Balance of payments and international investment position manual (BPM6)

From Statistics Explained

Authors: Robert Heath and Robert Dippelsman (International Monetary Fund, Statistics Department)

International standards for balance of payments statistics have been a priority for the International Monetary Fund (IMF) from its earliest days. The first edition of the Balance of Payments Manual was released by the Fund in January 1948. The latest is the fifth edition (BPM5), released in 1993.

The preparation of a sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) has now been finalised. Like its predecessors, it provides guidance for compilers on producing statistics to internationally agreed standards. As a result, basic variables for the external sector such as the current account balance and reserve assets can be reported by member countries in an internationally comparable way.

Background

The new manual is the culmination of several years work by the IMF’s Statistics Department in collaboration with compilers and other interested parties. The project was initiated in the early part of this decade by the IMF Committee on Balance of Payments Statistics (Committee), which meets annually, has broad geographic national representation, and was created by the Fund to advise it on balance of payments statistics. The project involved extensive consultation with data users, including those within the Fund. As well, national statistical compilers were involved with specialised expert groups [1] As well as national compilers, representatives from international agencies also participated. The issues and outcome papers produced by these groups are posted on the IMF website and took advantage of opportunities to comment on disseminated papers and material on a dedicated internet site. An Annotated Outline, released in 2004, proposed general directions and sought feedback on a range of questions.

Guiding principles

There were three guiding principles in preparing BPM6.

First, the basic framework for the balance of payments data in BPM5 is retained in BPM6, and so the changeover to BPM6 is likely to be less significant for countries than from BPM4 to BPM5. Nonetheless, the new manual brings increased elaboration and some changes in concepts, presentation, and emphasis. The sixth edition will be about twice as long as BPM5, in response to requests for more conceptual explanation and more detail on specific cases.

Second, the revision was undertaken to coincide with the update of the System of National Accounts (SNA), thereby maintaining and enhancing the harmonisation with national accounts statistics that was introduced in BPM5.[2]

The work programmes of the Committee and of the relevant groups revising the SNA were closely coordinated, not least in the production of issues papers. So, for instance, a decision to regard research and development (R&D) output such as patents and copyrights as produced assets means that sales of R&D are included in services in BPM6, rather than in the capital account as non-produced assets as in BPM5.

There are also some changes to bring BPM6 closer to the SNA. These include renaming the “income” and “current transfers” categories “primary income” and “secondary income,” replacing the monetary authorities sector with the central bank sector, and introducing a new category of rent for use of natural resources. Similarly, there are to be some changes in the SNA to bring it into line with the BPM, such as taking closer account of reinvested earnings on direct investment. The relationship between the SNA and international accounts is set out in Chapter 2 of BPM6.

Third, BPM6 adopts advances since 1993 in methodology that were included in other guides and manuals, such as the Monetary and Financial Statistics Manual (2000), the Government Finance Statistics Manual (2001), the External Debt Guide (2003), and the Guidelines for a Data Template (2001). In turn, these manuals and guides will be revised to maintain harmonisation among the major macroeconomic datasets.

Presentation of BPM6

BPM6 has 14 chapters and a series of appendices. It states general principles that are intended to be applicable in a wide range of circumstances. It also applies the principles to some specific topics that have been identified as needing additional guidance.

After the introductory chapters, like BPM5, BPM6 starts with basic principles. Two chapters include a detailed discussion of accounting principles, economic territory, units, residence, and institutional sectors and sub-sectors — in particular, compared with BPM5, there is more discussion of the financial sector.

Thereafter the structure of BPM6 is significantly reorganised from BPM5 to take account of the increasing importance of financial flows and stocks in analyzing external stability, as highlighted in the 2007 Surveillance Decision adopted by the IMF Executive Board. There is greater prominence given to positions, as discussed ahead, and “other flows,” highlighting the relevance of analysing holding gains and losses. Chapters 5 to 9 and the title of the Manual reflect this emphasis.

The current account is covered in Chapters 10 to 12, covering the same ground as Chapters 10 to 15 in BPM5. On services, there was close cooperation with the Interagency Task Force on Trade in Services in developing the methodology. The capital account is covered in Chapter 13 (Chapter 17 in BPM5), and Chapter 14 discusses selected issues in the analysis of the international accounts (Appendix V in BPM5).

The appendices bring more detail on exceptional financing and debt reorganisation than in BPM5. Supplementary information showing the benefits arising from concessional debt as one-off transfers at the point of loan origination is included, calculated as the difference between the nominal value of the debt and its present value using a relevant market discount rate. Further, although arrears are to be recorded as part of the value of the instrument and not as a separate transaction in the financial account, an exception is made in the analytical presentation [3] given the relevance of arrears to the concept of exceptional financing.

The topical summary appendices bring together in one place issues relating to direct investment, insurance, and financial leases that are discussed across different chapters of BPM6. Appendices on “multinational enterprises” and “remittances” explain datasets that are related to those set out in BPM6. Remittances include the new concept of personal transfers that is replacing “workers’ remittances” in the balance of payments.[4]

An appendix on currency and other economic unions is introduced. A currency union and its economic territory are defined, the currency union central bank is recognised as an institutional unit, and various aspects of recording that are special to currency and economic unions are described.

Another appendix sets out the detailed changes between BPM6 and BPM5, while the standard components and additional position data tables are provided as the final appendix, not least so that it is easy to find.

Major themes

BPM6 reflects changes that have occurred in the global economy since 1993. This period has been characterised by a significant growth in cross-border activity and policy challenges arising from increased financial flows. So consequently, globalisation, financial innovation, and the balance sheet approach are major themes that underlay many of the detailed changes made in BPM6.

Globalisation

The statistical implications of globalisation have been a major focus of BPM6, as global goods and financial flows have grown substantially in recent years.

After extensive discussion, there is a revised treatment of outsourced processing (so-called goods for processing), which will better reflect the actual flows and identify this activity separately. In BPM6, the fees received by economies for processing goods that have not changed ownership, and so are not owned by the entity undertaking the processing, are to be recorded as service earnings.[5] For those economies that are very active in outsourced processing activity, there could be a significant change in their trade balances arising from the introduction of BPM6, and possibly the current account. This is because the inward and outward flow of processed goods recorded gross in the trade account in BPM5 are recorded at the value of the processing fee in services under BPM6.[6] Also, repairs on goods are to be classified as a service not goods.

Using the same principles, merchanting activity, where a resident transacts in goods (buys then sells) with nonresidents outside of the domestic economy, is to be classified under goods transactions within exports; so imports of goods under merchanting are classified as negative exports. In BPM5 merchanting is recorded as a service transaction.

In a world of increasingly mobile individuals there are several modifications included in BPM6. The residence of households is to be based on “predominant center of economic interest,” while cross-border movements of personal effects during migration are no longer to be recorded as transactions but as reclassifications, given that no transaction takes place. High value goods acquired by travelers, such as occurs in the activity known as “shuttle trade,” are to be recorded as merchandise goods rather than under travel services.

Within direct investment, elaborations are provided to identify direct investment relationships in complex multi-country company structures, which are becoming increasingly common. More generally, the 10 percent level for establishing a direct investment relationship is maintained, but with a focus on voting power; direct investment positions and transactions are to be recorded on a gross basis as assets and liabilities.

Identification of the residence and activities of special purpose entities (SPEs) and similar corporate structures with little or no physical presence are dealt with in detail. SPEs are to be classified as separate institutional units in the economy in which they are incorporated, a clarification of the residence principles in BPM5. Further, reflecting that governments may create special rules for certain entities or zones, so restricting the free flow of capital, goods and services within an economy, the definition of economic territory is modified to a territory under the effective economic control of a single government.

Financial innovation

Many of the issues raised by compilers and users concerned developments on financial markets. There is additional discussion of a range of topics identified as of increasing importance such as financial derivatives and employee stock options, which are now included together as separate category in the financial account. Also, the financial instrument classification is set out explicitly in Chapter 5, whereas in BPM5 the discussion was mixed in with the functional categories.

There is guidance on the treatment of short positions, when a trader sells a borrowed security, and on the related fees for borrowing the security — to be classified as interest regardless of whether the security is debt or equity. When securities are lent or provided under reverse transactions, ownership in the balance of payments is assumed not to have changed, as the risk and rewards of ownership remain with the original owner. For this and for other cases like goods under financial leases, the concept of “change of ownership” in BPM5 is modified to “change in economic ownership.”

For index-linked instruments, a distinction is to be drawn depending on whether indexation has a holding gain motive (usually when based on a narrow index), or not (usually when more broadly based, such as with a consumer price index). For the former, the rate of interest accrual is to be fixed at issuance with any subsequent changes in value classified as holding gains and losses. Foreign currency indexed-linked debt with both principal and coupons indexed to a foreign currency is to be classified and treated as being denominated in that foreign currency.

Implicit financial services (FISIM) previously included in interest are to be recorded in services, as in SNA. The treatment in BPM5 of buy-sell margins on foreign exchange transactions as service earnings of financial intermediaries is extended to transactions in securities. Also, the measurement of insurance services is improved by reducing the impact of volatile insurance claims on their calculation. Loans continue to be valued at nominal value in the position data, but a memorandum item is included for the creditor to show the likely realisable value. So-called standardised guarantees are to be treated in the same way as insurance, and the treatment of “one-off” guarantees is clarified.

Research into the gold market revealed that gold is commonly traded in accounts whereby the dealer has a claim for a certain quantity of gold to be delivered without having ownership over specific gold bullion. Such accounts, known as unallocated gold accounts, are to be classified as a deposit (or monetary gold if held in reserves). The consequence of this change and of the SDR allocation decision noted below, is that only gold bullion held in reserves will be an financial asset in the system without a counterpart liability.

In BPM6, primary income of investment funds is to include reinvested earnings, like direct investment.

In the area of reserves, the definition of liquidity — including the ability to sell the asset without unduly affecting the value — has been clarified and guidance is given on the treatment in reserves of assets held in pooled funds and in special purpose government funds, usually known as sovereign wealth funds.

Balance sheet approach

Figure 1: International investment position reporters

In response to increasing interest in balance sheet analysis, as noted above there is more emphasis on the international investment position (IIP). Over the past decade, user interest in issues such as external debt and vulnerability has increased, and a growing number of countries are reporting IIP data to the Fund. As the graph shows, the number of reporters has tripled in the last ten years to well over one hundred. As a result of the shift in emphasis, the contents and title of the new manual include a reference to the IIP (although it is still abbreviated as BPM6).

Compared with BPM5, more of a statistical explanation of balance sheet changes is given in BPM6, to show changes that arise outside of transactions — such as from exchange rate and other valuation changes, and write-offs. Furthermore, debt instruments are identified separately, and additional supplementary breakdowns of debt instruments by remaining maturity and particularly currency emphasised. A memorandum item on reserves-related liabilities is included to help analysis of reserve assets. And, in this context, SDR allocations are to be recognised as a liability. The analytical chapter in BPM6 includes a discussion of the balance sheet approach.

Future developments

A new draft of BPM6 was available early in 2008. The website also has background materials, including the Annotated Outline and papers presented to various expert groups and the results of these discussions.</ref> and was promoted in regional outreach seminars during the first half of 2008. A final version would be prepared for Committee’s agreement in October 2008, and then be posted as the final version, subject to editing, by end-2008.

Countries are expected to update their data collections, methodologies, and procedures over the next several years, with 2012 or 2013 the most likely target dates for converting data for International Financial Statistics and the Balance of Payments Statistics Yearbook to the new manual. The Fund will support countries undertaking conversion in its training, documentation, and technical assistance programs. The Balance of Payments Compilation Guide and Textbook will also be updated.

See also

Further information

Notes

  1. There were four technical expert groups: Direct Investment (DITEG), Reserve Assets (RESTEG), Currency Unions (CUTEG), and other balance of payments issues (BOPTEG).
  2. The harmonisation of macroeconomic statistics is elaborated in The System of Macroeconomic Accounts Statistics: An Overview (Statistics Department, IMF Pamphlet Series No. 56).
  3. The analytical presentation includes the concept of exceptional financing, with the relevant transactions reclassified from that shown in the standard components.
  4. Personal transfers comprise all transfers in cash or in kind made or received by resident households to or from other nonresident households.
  5. The specific item in the services account is entitled “manufacturing services on physical inputs owned by others.”
  6. The BPM5 treatment of goods for processing differed depending upon where the goods were subsequently sold. If the goods were sold to a resident of the economy undertaking the processing or to a resident of a third party economy, the processing economy recorded a service earnings, otherwise all goods for processing were recorded under goods account on a gross basis.
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