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Balance of Payments Statistics – Definitions and Principles of Registration

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Balance of Payments Statistics – Definitions and Principles of Registration

Balance of Payments Statistics – Definitions and Principles of Registration

The Balance of Payments (BoP) is a statistical statement that systematically summarizes, for a specific period of time, the economic transactions of an economy with the rest of the world. Transactions consist of those involving:

-         Goods, services and incomes;

-         Financial claims on and liabilities to the rest of the world;

-         One-sided transactions (transfers).

 A transaction itself is defined as an economic flow that reflects the creation, transformation, exchange, transfer, or extinction of an economic value. It involves:

§         the change of ownership of goods and/or financial assets;

§         the provision of services; or

§         the provision of labor and/capital.

An international transaction consists in an economic flow between a resident  and a non-resident economic actor.

Residency is a central concept in the measurement of transactions between residents and non-residents. According to the Balance of Payments Manual (BMP5) and the 1993 SNA, this concept is not based on the nationality or legal criteria but on transactor’s  center of economic interest.

Further, because territorial boundaries recognized for political purposes may not always be appropriate for economic purposes, the economic territory of a country is used as the relevant geographical area to which the concept of residence is applied. An institutional unit is a resident unit of a country or economy when it has a centre of economic interest in the economic territory of a country. The economic territory of a country consists of the geographic territory administered by a government. Persons, goods and capital circulate freely within this territory. Included are islands that belong to the country, airspace, territorial waters, and continental shelf lying in international waters over which the country enjoys exclusive rights or over which it has, or claims to have, jurisdiction in respect of the right to fish or to exploit fuels or minerals below the seabed. Also included are territorial enclaves such as embassies, consulates, military bases, scientific stations, information or immigration offices and aid agencies, located in other economies and used by the government for diplomatic, military, scientific or other purposes with the formal political agreement of the governments of the economies where these enclaves are physically located.

Thus, while territorial enclaves used by foreign governments (or international organizations) may be located within a country’s geographical boundaries, such enclaves are not included in the host country’s economic territory.

An enterprise has a centre of economic interest, and thus residence, in an economy when it engages and intends to continue to engage in economic activities on a significant scale either indefinitely or over a long period of time from one or more locations, not necessarily fixed, within the economic territory of that economy. A period of one year is suggested as a guideline for determining residency, but this is not an inflexible rule.

Production undertaken outside the economic territory of a resident enterprise by the personnel, plant and equipment of that resident enterprise is treated as part of host country production, and the enterprise is treated as a resident unit (branch or subsidiary) of that country, if the enterprise meets the conditions mentioned in the earlier paragraph. In addition, the enterprise must maintain a complete and separate set of accounts of local activities (that is, income statement, balance sheet, transactions with the parent enterprise), pay income taxes to the host country, have a substantial physical presence, receive funds for enterprise work for the enterprise account, and so forth. If these conditions are met, the enterprise is considered a foreign affiliate. If these conditions are not met, the output of the enterprise should be classified as an export by a resident enterprise. Such production can generate an export only if the production is classified as domestic production (undertaken by a resident even though the physical process takes place outside the economic territory).

These considerations also apply to the particular case of construction activity carried out abroad by a resident producer. Special mention should be made of construction involving major specific projects (bridges, dams, power stations, etc.) that often take several years to complete and are carried out and managed by non-resident enterprises through unincorporated site offices. In most instances, site offices will meet the criteria requiring that site office production be treated (as would the production of a branch or affiliate) as the production of a unit resident in the host economy and as part of the production of the host economy rather than as an export of services to that economy.

Offshore enterprises, including those engaged in manufacturing processes (including assembly of components manufactured elsewhere), trading and financial activity are residents of the economies in which the offshore enterprises are located. This applies regardless of location in special zones of exemption from customs or other regulations or concessions.

The principles used to determine the residency of an enterprise are likewise applicable to an enterprise that operates mobile equipment (such as ships, aircraft, drilling rigs and platforms, and railway rolling stock) outside the economic territory where the enterprise is resident. Such operations may take place in (i) international waters or airspace or (ii) another economy. In the first case (an enterprise with operations taking place in international waters or airspace), the activities should be attributed to the economy in which the operator maintains residence. In the second case (an enterprise with production taking place in another economy), the enterprise may be considered to have a centre of economic interest in the other economy. If operations (such as a railway network) are carried out by an enterprise on a regular and continuing basis in two or more countries, the enterprise is deemed to have a centre of economic interest in each country and thus to have separate resident units in each. The enterprises must also be accounted for separately by the operator and recognized as separate enterprises by tax and licensing authorities in each country of operation. In cases involving the leasing of mobile equipment to one enterprise by another for a long or indefinite period, the lessee enterprise is deemed to be the operator, and activities are attributed to the country where the lessee is resident.

A household has a centre of economic interest where it maintains one or more dwellings within the country that members of the household use as their principal residence. All individuals who belong to the same household must be residents of the same economy. If a resident household member leaves the economic territory and returns to the household after a limited period of time, the individual continues to be a resident even if he or she makes frequent journeys outside the economic territory. An individual may cease to be a member of a resident household when he or she works continuously for one year or more in a foreign country. Even if an individual continues to be employed and paid by an enterprise that is resident in his or her home country, that person should normally be treated as a resident in the host country if he or she works continuously in the host country for one year or more.

Civil servants (including diplomats) and military personnel employed abroad in government enclaves continue to have centers of economic interest in their home countries while, and however long, they work in the enclaves. They continue to be residents in their home economies even if they live in dwellings outside of these enclaves. Because embassies and consulates are considered extraterritorial to the economies in which they are located, the compensation received by host country (local) staff is classified as payments of income to residents by non-residents.

However long they study abroad, students should be treated as residents of their home economy, provided they remain members of households in their home economies. In these circumstances, their centers of economic interest remain in their economies of origin, rather than in the economies where they study. Medical patients abroad are also treated as residents of their economies of origin, even if their stays are one year or more, as long as they remain members of households in their economies of origin. Any other individual who moves to another economy and stays, or expects to stay, for a year or more, is considered to undergo a change of centre of economic interest, that is, he or she is considered to be a migrant.

Refugees are persons displaced from their home economies by either natural disasters or other causes (such as persecution or conflict). Such displacement to other economies may be for a short period or on a long-term basis. In the case of short-term displacement, refugees continue to be residents of their home economies; however if the displacement is for a long period and the refugees change their centre of economic interest, they are considered to be migrants and thus no longer residents of their original economies.

Principles of registration:

1. Valuation of transactions. Market price should be used as the basis for valuation of transactions in international trade in services. Thus, transactions will generally be valued at the actual price agreed on by the supplier and the consumer. BPM5 identifies some of the more common circumstances under which it may not be possible to establish a market price and recommends that in such circumstances it is appropriate to develop a proxy measure, if possible by analogy with known market prices established under conditions that are considered essentially the same as those pertaining to the un-priced transaction. Particular problems may arise in valuing international transactions between related enterprises integrated under the same management but situated in different economies[1].

Transactions may not be market transactions because there is a lack of independence among the parties to the exchange, and the prices used in portraying such transactions in the books of the enterprises (called transfer prices) may or may not be market prices. Transfer pricing not based closely on market considerations could be expected to be common among related enterprises conducting business across national boundaries because disparities between taxes and regulations imposed by different governments are a factor in management decisions on the optimum allocation of profits among units.

2. The time of recording transactions.

The appropriate time to record transactions is the moment of ownership transfer or the time of service provision to the client. This may differ from the time at which payment is made or received. Nevertheless, it is generally agreed that the time of payment is an acceptable approximation of the transaction moment.

3. The convention to a common currency unit. Transactions may take place in a range of currencies, including the domestic currency of either the provider or the consumer of the services. To produce meaningful statistics, however, it is necessary to convert all transaction values to a common account unit. Most often, the common unit will be the national currency or an internationally recognized reference unit like the Euro or the US dollar. This facilitates the use of BoP statistics together with other statistics of the domestic economy and, respectively, to develop international comparisons.

However, if this currency is subject to significant depreciation when compared to other currencies used in the international transactions, nominal growth of transactions in money terms (current prices) over time may result from this depreciation. A similar effect may be observed if a country is experiencing hyperinflation. In such cases it may be more useful to express all transactions in another, more stable reference currency.

Romanian official statistics of international transactions were published in thousands of US dollars up to the end of 2002 and in thousands of euro since 1st of January 2003.

The most appropriate exchange rate to be used in converting (translating) values from the transaction currency to the currency of compilation is the market exchange rate prevailing at the time that the transaction takes place. The midpoint between buying and selling rates should be used so that any service charge (the spread between the midpoint and those rates) is excluded. However, because the actual midpoint rate at the time at which the transaction occurs may not be available to the compiler, an accepted practice is to take the average midpoint rate for the period for which the data are being compiled. BPM5 should be consulted for recommendations on conversion where there are multiple official exchange rates, or black or parallel market rates.

4. Double entry system. The basic convention applied in establishing a BoP is that every recorded transaction is represented by two entries with equal values:

-          one is designated a credit with a positive arithmetic sign;



-          the other is a debit with a negative sign, as most of the entries in the BoP refer to transactions in which economic values are provided or received in exchange for other economic values; those values consist of real resources (goods, services and income) and financial items.

In principle, the sum of all credit entries is identical to the sum of all the debit entries, and the net balance of all entries in the statement is zero.

Structure of the Balance of Payments

A Balance of Payments consists of two main groups of accounts:

    1. The current account (above the line account) refers to:

- goods and services;

- incomes;

- current transfers.

    1. The capital and financial account (under the line account) refers to:

- capital transfers and acquisition/disposal of non-produced and non-financial assets;

- financial assets and liabilities net entries.

A detailed classification of the standard components is presented in Table No. 1.

The general balance of payments of a country is perfectly balanced at the end of a year. The current account imbalance (over the line surplus or deficit) is regulated by a reverse imbalance of the financial and capital account (under the line deficit or surplus).

           

Statistical analysis of an Account of the Balance of Payments

By noting:

- xj all the entries in the credit side of the BoP (all the incomes similar to export      incomes),

- mj all the entries in the debit side of the BoP (all the payments similar to export      payments), and

- sj the saldo or the net position of the balance of a given item  of the BoP

   > 0    =>  surplus (positive imbalance) 

                        = 0    =>  balance (equilibrium)

                        < 0    =>  deficit (negative imbalance)

            As a group of chapters/positions/items of the BoP forms an account, one can write:

                       

            Four groups of indicators can be used in order to examine the data of a BP’s account:

1.      Indicators of the relative significance of a imbalance

2.      Indicators illustrating the evolution of an imbalance

3.      Indicators of structural analysis of a BP account imbalance

4.      Indicators of international comparative analysis

  1. The relative significance of a imbalance can be expressed by three tools:

a)      comparing the balance to the gross domestic product (GDP) pr net domestic product (GNP):

 and, rarely,     

A ±3% up to  ±5% of the GDP is an acceptable imbalance

b)      comparing the net position in a balance to the value of the total transactions:

          and, often,       

Up to ±10% is an acceptable imbalance.

c)      The percentage coverage of payments by incomes

     and, respectively,           

§         GA > 100%  is corresponding to a positive imbalance (surplus);

§         GA = 100%  when incomes equal payments;

§         GA > 100% if incomes cover partly the corresponding payments (the case of a negative imbalance or deficit).

  1. The evolution of an imbalance is shown by index numbers that compare data of different years.

a)      If there are registered imbalances with the same arithmetical sign in the two periods, one can directly compare the surpluses/deficits:

b)      The change over the time of an imbalance is generally expressed by the index of percentage coverage:

IGA > 100%  - a positive evolution: current coverage is higher than in the reference;

IGA = 100%  - a stationary (unchanged) coverage ratio of payments by incomes;

IGA < 100%  - a negative trend: a decrease of the percentage coverage in the current year as compared to the reference period.

Remark: The interpretation of IGA has to be combined with value data about imbalances

  1. Structural analysis of a BP account imbalance

The contribution of an item to the account imbalance:

Applicable only to items showing the same sign of imbalance as that of the account.

 if all the items contribute to the general imbalance;

if some of the account’s items show the other sign of the imbalance.

4.      International comparative analysis refers usually to indicators of relative significance of imbalance in the compared countries.

Remark: A direct comparison of imbalances does not help very much in the analysis. Only comparing countries with the same economic and financial potentials, or having the same total value of international transactions allow for:

          that can be higher, equal or lower than 1.

The International Investment Position

The International Investment Position (IIP) is a balance sheet of the stock of external financial assets and liabilities. It refers to:

- Financial claims on non-residents;

- Financial liabilities to non-residents;

- Monetary gold and special drawing rights (SDRs).

By convention, land and other immovable tangibles (except those owned by extraterritorial units) are treated as the property of economic entities of the economies in which the immovable tangibles are located. Therefore, a non-resident owner has a financial claim on the resident entity to which the ownership of such an asset is attributed rather than ownership of the actual non-financial asset.

The IIP at the end of a specific period (year) reflects financial transactions, valuation changes and other adjustments that affect the level of assets and/or liabilities that occurred during the period.

Components of IIP are classified upon two criteria (dimension):

a) According to the functional categories, and in concordance with the income components of the current account and the financial account in the BP, distinction is made between:

-          Direct investment  is subdivided into:

§         Equity capital plus reinvestment earnings and other capital (inter-company debt);

§         Claims on, and liabilities to affiliated enterprises.

-          Portfolio investment is classified by instrument:

§         Equity securities;

§         Debt securities;

§         Financial derivatives.

-          Other investments are classified as well by instrument and then by sector. Included are trade credits, loans, currency and deposits, other assets and liabilities.

-          Reserve assets comprise monetary gold, SDRs, reserve position in the IMF, foreign exchange assets and other claims.

b) According to the institutional categories, the assets and liabilities of an economy connected to the rest of the world are grouped into four sectors:

- General Government;

- Monetary Authority;

- Banking sector;

- Other sectors.

The net IIP – that in external financial assets minus external liabilities – often is used to analyze developments in the performance of an economy with regard to the rest of the world as of a specific reference date.

Complementary bibliography in English:

* * * Balance of Payments Manual, 5th Edition, International Monetary Fund, Washington, D.C., 1993



[1] Related enterprises are those where there exists a direct investment relationship as described in BPM5 and BD3. BPM5 defines the direct investment relationship as ownership, by a direct investor resident in one economy, of 10 percent or more of the ordinary shares or voting power (for an incorporated enterprise) or the equivalent (for an unincorporated enterprise) of an enterprise resident of another economy. Further, direct investment enterprises comprise those entities that are either directly or indirectly owned by the direct investor.

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