Introduction to the Conceptual Framework Course on Balance of Payments and International Investment Position Manual (BPM6)

IMF-PFTAC Nadi November 22-December 1, 2010 BP02

Lecture Outline

 Scope of international accounts  Integrated framework  Accounting rules  Sequence of accounts  Linkages with other macroeconomic frameworks 2

  

Scope of International Accounts

The

international accounts

for an economy  summarize the economic relationships between

residents

economy and the

rest of the world

of that They comprise:    The

international investment position

(IIP)  the

stock

of financial assets and liabilities compiled on a specific date; The

balance of payments

 a statement that systematically summarizes economic

transactions

time period; and for a specific The

other changes

in financial assets and liabilities account  covers

other flows

, such as valuation changes that reconcile the balance of payments and IIP for a specific period.

An

integrated framework

:   Sequence of accounts, each with a balancing item Harmonized with SNA 3

Integrated Framework

JAI Tunis/L2:4

  

Definition of the International Investment Position

The

international investment position

(IIP)  a statistical statement that shows at a point in time the value of financial assets of residents of an economy that are

liabilities

of an economy to nonresidents.

claims

on nonresidents or are gold bullion held as reserve assets; and the The difference between the assets and liabilities is the

net position

in the IIP  represents either net claims on or net liabilities to the rest of the world. The IIP represents a subset of the assets and liabilities included in the

national balance sheet

 In addition to the IIP, the national balance sheet incorporates nonfinancial assets as well as financial assets and liability positions between residents.

5

Definition of the balance of payments

   The

balance of payments

 a statistical statement that summarizes

transactions

between residents and nonresidents during a period.

Consists of:      the goods and services account, the primary income account, the secondary income account, the capital account, the financial account.

Under the

double-entry

accounting system   each transaction is recorded as consisting of two entries the sum of the credit entries equals the sum of the debit entries 6

Gross and Net Recording

 The current and capital accounts show transactions in

gross

terms.

 In contrast, the financial account shows transactions in

net

terms, which are shown separately for financial assets and liabilities (i.e., net transactions in financial assets shows acquisition of assets less reduction in assets,

not assets net of liabilities

).

7

Current Account

   

The current account shows flows of goods, services, primary income, and secondary income between residents and nonresidents.

The

balance

on these accounts is known as the current account balance.

The current account balance shows the difference between:  the sum of exports of goods and services and income receivable  and the sum of imports of goods and services and income payable The value of the current account balance equals the saving investment gap for the economy (Chapter 14).

 Links the international accounts to the domestic economy 8

Capital Account

   The capital account shows credit and debit entries for

nonproduced nonfinancial assets

and

capital transfers

between residents and nonresidents.

Acquisitions and disposals of nonproduced nonfinancial assets:  such as land sold to embassies and sales of leases and licenses, Capital transfers  that is, the provision of resources for

capital purposes

by one party without anything of economic value being supplied as a direct return to that party.

9

Financial Account

     The financial account shows

net

acquisition and disposal of

financial

assets and liabilities Financial account transactions appear in the balance of payments and, because of their effect on the stock of assets and liabilities, also in the

integrated

IIP statement.

The sum of the balances on the current and capital accounts represents the

net lending

(surplus) or

net borrowing

(deficit) by the economy with the rest of the world. This is conceptually equal to the net balance of the financial account.

In other words, the financial account measures how the net lending to or borrowing from

nonresidents

is financed.

10

Net Errors and Omissions

     In principle, balance of payments accounts are balanced In practice, imbalances result from imperfections in

source data

and

compilation

.

This imbalance is labeled

net errors and omissions

Should be identified separately in published data. It should not be included indistinguishably in other items.

Derived residually as net lending/net borrowing and can be derived from the financial account minus the same item derived from the current and capital accounts  For example, if net lending/net borrowing measured from the current and capital accounts is 29, while net lending/net borrowing measured from the financial account is 31, then net errors and omissions is +2.

11

Net Errors and Omissions

   A large or volatile value of net errors and omissions hampers interpretation of the results.

Not possible to give guidelines on an

acceptable size

of net errors and omissions, it can be assessed (where possible) by compilers in relation to other items, such as GDP, positions data, and gross flows.

Statistical discrepancies also can arise in the IIP statement.

 Closing values are by definition equal to the opening values plus net transactions plus net other changes during the period. However, if these components are independently measured, discrepancies may arise because of data imperfections.

12

Country

Cook Islands Fiji FSM Kiribati PNG Samoa Solomon Islands Tonga Tuvalu Vanuatu Average (absolute values)

Net E&O as % of X+M Goods – latest

-3% 6% 6% 19% 1% 20% 19% (qtly) -21% (qtly) 16% 4 11.5

Average Net E&O over last five years

?

8% (3 years) 7 20 <1% 11% (3 years) 18% (6 quarters) 6% (6 quarters) 15% 6% 10

Number of years with positive value

4 2 (3years) 1 1 4 2 (3 years) 3 (6 quarters) 1 (6 quarters) 3 2 13

Linkages within the International Accounts

 Some of the important linkages

within

the international accounts are as follows:     The end of period values of the IIP are the sum of the beginning of period values, transactions, and other flows.

The current, capital, and financial account entries are in balance, in principle.

The balance on the sum of the current and capital accounts is equal to the balance on the financial account.

 This balance is called

net lending/net borrowing

, whichever way it is derived.

Financial assets and liabilities generally give rise to investment income. The

rate of return

is derived as the ratio of income to the corresponding stock of assets or liabilities. 14

Linkages and Consistency with Other Datasets  

National Accounts

 International accounts correspond to the rest of the world accounts of the SNA

Monetary and Financial Statistics

 Balance sheets for deposit-taking and other financial corporations should be consistent with the corresponding international accounts items.

  foreign assets and liabilities of the central bank; foreign assets and liabilities of other deposit-taking corporations 15

Linkages and Consistency with Other Datasets

Government Finance Statistics

  The following items that appear in government finance statistics should be consistent with their international accounts equivalents:     interest payable on general government external debt; grants by general government to nonresidents; grants to general government from nonresidents; net external financing; and external assets and liabilities.

16