1. 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

2. Lecture Outline Scope of international accounts Integrated framework
Accounting rules
Sequence of accounts
Linkages with other macroeconomic frameworks

3. Scope of International Accounts
The international accounts for an economy
summarize the economic relationships between residents of that economy and the rest of the world
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 for a specific time period; and
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
Emphasize the importance of understanding residence – who and what is included and who and what is excluded.
Greater emphasis on the IIP than in previous BOP manuals. The IIP is a partial balance for the country – it only records value of financial assets that are claims on non-residents and gold held as reserve assets; and liabilities of residents to non-residents.
The other changes account is where revaluation of assets and liabilities are recorded, for example, as would occur if the value of reserve assets changed due to exchange rate changes.

4. Integrated Framework
Explain the sequence of transaction accounts, how they link to the IIP, how the differences between the opening IIP and closing IIP are fully explained in the accumulation accounts – transactions and other changes accounts.
The IIP only records that part of the national balance sheet that relates to assets of residents that are claims against non-residents, and liabilities of residents that are assets of non-residents.

5. 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 claims on nonresidents or are gold bullion held as reserve assets; and the liabilities of an economy to nonresidents.
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.

6. Definition of 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
Will go into these in more detail later.
G&S account includes imports and exports of goods and services, the balancing items are the balance on trade in goods and balance on trade in services and in total the balance on goods and services.
The Primary Income account records incomes earned by residents making its resources available to non-residents. E.g., labour, natural resources such as the right to fish in territorial waters or to extract mineral deposits, and financial assets such as investments in businesses, financial investments and loans and reserve assets.
The secondary income account records current transfers between residents and non-residents, such as personal transfers (to family members, to churches, etc), international cooperation and some insurance related transactions.
The capital accounts records capital transfers in and out and transactions in non-produced non-financial assets between residents and non-residents, e.g., a country buying a piece of land to build an embassy.
The financial account records transactions in financial assets and liabilities that take place between residents and non-residents.

7. 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).
So exports of goods are shown separately from imports of goods in the current account, for example.
But for financial account transactions there may be many transactions of the same nature that are not meaningful to show gross. For example, if a country has borrowed $10m to pay off another loan of $10m, the net flow is zero and that is what is shown in the financial account.

8. 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

9. 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.
Sales of leases and licenses are rare.
Main item in this account is capital transfer and include capital grants and debt forgiveness.

10. 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.
Refer back to the integrated framework diagram. Sequence of accounts going downward, double entry system, net lending/borrowing has to be financed and that is shown in the financial account.

11. 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.

12. 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.

13. Number of years with positive value
Country
Net E&O as % of
X+M Goods – latest
Average Net E&O -
over last five years
Number of years with positive value
Cook Islands
-3% ? 4
Fiji 6%
8% (3 years)
2 (3years)
FSM 7 1
Kiribati
19% 20
PNG 1%
<1%
Samoa
20%
11% (3 years)
2 (3 years)
Solomon Islands
19% (qtly)
18% (6 quarters)
3 (6 quarters)
Tonga
-21% (qtly)
6% (6 quarters)
1 (6 quarters)
Tuvalu
16%
15% 3
Vanuatu 2
Average (absolute values)
11.5 10
These data are from the most recent data I could get from official websites. Some only have quarterly data, some only have three years of data. We’ll discuss dissemination issues later in the workshop.
Gives an indication of the size of net errors and omissions, relative to the sum of exports and imports of goods, firstly for the latest year or quarter and secondly as an average over the last several years or quarters. Thirdly, the number of values with the same sign gives an indication of possible bias in the estimates.

14. 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.
Refer to the integrated framework diagram.

15. 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

16. 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.