The Balance of Payment Statement

Balance of payments records flows between one economy and the rest of the world. These flows are grouped together for the purpose of economic analyses.

The current account

Within the current account there are three main categories in which the transactions are recorded, the first one is Goods and services, the second is Income and the third is Current transfers.

Goods and services; imports and exports of goods and services are recorded at market prices at the customs frontier of the exporting economy, f.o.b. valuation. When the value of goods are recorded f.o.b., it means that the market price of the exporting goods does not include the cost of insurance nor freight, since these are recorded as separate services.

General merchandise refers to movable goods for which changes in ownership, actual or imputed, occur between residents and non-residents.

Goods for processing are goods exported or imported for processing, and that comprise two transactions; a) the export/import of the good, and b) the re-import/re-export of the processed good on the basis of a contract or a fee. The inclusion, on a gross basis, of these transactions under the label Goods is an exception to the change of ownership principle.

Example; The export of oil and the re-import of petroleum should be recorded on a gross basis under the label Goods, not as import of a processing-service.

Repairs on goods is actually a service, but are recorded under the label Goods. The service is measured on a net basis, rather than the value of the goods before and after the repair.

Goods procured in ports by carriers, all goods, such as fuel, provisions, stores, and supplies, that resident/non-resident carriers procure abroad.

Non-monetary goldcover exports and imports of all gold not held as reserve assets by the authorities (central bank).

Transportation covers all transportation services carried out by residents of one economy for those of another, that involve the carriage of passengers, freight, rentals of carriers with crew, and related services. ( E.g. Freight insurance are part of insurance services, wail loading/unloading are part of the transportation service.)

Travel differs from other components of international services, in that sense that it is demand-oriented activity. The consumer moves to the location of the provider for the goods and services desired by the consumer/traveler. Travel is not a specific type of services, but an assortment of goods and services, those products the traveler decides to consume. Excluded from travel is international carriage of travelers, which is covered under transportation. Typical goods and services entered in travel are lodging, food and beverages, transportation within the visiting country, souvenirs, and gifts. A traveler is an individual staying for less than a year in an economy in which he is not resident (there are some exceptions), the travel might be for the purpose of either business or pleasure.

Communication services covers both telecommunications, and postal and courier services.

Construction services are work performed on construction projects and installations by employees of an enterprise in locations outside the economic territory of that enterprise.

Insurance services cover the provision of various types of insurance to non-residents by resident insurance companies, or vice versa. Services included are freight insurance, other types of direct insurance, re-insurance and agent commissions related to insurance transactions. The treatment of freight insurance as a separate service is consistent with the f.o.b. (free on board) valuation of merchandise exports and imports; insurance cost up to the customs frontier of the exporting economy is included in the f.o.b. value of the goods exported and, if the insurance is paid for by the importer, the exporter is deemed to purchase the insurance and simultaneously recover the cost from the f.o.b. value in the accounts.

Financial services includes financial intermediary and auxiliary services between residents and non-residents. Financial intermediation services indirectly measured (FISIM), as is imputed as a service in the SNA, is not recommended to be explicitly shown in the BOP. As a result, these implicit services are reported indistinguishably as interest receivable or payable, under investment income in the BOP.

Computer and information services cover computer data and news-related service transactions, such as data bases, data processing, hardware consultancy, software implementation, maintenance and repair of computers, peripheral equipment, news agency services etc. between residents and non-residents.

Royalties and license fees cover the payments and receipts between residents and non-residents for the authorized use of intangible, non-produced, non-financial assets and proprietary rights and use of produced originals and prototypes. Inclusion of this item under services, rather than under income, is in accordance with the treatment in the 93SNA.

Other business services is a mixed category of different services other than those previously defined. Included are merchanting and other trade related services, operational leasing, and miscellaneous business, professional, and technical services.

Personal, cultural and recreational services involve transactions between residents and non-residents for two main categories of services; audiovisual and related services, and other cultural and recreational services.

Government services is a residual category covering government services not included in previous classifications. This category also includes services associated with international organizations.

Income includes two types of transactions between residents and non-residents; compensation of employees and investment incomes. Compensation of employees should be recorded after the accrual principle, and so should interest. If interest is not actually paid, an imputed entry should be recorded under the appropriate instrument and a counterpart entry should be made in the financial account to reflect an increase in the claim associated with the non-payment. Dividends should be recorded as of the day they are payable. Reinvested earnings of direct investment enterprises are recorded in the period in witch they are earned, and distributed earnings of branches and other un-incorporated enterprises recorded as of the times they are transferred.

Compensation of employees comprises wages, salaries, and other benefits, in cash or in kind, earned by individuals in economies/countries other than those in witch they are resident. Included in compensation of employees are also contribution paid by employers, on behalf of employees, to social security schemes or to private insurance or pension funds.

Investment incomecovers income derived from a resident entity’s ownership of foreign financial assets. This is identical to the term property income in the SNA. Most common are income on equity (dividends), and income on debt (interest). BOP classifies investment income into three categories; Direct investment income, Portfolio investment income, and Other investment income.

Last category of transactions in the current account are the current transfers. Transfers differs from other transactions in the sense that one transactor provides an economic value to another transactor but does not receive any quid pro quo on witch economic value is placed. The transfers are identified either as current or capital transfers, depending on the purpose of the transfer, and recorded in the current or capital account according to that. The distinction between current and capital transfers is in accordance with the 93SNA, and is a departure from earlier editions of the manual.

A current transfer is a unrequited transaction between two parties. As current transfers are included all transfers that are not capital transfers. To distinguish between current and capital transfer one should bear in mind that the capital transfer should result in a change in the stocks of assets of one or both parties to the transaction.

Current transfers should be classified into two main categories, according to the sector of the compiling economy witch are affected; general government or other sectors.

General government transferscomprises transfers between government of different economies, between governments and international organizations, and between governments and non-residents other than governments and international organizations.

Current transfers between other sectors of an economy and non-residents comprise those occurring between individuals, between non-governmental institutions or organizations, or between non-resident governments and individuals or non-governmental institutions. Included here is workers remittances, a transfer from a migrant employed in a new economy, and considered resident there, to somebody (often relatives) in his or hers “home” country.

A current transfer can be either in cash or in kind. Included as current transfers in kind are e.g. food, clothing, medical supplies and other consumer goods which are often transferred from one country or an international organization to another country for distribution to relieve hardships caused by famine, natural disasters, wars etc.

The capital and financial account is divided into two main categories in which the transactions are recorded. The first one is the capital account, which covers transactions involving the receipt or payment of capital transfers, and acquisition / disposal of non-produced non-financial assets. The second is the financial account, which covers transactions associated with the change of ownership in the foreign financial assets and liabilities of an economy. Changes that are not related to transactions are excluded from the capital and financial account.

The capital account includes capital transfers, an item which earlier was recorded as part of current transfers in the current account. The change in classification is due to the harmonization between the BOP and the SNA.

Capital transferscovers transfers in cash and in kind. A transfer in kind is treated as a capital transfer if it consist of (i) the transfers of ownership of a fixed assets, or (ii) the forgiveness of a liability by a creditor when no counterpart is received in return. A transfer in kind should be valued at the marked price of the object. A transfer in cash is treated as a capital transfer when it is linked to the acquisition (or disposal) of fixed assets by one or both parties. A capital transfer should in general lead to a change in the stock of assets for one or both parties to the transaction. The capital transfers are classified by sector, transfers between general governments (and international organizations) or between other sectors.

Acquisition or disposal of non-produced, non-financial assetscovers both tangible assets, like subsoil-resources and land, and non-tangible assets, like patents, copyrights and trademarks. Since land can only be traded between residents (if a foreigner buys land he actually acquires a financial claim on a notional resident unit, only exception is if the land is bought by a foreign embassy), this group of transactions will mainly comprise acquisition and disposal of non-produced, non-financial, intangible assets.

The financial account classifies financial assets into categories according to function or purpose, a classification witch makes it possible to conduct analysis to exhibit different pattern of behavior, but these are again classified into sub-categories.

The financial account records transactions in foreign financial assets, witch consists of monetary gold, SDRs, claims on non-residents, and transactions in foreign liabilities of a nation, which consists of in-debtness to non-residents.

Direct investment is a category of international investment that reflects the objective of obtaining a lasting interest by a resident entity in one economy in an enterprise resident in another economy. A direct investment relationship exists between units in different economies when one of the units holds 10 percent or more of the equity of the other. Direct investments comprises not only the initial transaction or investment which establish the relationship between the investor and the enterprise, all investment transactions between units that have a direct investment relationship are treated as direct investment, not only equity transactions.

Direct investment can be broken down into equity capital, reinvested earnings, and other capital, witch in turn can be subdivided into asset and liability transactions.

Direct investment abroad refers to a direct investment relationship where a resident unit holds more than 10 percent of the equity of an enterprise abroad. It normally refers to transactions in an asset for the compiling economy, but reverse investment (e.g. loan) by the enterprise abroad to the resident unit is also shown as direct investment in BOP, even though it refers to a liability.

Vice versa for direct investment in the compiling economy. It normally refers to transactions in liabilities, but again, reverse investment by the resident enterprise would be shown in this category, even though it refers to an asset.

Reinvested earnings are earnings by direct investment enterprises that are not distributed to the owners, but are considered to have been reinvested in the company. BOP records these earnings as if they had been distributed as investment income (current account), and (re-)invested as direct investment (financial account).

Portfolio investment covers transactions in equity securities and debt securities, in the form of bonds and notes, money market instruments and financial derivatives such as options. The coverage and classification of portfolio investments are significantly revised from the BPM4 to the BPM5, because of the changes in the international financial market over the last years with the introduction of new financial instruments.

Other investments is a residual category that covers all financial transactions not part of direct investment, portfolio investment, or reserve assets. Other investments cover transactions in trade credits, loans, currency and deposits, and other assets and liabilities.

Reserve assets comprises monetary gold, SDRs, reserve position in the Fund, foreign exchange assets (foreign currency, deposits and securities), and other claims available to and controlled by the country’s monetary authorities for direct financing of payments imbalances, for interventions in the exchange market to affect the currency’s exchange rate, and for other purposes. The reserve assets is an important component of the BOP-statistics, an essential element in the analysis of a country’s external position, but not an absolute measure, since countries might have supplementing reserve assets, or allow the exchange rate to float. In contrast to BPM4, BPM5 do not record any changes in reserve assets that are not attributable to transactions. Adjustments in the value of the reserve assets are not part of the BOP, but are recorded in the IIP.