigner transactions will nevertheless show up for the whole world when the statements for all individual countries are aggregated. Transfers of existing reserves between residents and foreigners will simply cancel out, but transactions that create or destroy reserves will be recorded under reserves by one partner and in some other category by the other. In the example cited in the previous paragraph, newly created foreign exchange assets in the statement for one partner will show up as an increase in liabilities for the reserve center concerned. For the world as a whole, therefore, liquidity creation in the form of foreign exchange assets will correctly be seen as the counterpart of the reserve center’s liabilities.
In the following sections, the balance of payments recording of each type of reserve asset is considered in turn; the several sources of reserve changes—financing of imbalances in transactions with the rest of the world, reserve creation, and revaluation—are discussed with respect to their treatment under the existing and revised systems; and comments are offered on the analytic usefulness of the results that could be obtained under various interpretations of the revised procedure.
II. Gold Transactions
Recognition has long been accorded in the balance of payments to the fact that the acquisition of gold by the monetary sectors from the nonmonetary sectors is a source of reserve creation,4 or at least of changes in official reserve assets, that should be recorded. The prescribed gold treatment results in the system’s only example of global asymmetry. That is, the sum of the monetary gold (and the nonmonetary gold) item for the world as a whole is not zero, as it is for each of the other main categories in the balance of payments, but is a quantity that is described as representing “the net addition to or subtraction from the gold holdings of all monetary institutions.” 5 This “addition or subtraction” is, of course, the measure of liquidity creation.
However, the existing treatment does not allow reserve creation through gold transactions to be observed country by country; it becomes apparent only when the statements for all countries are aggregated.6 In effect, liquidity creation is combined with the international gold transactions of the domestic nonmonetary sectors in the balance of payments item for nonmonetary gold. Only if this item could be summed for all countries so that the international nonmonetary transactions cancel out (as they logically must, since one country’s exports are another country’s imports) could the transformation of commodity gold into a reserve asset be seen.7
For the individual country, the most awkward feature of the existing treatment of gold transactions is the arbitrary inclusion of offsets to reserve creation in the goods and services account under the heading of nonmonetary gold. This follows from the presentation of those changes in gold reserves that reflect reserve creation as though they are financing their counterpart in nonmonetary gold, an item that contributes to the imbalance on goods and services account. The fact that this interpretation has been accepted with very little comment is perhaps somewhat surprising. The goods and services account is most usefully regarded as measuring the flow of real resources between the domestic economy and the rest of the world, and the domestic nonmonetary sectors’ gold transactions with the domestic monetary sectors would not seem to have a logical place in this aggregate. Even when it is agreed that these gold transactions are to be regarded as producing a payments imbalance, it does not follow that the imbalance is appropriately shown to be on goods and services account. Rather, it is of a special character, a fact that could better be indicated by including the transactions in a category for reserve creation.
The revised, three-way classification of the balance of payments entries now proposed for gold can be described as follows. Monetary gold covers, as at present, all changes in the holdings of the monetary sectors. These changes come about in two ways: (1) through transactions with foreign monetary sectors, which merely transfer a reserve asset from one holder to another; and (2) through other transactions, which create a reserve asset. The first type is one side of the usual kind of balance of payments transaction, a purchase or sale that has a spontaneous counterpart entry—most likely a change in some other asset or liability. For the second type, a counterpart entry is made in the item for reserve creation.
After all changes in monetary gold holdings have been entered and have been fully provided with the offsets required under the double-entry system used for balance of payments accounting, any other gold flows between the domestic economy and the rest of the world are taken into account in the “nonmonetary gold” item. By definition, these will be all the flows that occur when gold changes hands internationally, except where it is a reserve asset being transferred between domestic and foreign monetary sectors. Stated positively, these flows comprise all acquisitions of gold by the domestic nonmonetary sectors from foreigners, whether the foreigners are in the nonmonetary or monetary sectors, and all acquisitions of gold by the domestic monetary sectors from foreign nonmonetary sectors. The matching entry for a nonmonetary gold flow always arises spontaneously; presumably the immediate counterpart is most often a change in an asset or liability.
Under the new scheme, therefore, all the entries in the nonmonetary gold item will refer to gold that is being traded internationally as a commodity,8 which makes that item’s placement in the goods and services account entirely appropriate. An example comparing this treatment with the one specified in the third edition of the Manual is given in Table 1, in the Appendix. This table indicates that the three-way classification calls for one piece of information that need not be collected under present practice, namely, the division of the domestic monetary sectors’ transactions between those with foreign monetary sectors (including international monetary institutions) and those with other partners.
Treatment of Gold Transactions1
An “x” shows that no entry is to be recorded. Positive figures are credits; negative figures are debits.
If gold holdings of the monetary sector other than those of the monetary authorities are not considered part of the reserves, a transaction between the monetary authorities and another institution in the monetary sector would be represented by an entry in this item.
Under the present treatment, the domestic monetary sectors’ transactions need not distinguish the sector of the foreign partner.
It is assumed in this example that the transactions have taken place at par value. Any difference between par and transactions values will affect “other net assets” and will be offset in “nonmonetary gold.”
Treatment of Gold Transactions1
| Present Treatment | Proposed Treatment | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Transaction | Monetary gold (increase—) (1) | Other net assets (increase—) (2) | Nonmonetary gold (imports—) (3) | Monetary gold (increase—) (4) | “Reserve creation” (5) | Other net assets (increase—) (6) | Nonmonetary gold (imports—) (7) | ||
| Domestic new production sold to | |||||||||
| Domestic nonmonetary sectors | x | x | x | x | x | x | x | ||
| Domestic monetary sectors | —1 | x | 1 | —1 | 1 | x | x | ||
| Foreign countries | x | —2 | 2 | x | x | —2 | 2 | ||
| Existing gold sold by | |||||||||
| Domestic nonmonetary sectors to | |||||||||
| Domestic nonmonetary sectors | x | x | x | x | x | x | x | ||
| Domestic monetary sectors | —3 | x | 3 | —3 | 3 | x | x | ||
| Foreign countries | x | —4 | 4 | x | x | —4 | 4 | ||
| Domestic monetary sectors to | |||||||||
| Domestic nonmonetary sectors | 5 | x | —5 | 5 | —5 | x | x | ||
| Domestic monetary sectors | x | x | x | x2 | x2 | x | x | ||
| Foreign nonmonetary sectors | 62 | —63,4 | 04 | 6 | —6 | —64 | 64 | ||
| Foreign monetary sectors | 73 | —73 | x | 7 | x | —7 | x | ||
| Foreign countries’ | |||||||||
| Nonmonetary or monetary sectors to domestic nonmonetary sectors | x | 8 | —8 | x | x | 8 | —8 | ||
| Nonmonetary sectors to domestic monetary sectors | —93 | 93,4 | 04 | —9 | 9 | 94 | —94 | ||
| Monetary sectors to domestic monetary sectors | —103 | 103 | x | —10 | x | 10 | x | ||
| Total | —5 | 8 | —3 | —5 | 2 | 8 | —5 | ||
An “x” shows that no entry is to be recorded. Positive figures are credits; negative figures are debits.
If gold holdings of the monetary sector other than those of the monetary authorities are not considered part of the reserves, a transaction between the monetary authorities and another institution in the monetary sector would be represented by an entry in this item.
Under the present treatment, the domestic monetary sectors’ transactions need not distinguish the sector of the foreign partner.
It is assumed in this example that the transactions have taken place at par value. Any difference between par and transactions values will affect “other net assets” and will be offset in “nonmonetary gold.”
Treatment of Gold Transactions1
| Present Treatment | Proposed Treatment | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Transaction | Monetary gold (increase—) (1) | Other net assets (increase—) (2) | Nonmonetary gold (imports—) (3) | Monetary gold (increase—) (4) | “Reserve creation” (5) | Other net assets (increase—) (6) | Nonmonetary gold (imports—) (7) | ||
| Domestic new production sold to | |||||||||
| Domestic nonmonetary sectors | x | x | x | x | x | x | x | ||
| Domestic monetary sectors | —1 | x | 1 | —1 | 1 | x | x | ||
| Foreign countries | x | —2 | 2 | x | x | —2 | 2 | ||
| Existing gold sold by | |||||||||
| Domestic nonmonetary sectors to | |||||||||
| Domestic nonmonetary sectors | x | x | x | x | x | x | x | ||
| Domestic monetary sectors | —3 | x | 3 | —3 | 3 | x | x | ||
| Foreign countries | x | —4 | 4 | x | x | —4 | 4 | ||
| Domestic monetary sectors to | |||||||||
| Domestic nonmonetary sectors | 5 | x | —5 | 5 | —5 | x | x | ||
| Domestic monetary sectors | x | x | x | x2 | x2 | x | x | ||
| Foreign nonmonetary sectors | 62 | —63,4 | 04 | 6 | —6 | —64 | 64 | ||
| Foreign monetary sectors | 73 | —73 | x | 7 | x | —7 | x | ||
| Foreign countries’ | |||||||||
| Nonmonetary or monetary sectors to domestic nonmonetary sectors | x | 8 | —8 | x | x | 8 | —8 | ||
| Nonmonetary sectors to domestic monetary sectors | —93 | 93,4 | 04 | —9 | 9 | 94 | —94 | ||
| Monetary sectors to domestic monetary sectors | —103 | 103 | x | —10 | x | 10 | x | ||
| Total | —5 | 8 | —3 | —5 | 2 | 8 | —5 | ||
An “x” shows that no entry is to be recorded. Positive figures are credits; negative figures are debits.
If gold holdings of the monetary sector other than those of the monetary authorities are not considered part of the reserves, a transaction between the monetary authorities and another institution in the monetary sector would be represented by an entry in this item.
Under the present treatment, the domestic monetary sectors’ transactions need not distinguish the sector of the foreign partner.
It is assumed in this example that the transactions have taken place at par value. Any difference between par and transactions values will affect “other net assets” and will be offset in “nonmonetary gold.”
This additional detail obviously presents no statistical difficulty and cannot be regarded realistically as breaching the tradition of central bank secrecy with respect to gold transactions. A great majority of transactions between monetary sectors undoubtedly include as one partner either the Fund or the United States, both of which already publish full country details promptly and regularly. It is difficult to see why other countries might think it desirable to withhold these figures on the grounds of confidentiality, especially as no country need necessarily identify its partners separately. No other extra information is required, since the new nonmonetary gold item is simply the difference between reserve creation and the present nonmonetary gold item, so that nonmonetary gold is no more difficult to calculate on one basis than on the other.
III. Initial Allocation of SDR’s 9
SDR’s are intended to be a new form of reserve asset, the initial allocations of which will create international liquidity. With the recognition of reserve creation as a balance of payments category, accounting for SDR’s would become routine. The initial allocations appear as an increase in reserves. Since this increase comes about without any transaction taking place between residents and foreigners, it has no spontaneous offset in any other item and is thus given a counterpart in the item for reserve creation. Transactions in existing SDR’s, like any other resident/foreigner transactions in reserve assets, will have a spontaneous counterpart; under the conversion techniques being contemplated, the immediate offset would be a change in some other reserve asset or, particularly for the reserve centers, a change in liabilities to foreign official holders.
The initial allocation of SDR’s might be supposed, on first thought, to give rise to some sort of a liability on the part of the accepting country; if this were the case, the balance of payments offset to the initial allocation would apparently have to be classed as an increase in liabilities rather than as reserve creation. However, careful examination fails to reveal any trace of a pecuniary obligation that is assumed by a country with respect to the SDR’s that it receives initially. While the asset would disappear or would have to be returned if the scheme were liquidated, if the member were to withdraw from the scheme, or if part or all of the allocation were to be canceled, these circumstances do not constitute a liability but only a special characteristic of this kind of asset. This point may be clarified by drawing a parallel with another kind of asset that is not a claim. Suppose that an entrepreneur acquires title to a piece of land subject to various provisos, such as that the land would have to be returned if the enterprise were liquidated, if the titleholder withdrew from the business in which the land was being used, or if the land were no longer needed for the purpose for which it was acquired originally. Clearly, none of these provisos would ever lead the titleholder to consider that he should enter a liability in the balance sheet of his enterprise as a counterpart to the value of the land. An entry on the credit side is required, of course, to make the books balance, but credit entries represent not only indebtedness but also net worth, reserves, revaluation gains and losses, windfall profits and losses, and the like. Reserve creation through the initial allocation of SDR’s can readily be conceived as another of these credit items that are not liabilities.
Furthermore, the acceptance obligation that countries undertake when they receive an allocation of SDR’s can in no way be seen as providing a liability counterpart of the asset. If this obligation were to be taken into account at all in the balance of payments, it would have to be viewed as the commitment of a reserve asset. That is, a country could, if it wished, divide its gold and foreign exchange holdings between those that were freely usable and those that were committed for the fulfillment of its acceptance obligation, the latter amount being twice in excess of the SDR’s initially allocated to it.10 This sort of distinction, however, is rarely made in balance of payments accounting because of its lack of significance for analysis. It would generally be possible, for example, to divide reserve assets between the part that is committed to meet forward sales contracts and the part that is freely usable, but in practice this distinction is almost never made. The acceptance obligation on SDR’s is an even vaguer sort of commitment, since neither the timing nor the amount of the possible transactions can be determined in advance. Moreover, even when transactions take place, they change only the composition and not the size of total reserves. It seems unlikely, therefore, that it would be deemed useful to account for the acceptance obligations at all in the balance of payments; the entries that could be made would only provide at most a memorandum of the maximum extent to which the composition of reserves was subject, without the accepter’s consent, to alteration in this one respect. In addition, in a global context, the entries for acceptance obligations would reveal another illogicality, since their sum for the world as a whole would be not less than twice the amount of SDR’s in existence.
The initial allocation of SDR’s thus represents an increase in reserve assets that is not matched by an increase in liabilities, and the logical place for its counterpart entry is in the new item for reserve creation.
IV. The Fund’s General Account
The Manual’s recommendations with respect to a country’s entries for its relations with the Fund were formulated long before any part of Fund positions came to be conceived as reserve assets. The entries thus depend mainly on rather formal analogies with other, more familiar, types of capital movement. The evolution of Fund operations and of the interpretation placed on them almost inevitably suggests some modifications in the balance of payments recording of General Account transactions.11
The drawback to the present treatment is that, apart from subscriptions and lending to the Fund, transactions with the Fund are expressed entirely in terms of changes in liabilities. Thus, most changes in Fund gold tranche or credit tranche positions—which are to be considered unconditional and conditional assets, respectively—actually show up as changes in liabilities to the Fund. Since these liabilities reflect the Fund’s holdings of its members’ currencies, the present treatment is quite correct in a formal sense. However, the fact that a country that draws on the Fund or makes repurchases is dealing in a reserve asset is no less literally true and is a more meaningful way of looking at these transactions from an analytic standpoint. The direct recording of the changes in assets instead of their reflection in entries for subscriptions, lending, and Fund currency holdings would be a simplification that does little or no violence to Manual precepts.
The difference between the present and the revised treatment in any case would be only a matter of classification and description, since the underlying transactions would naturally be the same. The gold portion of a subscription is obviously only another name for the creation of a “reserve position in the Fund.” The currency portion of a subscription is always equal to the change in the Fund’s currency holdings (members’ liabilities) resulting from the currency subscription, so that the net of the two items is always nil. Other transactions affecting liabilities to the Fund also give rise to equal and opposite changes in Fund asset positions, so that whether the balance of payments entries are said to stand for the changes in liabilities or the changes in asset position is only a matter of terminology.
The balance of payments thus need identify only two categories of Fund General Account transactions in the capital account—“reserve position in the Fund” and “use of Fund credit”—both of which form part of the monetary authorities’ net assets. The use of the phrase “use of Fund credit” rather than “credit tranche position” is deliberate and significant. Although changes in reserve positions in the Fund may represent reserve creation for the world as a whole, they do not involve reserve creation for the country concerned, since the positions are always exchanged for some other reserve asset. Credit tranche positions, however, are first created at no cost in terms of other reserve assets; their subsequent “use” for transactions involves their conversion into a form of asset that can actually be employed to make payments, with no change in total net reserves of the drawing country. The balance of payments recording of the creation of conditional assets is attended with special difficulties, as discussed in Section VI below on conditional reserves, and it is proposed that only the use of credit tranche positions—not their original creation—be entered. In other words, the balance of payments is to show all changes in reserve positions in the Fund but only such changes in credit tranche positions as result from transactions.
Compared with the present treatment, this revised approach eliminates the paired entries for currency subscriptions to the Fund and the accompanying increase in national currency liabilities to the Fund. The retention of these entries could no doubt be rationalized, but it is difficult to see what analytic purpose they are intended to serve. Under the present method, they represent an increase in liabilities to the Fund, which is offset, apparently, by a claim on the Fund for the cancellation of this increase if the member’s subscription terminates. In the revised scheme, where changes in Fund positions as assets are substituted for changes in liabilities to the Fund, the increase in Fund position resulting from a currency subscription can be quantified only if further assumptions are made; the assumptions under which the increase in position would be equal to the subscription are by no means the most realistic ones.
V. Foreign Exchange Reserves
A question arises in connection with the balance of payments recording of foreign exchange reserves. The problem is to find a definition of “foreign exchange” that is suitable both for the balance of payments and in other contexts in which the concept is used; as the result of the application of such a definition, a conversion of financial claims of the domestic economy on the rest of the world other than foreign exchange reserves into foreign exchange reserves should be regarded as reserve creation.
Official foreign exchange reserves form part of the financial claims of the domestic economy on the rest of the world. In concept, they are assets effectively at the disposal of the official sector for use in settling payments imbalances. The concept is reasonably clear, but its application in practical terms poses formidable difficulties. Two factors make it hard to say whether certain assets are “effectively at the disposal” of the official sector. First, the ownership of the asset is not always an adequate indication of its availability for financing imbalances. Commercial bank holdings may, in some instances, be as readily accessible to the central bank as assets that the latter holds in its own name. On the other hand, some assets actually held by the central bank, say, on behalf of the government, cannot be regarded realistically as available for financing. Second, the form of the asset does not always determine whether it is, in fact, freely usable. Some assets that are nominally quite illiquid prove easily accessible when a need for balance of payments financing actually arises. Therefore, a definition based on criteria of holder or form, or a combination of the two, cannot be depended on to produce figures for foreign exchange reserves that measure the intended concept in a meaningful way.
Since foreign exchange assets, however defined, are claims of the domestic economy on the rest of the world, changes in them can occur only through resident/foreigner transactions. This is in contrast with gold and SDR’s, for example, which can show changes without any transactions with foreigners. As applied to foreign exchange reserves, “reserve creation” could thus only refer to a shift of assets from one form that did not qualify them to be classified as reserves to another form that brought them under the definition. Therefore, the creation of foreign exchange reserves is directly dependent on how that term is defined.
As a matter of fact, the balance of payments already has occasion to record foreign exchange transactions that could be explained more satisfactorily as reserve creation than they can be by the entries called for under existing principles. A prominent recent example is the sale by the U.K. authorities of their portfolio of corporate dollar securities and the transfer of the proceeds to the official reserves. Since the current rules seemed unsuitable, both aspects of this transaction were, in effect, omitted from the basic presentation for the United Kingdom in the Balance of Payments Yearbook, although an explanation is given there, of course, in the Notes to Tables 1 and 2. With a category for reserve creation, this transaction could usefully have been shown in a straightforward manner as an increase in reserves matched by reserve creation.12
In view of the difficulties in finding objective criteria on which to base a definition of official foreign exchange reserves, a pragmatic approach seems to be indicated. The recording of conversions of financial claims other than foreign exchange reserves into foreign exchange reserves as reserve creation would admittedly represent the substitution of an element of analytic judgment for the mechanical application of purely objective criteria, a practice that the present Manual quite rightly makes every effort to avoid, especially in the presentation of the basic figures. However, precisely in this area the solutions that have been found are not always completely successful in this respect. Specifically, no hard and fast rule has been formulated for drawing the distinction between the nonmonetary and monetary sectors, and no self-sufficient definition is given for “freely usable assets” (i.e., reserves). These concepts are, in the final analysis, left to be interpreted somewhat flexibly, in a way that is most suitable to the circumstances of the country concerned. A similar approach might well be adopted for distinguishing the reserve creation element of changes in foreign exchange reserves.
VI. Conditional Reserves
The categories of official reserves that have been discussed so far are mainly of the type that are considered to constitute unconditional liquidity for their holders. A reappraisal of the role of the reserve creation process, as it is recorded in the balance of payments, would be incomplete without some mention of conditional reserves. When the Manual was last revised (in July 1961), transactions that are now thought of as changes in conditional liquidity were by no means unknown but were usually conceived of in rather different terms. Thus, a country drawing on its credit tranche position in the Fund was regarded without much hesitation as having incurred a liability, just as if it had undertaken any other sort of external borrowing for balance of payments purposes. Although the Manual makes no specific reference to conditional assets, the treatment prescribed for Fund credit tranche drawings and for “committed” assets and liabilities makes it quite apparent that conditional assets would fit the system best if they were classified as liabilities.
The basis for the distinction between assets and liabilities is not quite as unequivocal as might be thought; important exceptions can be found to the most obvious criteria that might be proposed. Financial assets usually constitute claims on a debtor, that is, they have a counterpart in liabilities, but monetary gold and SDR’s are not claims in this sense. On the other hand, liabilities are generally assumed to represent obligations for repayment; however, all conditional assets and even some forms of unconditional assets (for example, the proceeds of swap drawings, Fund gold tranche positions, and, in part, SDR’s) are not entirely free of this obligation.
A rigid line of demarcation between unconditional and conditional assets also seems impossible to draw. No reserve asset could be said literally to be completely unconditional, at least if self-imposed conditions of prudent management are taken into account. Whether an asset has been earned is not a sufficient criterion, since SDR’s are unconditional without being earned, while payments agreement balances, which are certainly earned, may be considered so conditional as to be excluded entirely from the category of reserves. Nor is the presence of a repayment obligation a sure sign of conditionality, as mentioned above.
Conditional assets therefore cannot be clearly differentiated from either liabilities or unconditional assets, at least in such terms as are usually employed for making distinctions of this sort in the balance of payments. It does not follow, however, that the inclusion of a category for conditional assets would be inappropriate. Rather, it argues that the category should be interpreted flexibly, with the view to making the entries serve the analytic purposes for which they are intended. The chief interest in this paper for this kind of asset, however, is found in its relationship to reserve creation. Reserves that are regarded as conditional are probably always created rather than earned. They thus come into being without any transaction between the domestic economy and the rest of the world; if the change in reserves that takes place as the result of their creation or destruction is shown in the balance of payments, it would seem logical that it should have a counterpart in the category for reserve creation. However, several considerations make it rather doubtful that the creation of conditional liquidity would be a useful phenomenon to record in the balance of payments.
Most importantly, the amount, or timing, or both, of the initial creation of conditional assets cannot usually be specified in a way that will bear a direct relationship to other balance of payments phenomena occurring in the same period. Amounts are likely to take the form of ceilings, with part or all of the total becoming available only when given situations prevail or certain conditions are met. Even when the amounts are determinate, it is difficult to choose a date on which they can be said to have been created. The effective date of the agreement to make them available is often not particularly relevant in explaining other balance of payments developments that are taking place contemporaneously. The creation of conditional assets that would be said to occur when a swap line is arranged, for example, might appear rather paradoxical from the viewpoint of the partner whose payments balance happens to be highly favorable at the time. Furthermore, it seems questionable whether the creation of conditional assets in fact represents any new asset creation at all. The “creation” of such assets probably amounts to nothing more than the formal confirmation of the capability to borrow and the willingness to lend. This capability and willingness probably would have been found to exist in case of need even without such advance arrangements; to show that they first come into existence when they are confirmed does not seem very realistic or very useful for balance of payments analysis.
These points can be illustrated more concretely by reference to what is perhaps the most familiar kind of conditional liquidity, credit tranche positions in the Fund. A member acquires a credit tranche position at the time that it makes a subscription payment. The amount of this position, while linked to the subscription, cannot be specified unless assumptions are made about the conditions that will be fulfilled. In any event, rather special assumptions would be required to establish a position that was equal in amount to the currency portion of the subscription, which is the entry called for under the present treatment. An amount equivalent to quota would be more realistic under the policies that presently govern credit tranche drawings; even this, however, would not take account of the potential availability of the compensatory financing facility, on the one hand, or of the much greater degree of conditionality attaching to drawings in the higher credit tranches, on the other hand.
Much of this uncertainty is removed when a stand-by arrangement is agreed. A stand-by represents in effect a finding about the conditions that have been met and thus establishes the basis for assigning a value to the conditional liquidity that is available for immediate use. There would be no practical difficulty in recording the creation of liquidity through stand-by arrangements in the balance of payments in the same way as the creation of unconditional liquidity in the forms of monetary gold and SDR’s.
The amounts that could be assigned to the conditional liquidity represented by credit tranche positions may be thought of as milestones in a continuous progression of liquidity creation, the terminal point of which is not fixed absolutely. Each of these intermediate points may influence the shaping of balance of payments and reserve policy. However, the effect is probably exercised not so much through the occasional changes that occur in these assets, which is what could be shown in the balance of payments, as through their continuing existence at levels the significance of which is related to the fulfillment of conditions. On balance, it seems unlikely that most analysts would find it very useful to have the creation of conditional assets recorded in the balance of payments.
Even if it is decided that the creation of conditional liquidity is generally not to be recorded in the balance of payments, a question nonetheless arises about how the creation that must accompany the actual use of conditional liquidity is to be treated. To illustrate, when a country makes a drawing from the Fund in the credit tranches, it exchanges a conditional asset (credit tranche position) for an unconditional one (foreign exchange). The balance of payments should undoubtedly record this exchange, but it might also show that the conditional asset was created at the time of the exchange, since the statement contains no evidence of its creation in an earlier period. However, the increase through creation and the decrease through exchange of the conditional asset coincide in amount and timing, thus canceling out, so that the only entries that would actually appear would be an increase in foreign exchange and a counterpart in reserve creation. This way of representing the transaction seems harder to interpret than the method by which only the exchange of a conditional for an unconditional asset is entered. In other words, the present method of offsetting the change in unconditional assets with an entry for balance of payments loans, the use of swap lines, or the like appears quite satisfactory. The extension of the concept of the reserve creation category beyond the creation of unconditional liquidity does not seem to have much to commend it.
VII. Revaluation Changes
The present Manual system rigorously and explicitly excludes all changes in the value of a country’s assets and liabilities that do not result from transactions, and the appreciation or depreciation of financial capital items is not recorded until such time as these items are transferred between residents and foreigners.13 This treatment is logical as long as the balance of payments is oriented almost exclusively toward explaining the creation of imbalances and their financing. When interest in reserve movements is broadened to include those resulting from reserve creation as well, the possible usefulness of including changes arising from revaluation needs to be considered.
Ample evidence exists that countries attach importance to the level of their reserves and to changes in that level, regardless of the source of the changes. The loss of reserves that a country sustains, for example, when its holdings of a reserve currency are devalued, may thus be a factor that will influence its subsequent balance of payments policy. A loss of this kind is, of course, usually a one-time phenomenon and may not evoke the same degree of policy reaction as a continuing deterioration in the terms of trade or in the competitive position of exports. Nevertheless, countries undoubtedly adopt policies aimed at rebuilding their reserves after experiencing fortuitous, one-time losses. It would seem natural to expect them to do so regardless of whether such losses were the counterpart of transactions in the present balance of payments sense, such as those that might be undertaken after an earthquake, or whether they resulted from the depreciation of the foreign currency in which the reserves were held.
The adoption of a balance of payments category for reserve creation provides a means of incorporating revaluation changes in the system. Changes in the outstanding amount of reserve assets owing to appreciation or depreciation of their value can be included with other reserve movements and provided with a counterpart in the item for reserve creation. This latter item is intended to record the counterparts of those reserve changes that are not the consequence of transactions with the rest of the world, and revaluation changes fit this description exactly.
Since not only official reserves but also all items of financial capital are subject to fluctuations in value, consideration might be given to allowing the balance of payments statement to reflect revaluation changes generally. Such a practice might not be as applicable to other financial items as it would be to reserves, however, for several reasons. First, the introduction of a reserve creation item is designed to assist in the formulation of official policy. It appears unlikely that fluctuations in the valuation of privately held capital could be of much direct concern to the authorities. Second, valuation changes might, of course, affect the pattern of private capital movements and thus indirectly become a matter for concern. Their ex post facto recording in the balance of payments, however, would presumably be of little interest, since the expectation of revaluation gains and losses, rather than their realization, gives rise to private capital flows. Third, statistical problems probably would make it impractical to attempt a universal recording of valuation changes in the balance of payments, if up-to-date statements are required. The information could be derived only, if at all, from the books of each individual and each enterprise holding foreign assets or liabilities.
These objections do not apply, at least with much force, to the recording of valuation changes in official reserves. Moreover, the inclusion of such changes would not be a unique lapse from consistency in the balance of payments accounting system. The balance of payments has always admitted exceptions to principles, when it was analytically useful to do so. For example, the present system, in principle, excludes changes in coverage but finds it appropriate to make an exception for migrants’ transfers, which are to be included in the statement. The inclusion of entries for the revaluation of reserve assets represents a closely analogous situation.
APPENDIX
Gold Transactions: Example of the Present and Proposed Balance of Payments Treatment
The Balance of Payments Manual, paragraph 161, contains a matrix illustrating how each type of gold transaction is to be treated in the balance of payments. An adaptation of this matrix is presented as a numerical example in Table 1. The numbers in columns 1-3 of that table represent the balance of payments entries for the transactions under the headings and according to the item designations used for the treatment in the current edition of the Manual. The numbers in columns 4-7 represent the same transactions regrouped under the headings and according to the item designations used for the treatment proposed in this paper.
La présentation des réserves et de la création de réserves dans les comptes de la balance des paiements
Résumé
Le Manuel actuel de la Balance des Paiements ne renferme aucune directive spéciale pour la présentation, le cas échéant, dans les relevés de balance des paiements, des premières allocations de droits de tirage spéciaux sur le Fonds (D.T.S.). La création délibérée de réserves officielles n’avait pas été envisagée à l’époque où furent formulées les définitions et conventions qui régissent actuellement l’établissement de la balance des paiements; la solution proposée dans cet article consiste à introduire une nouvelle catégorie, la création de réserves, qui serait la contrepartie de l’accroissement des réserves qu’entraîne leur création délibérée.
L’introduction de ce concept met en lumière le fait qu’il existe déjà dans la balance des paiements, bien que sous un autre aspect, au moins une forme de création de réserves, à savoir la transformation par laquelle l’or cesse d’être une marchandise pour devenir un avoir financier. C’est ce qui se passe lorsque la propriété de l’or est transférée des secteurs non monétaires aux secteurs monétaires. L’enregistrement de ce processus de conversion dans la balance des paiements s’effectue actuellement en vertu d’une convention spéciale qui représente une exception majeure aux règles normalement appliquées. Les auteurs de cette étude suggèrent toutefois que la monétisation de l’or et la première allocation de D.T.S. sont des faits économiques de nature analogue que l’on peut facilement faire entrer dans le cadre de la balance des paiements.
En raison, notamment, des problèmes d’ordre conceptuel soulevés par les principes de comptabilité actuellement en vigueur, certaines autres formes de création de réserves, qui pourraient se prêter à d’intéressantes analyses du point de vue de la balance des paiements, ont été jusqu’à présent délibérément exclues du relevé. On peut citer, à titre d’exemple, les variations de la valeur des réserves des pays qui résultent d’une modification de la parité d’une monnaie de réserve. L’incorporation, dans le relevé de la balance des paiements, d’une catégorie spéciale pour la création de réserves permettrait d’enregistrer d’une manière uniforme toutes les variations du montant des réserves et de ne plus avoir recours à des exceptions spécifiques aux principes établis.
El tratamiento de las reservas y de la creación de reservas en las cuentas de la balanza de pagos
Resumen
Los principios existentes ofrecen poca orientación en cuanto a la forma de presentar una asignación inicial de derechos especiales de giro (DEG) en el Fondo, cuando llegue a efectuarse dicha asignación, como una partida de un estado de balanza de pagos. La creación deliberada de reservas oficiales no se tuvo en cuenta cuando se formularon las definiciones y convenciones por las que ahora se rige la contabilidad de la balanza de pagos; la solución que aquí se sugiere consiste en reconocer una nueva categoría, creación de reservas, como contrapartida del aumento de reservas que se produce mediante su creación deliberada.
La introducción de este concepto revela el hecho de que la balanza de pagos ya incluye, aunque de otra guisa, por lo menos una forma de creación de reservas, al transformarse el oro de mercancía en activo financiero. Esto es lo que se indica que tiene lugar cuando la propiedad del oro se transfiere de los sectores no monetarios a los sectores monetarios. El registro en la balanza de pagos de este proceso de conversión está racionalizado actualmente como convención especial que representa una desviación importante de las reglas que se aplican normalmente. No obstante, en este trabajo se sugiere que la monetización del oro y la asignación inicial de DEG son acontecimientos económicos afines y podemos hacer fácilmente que se ajusten de forma conveniente dentro del marco de la balanza de pagos.
Debido en parte a las dificultades conceptuales que plantean los principios contables actuales, en el pasado se han excluido deliberadamente del estado de balanza de pagos ciertas otras formas de creación de reservas que podrían proporcionar análisis interesantes en el ámbito de la balanza de pagos. Entre ellas se incluyen, por ejemplo, las variaciones en el valor de las reservas en existencia de un país, como consecuencia de una variación en la paridad de una moneda de reserva. Al incorporar al estado de balanza de pagos una categoría para la creación de reservas, se tendría un medio consistente para registrar todas las variaciones de las reservas en existencia, sin tener que depender de excepciones ad hoc a los principios establecidos.
Mr. Smith, Assistant Director in charge of the Balance of Payments Division, Research Department, is a graduate of Amherst College and did further work at Harvard Graduate School. Before coming to the Fund, he was with the U.S. Government, specializing in balance of payments problems.
Mr. Bouter, Assistant Chief of the Balance of Payments Division, Research Department, is a graduate of the Netherlands School of Economics. He was formerly on the staff of the Central Planning Bureau in the Netherlands and head of the Bureau of Statistics in the Netherlands Antilles.
This description, while reasonably accurate, makes a rather unappealing title for a balance of payments category, and it is hoped that a more elegant name can be devised eventually. However, nomenclature has always raised difficult problems for the balance of payments, as indeed it has for all the social accounts.
International Monetary Fund, Balance of Payments Manual (Washington, Third Edition, July 1961), para. 38.
How “reserves” or “liquidity” is to be defined is in itself a vexing problem, on which the Manual provides no specific guidance. Some aspects of the subject are dealt with in an article by N. John Brady, “Problems in Compiling Gold and Foreign Exchange Statistics,” Staff Papers, Vol. XI (1964), pp. 262–84. The question is touched on in the present paper only as it becomes relevant to do so in a particular context.
For convenience, throughout the rest of this paper each specific mention of “creation” will be taken to imply the possibility of the reverse process of “destruction.”
See Balance of Payments Concepts and Definitions, International Monetary Fund, Pamphlet Series No. 10 (Washington, 1968), p. 29.
If international liquidity is conceived to include the assets of international monetary institutions, as well as countries, then statements for these institutions must also be included in the aggregate.
This treatment of gold and its rationale are fully described in the Manual, especially paras. 33 and 158–91. An example illustrating the treatment is given in this paper in the Appendix.
The Fund’s Manual has always adhered to the convention of considering all gold as a commodity, except for that which is held by the monetary sectors for monetary purposes, and no change in this convention is contemplated.
In keeping with the practice in this paper of describing only reserve creation (see fn. 4, p. 207), this section focuses on initial allocation rather than net cumulative allocation, the formal term used in referring to allocation less cancellation.
Even this “obligatory limit” is not necessarily a significant figure, since it may be exceeded by agreement between a participant and the Fund.
The treatment described below has been introduced for the “basic” (uniform) tables in Volume 20 of the Fund’s Balance of Payments Yearbook.
It might be argued, with considerable justification, that the portfolio holdings should have been included in the reserves all along, in which case there would have been no change in the reserves to record at the time that the holdings were “liquefied.” To this it may be answered that, if this interpretation is accepted, the original acquisition of the portfolio as reserves, through the official vesting of privately held foreign securities, offers an equally striking example of reserve creation through transactions between residents. It is strictly a matter of analytic judgment as to which occasion the reserve creation could have been recorded more usefully.
Changes in direct investment capital owing to such things as depreciation, which are entered in the balance of payments as from the time they occur, are not considered to represent revaluation. Rather, they constitute real changes in the amount of domestic assets employed by the enterprises and, hence, in the financial equity of the foreign owners of the assets.