1. Copyright 2010, The World Bank Group. All Rights Reserved. 1 OTHER ECONOMIC FLOWS GOVERNMENT FINANCE STATISTICS Part 1 This lecture describes flows other than transactions that are recorded as holding gains and losses

2. Copyright 2010, The World Bank Group. All Rights Reserved. 2 GOVERNMENT FINANCE STATISTICS The last lecture, on Transactions in Financial Assets and Liabilities, concluded the discussion on transactions, which are the principal flows of the GFS system that the government controls in pursuit of fiscal policy. Flows other than transactions, known as other economic flows, which change the values of assets, liabilities, and net worth, are usually not controlled by fiscal policy. THIS LECTURE

3. Copyright 2010, The World Bank Group. All Rights Reserved. 3 GOVERNMENT FINANCE STATISTICS NATURE OF OTHER ECONOMIC FLOWS The 2001 GFS Manual specifies an integrated system that includes all flows necessary to explain the changes between the beginning and the end of the accounting period. Flows other than transactions comprise two major categories of other economic flows that change the values of assets, liabilities, and net worth: holding gains and losses and other changes in the volume of assets. A holding gain or loss is a change in the monetary value of an asset or liability resulting from changes in the level and structure of prices, assuming that the asset or liability has not changed qualitatively or quantitatively. An other change in the volume of assets is any change in the value of an asset or liability that does not result from a transaction or a holding gain.

4. Copyright 2010, The World Bank Group. All Rights Reserved. 4 Non- financial assets Financial assets Liabilities Expense Revenue Statement of Government Operations Change in net worth = = + - - Liabilities Financial assets Non- financial assets Change in net worth Statement of Other Economic Flows = + - Non- financial assets Financial assets Liabilities Net worth Closing Balance Sheet = + - Liabilities Financial assets Non- financial assets Net worth Opening Balance Sheet + - = Stocks Flows GFSM 2001 Analytic Framework

5. Copyright 2010, The World Bank Group. All Rights Reserved. 5 GOVERNMENT FINANCE STATISTICS CODING OF TRANSACTIONS, OTHER ECONOMIC FLOWS, AND STOCKS Other economic flows are classified by the type of asset or liability affected. To facilitate reconciliation and integration of all flows and stocks the same classification categories are used. Transactions, holding gains, and other changes in volume are distinguished by the use of different classification code prefixes: - Transactions use prefix3 - Holding gains use prefix4 - Other change in volume use prefix5 For consistency of classification among transactions, other economic flows, and stocks of assets and liabilities, the stocks classification categories use prefix 6.

6. Copyright 2010, The World Bank Group. All Rights Reserved. 6 GOVERNMENT FINANCE STATISTICS Holding gains and losses can apply to all assets and liabilities. In the case of assets and liabilities expressed in a foreign currency, holding gains and losses can result from changes in exchange rates. Holding gains do not include a change in the value of an asset resulting from a change in the quantity or quality of the asset. HOLDING GAINS IN GENERAL

7. Copyright 2010, The World Bank Group. All Rights Reserved. 7 GOVERNMENT FINANCE STATISTICS TYPES OF HOLDING GAINS For some analytic purposes, it may be desirable to divide the total value of holding gains accruing on a category of assets into neutral and real holding gains. Not all assets have market prices in the ordinary sense of the term “price” and holding gains on these assets are always zero.

8. Copyright 2010, The World Bank Group. All Rights Reserved. 8 GOVERNMENT FINANCE STATISTICS REALIZED AND UNREALIZED HOLDING GAINS Holding gains result from price changes and can accrue on all economic assets held for any length of time during an accounting period. Holding gains may be realized or unrealized.

9. Copyright 2010, The World Bank Group. All Rights Reserved. 9 GOVERNMENT FINANCE STATISTICS The precise calculation of holding gains, the direct method, requires records to be maintained of all individual transactions and other changes. In practice, it is unlikely that all of the requisite data will be available, and alternative estimation techniques using less information, the indirect method, must be employed. ESTIMATION OF HOLDING GAINS

10. Copyright 2010, The World Bank Group. All Rights Reserved. 10 GOVERNMENT FINANCE STATISTICS When bonds and bills are issued at a discount the price will gradually rise over the life of the bond until it reaches the maturity value. This increase in price is not a holding gain. The value of bonds and bills changes when the market rates of interest change. Changes attributable to market rates of interest are holding gains. Changes in the value of shares and other equity are treated as holding gains. Reinvested earnings on direct foreign investment that result in increased foreign equity is treated in1993 SNA as a transaction in additional equity. In the GFS system the increase is treated as a holding gain. FINANCIAL ASSETS WITH FIXED MONETARY VALUES

11. Copyright 2010, The World Bank Group. All Rights Reserved. 11 SHARES AND OTHER EQUITY GOVERNMENT FINANCE STATISTICS Change in the monetary value of government equity in corporations resulting from price changes is a holding gain. Reinvested earnings on direct foreign investment is treated as holding gains in GFS.

12. Copyright 2010, The World Bank Group. All Rights Reserved. 12 GOVERNMENT FINANCE STATISTICS INSURANCE TECHNICAL RESERVES In the GFS system, the increase in the value of liabilities for insurance technical reserves is treated as a property expense. A holding gain is recorded with respect to the liability for a defined- contribution retirement scheme

13. Copyright 2010, The World Bank Group. All Rights Reserved. 13 GOVERNMENT FINANCE STATISTICS FINANCIAL ASSETS DENOMINATED IN FOREIGN CURRENCIES Holding gains may occur because both the price of the asset in the foreign currency changes and because the exchange rate changes.

14. Copyright 2010, The World Bank Group. All Rights Reserved. 14 GOVERNMENT FINANCE STATISTICS FIXED ASSETS The value of a fixed asset changes as a result of consumption of fixed capital as well as price changes.

15. Copyright 2010, The World Bank Group. All Rights Reserved. 15 GOVERNMENT FINANCE STATISTICS INVENTORIES Many transactions in inventories are internal transactions. It will be necessary to estimate holding gains using assumptions about the timing of additions to and withdrawals from inventories and the prices prevailing at those times.

16. Copyright 2010, The World Bank Group. All Rights Reserved. 16 GOVERNMENT FINANCE STATISTICS NONFINANCIAL ASSETS DISPOSALS The difference between the balance sheet value of an asset and the disposal value is the exchange value less any costs of ownership transfer. The costs of ownership transfer are a holding loss.