This paper proposes some revisions in the structure and classification of the capital account of the balance of payments. Since the publication of the fourth edition of the IMF's Balance of Payments Manual (BPM) in 1977, innovations have occurred in a range of financial instruments and transactions, necessitating a reappraisal of the existing classification scheme for the capital account. A related consideration is the ongoing work on the revision of the United Nations' A System of National Accounts (SNA), one of the goals of which is to harmonize it with related standards on balance of payments, government finance, and money and banking statistics. Although some of the other papers in this volume focus on the special features of newly introduced financial instruments, this paper essentially addresses the need for modifications in the existing BPM classification of capital account items1 that would facilitate links between the classification of the capital account of the balance of payments, on the one hand, and the corresponding classification as reflected in the SNA, on the other.
The structure of the capital account as proposed in this paper reflects (1) the Fund's analytical and operational needs; (2) the need to devise a classification scheme for financial assets and liabilities that would not only permit links between flow and stock data but would also facilitate comparison of data on stocks of assets and liabilities with data on the associated income flows as portrayed in the current account; (3) the need for harmonization between the balance of payments classification of capital account transactions and the corresponding classification of external transactions used in the SNA; and (4) the need to promote compatibility between the Fund's systems on balance of payments, government finance, and money and banking statistics. The revised classification scheme proposed for the capital account of the balance of payments is presented in Table 1.2
Section I discusses the content of the capital account of the balance of payments, whereas Sections II and III examine the classification of financial assets and liabilities and its application to the different capital account categories that are distinguished. Section IV discusses the desirability of countries, furnishing supplementary information on certain transactions that are deemed to constitute balance of payments financing transactions. Some concluding remarks and points for discussion are offered in Section V.
I. Coverage of the Capital Account
The capital account of the balance of payments is defined to cover the receipts and payments of capital transfers; transactions in foreign financial assets and liabilities; and valuation changes (including reconciliations and reclassifications) affecting the stock of reserves, together with their counterparts.
Capital Transfers
In contrast to the existing BPM, this paper proposes that a differentiation be made between current and capital transfers and that the latter be shown as part of the capital account of the balance of payments. The separation of current from capital transfers is required to compile measures of national and sectoral saving. The distinction between current and capital transfers is to be made according to the criteria described in paragraphs 7.60 and 7.74–7.77 of the SNA.
Although the guidelines for distinguishing between current and capital transfers are reasonably clear, problems are encountered in applying them in the context of international transactions, in particular because both the donor and the recipient are required to treat a transfer payment or receipt as current or capital. The distinction may be clear in domestic transactions, but statisticians do not always have all the relevant facts for international transactions. This consideration led previous editions of the BPM to refrain from differentiating between current and capital transfers and to treat them indistinguishably as current. It seems desirable to adopt a uniform treatment throughout the various sectors of the SNA in differentiating between current and capital transfers.
Transactions in Financial Assets and Liabilities
Transactions in financial assets and liabilities are first grouped into three functional categories: reserves (including use of Fund credit), direct investment, and other capital (see Table 1).
Table 1.
Proposed Classification of Capital Account Items
Note: “N.i.e.” indicates “not included elsewhere.”
Table 1.
Proposed Classification of Capital Account Items
| A. | Capital, excluding reserves | |||||
| Capital transfers | ||||||
| General government | ||||||
| Other sectors | ||||||
| Direct investment | ||||||
| Abroad | ||||||
| Equity capital | ||||||
| Reinvestment of earnings | ||||||
| Other long-term capital | ||||||
| Short-term capital | ||||||
| In reporting economy | ||||||
| Equity capital | ||||||
| Reinvestment of earnings | ||||||
| Other long-term capital | ||||||
| Short-term capital | ||||||
| Other capital | ||||||
| Long-term capital: assets | ||||||
| General government | ||||||
| Bonds | ||||||
| Corporate equities | ||||||
| Drawings and repayments on loans extended | ||||||
| Other assets | ||||||
| Monetary authorities | ||||||
| Bonds | ||||||
| Corporate equities | ||||||
| Drawings and repayments on loans extended | ||||||
| Other assets | ||||||
| Deposit money banks | ||||||
| Bonds | ||||||
| Corporate equities | ||||||
| Drawings and repayments on loans extended | ||||||
| Other assets | ||||||
| Nonmonetary financial institutions | ||||||
| Bonds | ||||||
| Corporate equities | ||||||
| Drawings and repayments on loans extended | ||||||
| Other assets | ||||||
| Other sectors | ||||||
| Bonds | ||||||
| Corporate equities | ||||||
| Drawings and repayments on loans extended | ||||||
| Trade and other suppliers' credits | ||||||
| Other loans n.i.e. | ||||||
| Other assets | ||||||
| Long-term capital: liabilities | ||||||
| General government | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Other bonds | ||||||
| Drawings and repayments on other loans received | ||||||
| Trade and other suppliers' credits | ||||||
| Other loans n.i.e. | ||||||
| Other liabilities | ||||||
| Monetary authorities | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Drawings and repayments on other loans received | ||||||
| Other deposits | ||||||
| Other bonds | ||||||
| Other liabilities | ||||||
| Deposit money banks | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Drawings and repayments on other loans received | ||||||
| Other corporate equities | ||||||
| Other deposits | ||||||
| Other bonds | ||||||
| Other liabilities | ||||||
| Nonmonetary financial institutions | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Drawings and repayments on other loans received | ||||||
| Other corporate equities | ||||||
| Other deposits | ||||||
| Other bonds | ||||||
| Other liabilities | ||||||
| Other sectors | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Drawings and repayments on other loans received | ||||||
| Trade and other suppliers' credits | ||||||
| Other loans n.i.e. | ||||||
| Other corporate equities | ||||||
| Other bonds | ||||||
| Other liabilities | ||||||
| Short-term capital: assets | ||||||
| General government | ||||||
| Currency and deposits | ||||||
| Loans extended | ||||||
| Other assets | ||||||
| Monetary authorities | ||||||
| Currency and deposits | ||||||
| Loans extended | ||||||
| Other assets | ||||||
| Deposit money banks | ||||||
| Currency and deposits | ||||||
| Loans extended | ||||||
| Other assets | ||||||
| Nonmonetary financial institutions | ||||||
| Currency and deposits | ||||||
| Loans extended | ||||||
| Other assets | ||||||
| Other sectors | ||||||
| Currency and deposits | ||||||
| Loans extended | ||||||
| Trade and other suppliers' credits | ||||||
| Other loans n.i.e. | ||||||
| Other assets | ||||||
| Short-term capital: liabilities | ||||||
| General government | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Other loans received | ||||||
| Trade and other suppliers' credits | ||||||
| Other loans | ||||||
| Other liabilities | ||||||
| Monetary authorities | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Other currency and deposits | ||||||
| Other loans received | ||||||
| Other liabilities | ||||||
| Deposit money banks | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Other deposits | ||||||
| Other loans received | ||||||
| Other liabilities | ||||||
| Nonmonetary financial institutions | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Other deposits | ||||||
| Other loans received | ||||||
| Other liabilities | ||||||
| Other sectors | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Other loans received | ||||||
| Trade credits and other suppliers' credits | ||||||
| Other loans | ||||||
| Other liabilities | ||||||
| B. | Reserves | |||||
| Monetary gold | ||||||
| Total change in holdings | ||||||
| Counterpart to monetization or demonetization | ||||||
| Counterpart to valuation changes | ||||||
| SDRs | ||||||
| Total change in holdings | ||||||
| Counterpart to allocation or cancellation | ||||||
| Counterpart to valuation changes | ||||||
| Reserve position in the Fund | ||||||
| Total change in holdings | ||||||
| Counterpart to valuation changes | ||||||
| Foreign exchange assets | ||||||
| Total change in holdings | ||||||
| Counterpart to valuation changes | ||||||
| Other claims | ||||||
| Total change in holdings | ||||||
| Counterpart to valuation changes | ||||||
| Use of Fund credit | ||||||
| Total change in holdings | ||||||
| Counterpart to valuation changes | ||||||
Note: “N.i.e.” indicates “not included elsewhere.”
Table 1.
Proposed Classification of Capital Account Items
| A. | Capital, excluding reserves | |||||
| Capital transfers | ||||||
| General government | ||||||
| Other sectors | ||||||
| Direct investment | ||||||
| Abroad | ||||||
| Equity capital | ||||||
| Reinvestment of earnings | ||||||
| Other long-term capital | ||||||
| Short-term capital | ||||||
| In reporting economy | ||||||
| Equity capital | ||||||
| Reinvestment of earnings | ||||||
| Other long-term capital | ||||||
| Short-term capital | ||||||
| Other capital | ||||||
| Long-term capital: assets | ||||||
| General government | ||||||
| Bonds | ||||||
| Corporate equities | ||||||
| Drawings and repayments on loans extended | ||||||
| Other assets | ||||||
| Monetary authorities | ||||||
| Bonds | ||||||
| Corporate equities | ||||||
| Drawings and repayments on loans extended | ||||||
| Other assets | ||||||
| Deposit money banks | ||||||
| Bonds | ||||||
| Corporate equities | ||||||
| Drawings and repayments on loans extended | ||||||
| Other assets | ||||||
| Nonmonetary financial institutions | ||||||
| Bonds | ||||||
| Corporate equities | ||||||
| Drawings and repayments on loans extended | ||||||
| Other assets | ||||||
| Other sectors | ||||||
| Bonds | ||||||
| Corporate equities | ||||||
| Drawings and repayments on loans extended | ||||||
| Trade and other suppliers' credits | ||||||
| Other loans n.i.e. | ||||||
| Other assets | ||||||
| Long-term capital: liabilities | ||||||
| General government | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Other bonds | ||||||
| Drawings and repayments on other loans received | ||||||
| Trade and other suppliers' credits | ||||||
| Other loans n.i.e. | ||||||
| Other liabilities | ||||||
| Monetary authorities | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Drawings and repayments on other loans received | ||||||
| Other deposits | ||||||
| Other bonds | ||||||
| Other liabilities | ||||||
| Deposit money banks | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Drawings and repayments on other loans received | ||||||
| Other corporate equities | ||||||
| Other deposits | ||||||
| Other bonds | ||||||
| Other liabilities | ||||||
| Nonmonetary financial institutions | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Drawings and repayments on other loans received | ||||||
| Other corporate equities | ||||||
| Other deposits | ||||||
| Other bonds | ||||||
| Other liabilities | ||||||
| Other sectors | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Drawings and repayments on other loans received | ||||||
| Trade and other suppliers' credits | ||||||
| Other loans n.i.e. | ||||||
| Other corporate equities | ||||||
| Other bonds | ||||||
| Other liabilities | ||||||
| Short-term capital: assets | ||||||
| General government | ||||||
| Currency and deposits | ||||||
| Loans extended | ||||||
| Other assets | ||||||
| Monetary authorities | ||||||
| Currency and deposits | ||||||
| Loans extended | ||||||
| Other assets | ||||||
| Deposit money banks | ||||||
| Currency and deposits | ||||||
| Loans extended | ||||||
| Other assets | ||||||
| Nonmonetary financial institutions | ||||||
| Currency and deposits | ||||||
| Loans extended | ||||||
| Other assets | ||||||
| Other sectors | ||||||
| Currency and deposits | ||||||
| Loans extended | ||||||
| Trade and other suppliers' credits | ||||||
| Other loans n.i.e. | ||||||
| Other assets | ||||||
| Short-term capital: liabilities | ||||||
| General government | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Other loans received | ||||||
| Trade and other suppliers' credits | ||||||
| Other loans | ||||||
| Other liabilities | ||||||
| Monetary authorities | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Other currency and deposits | ||||||
| Other loans received | ||||||
| Other liabilities | ||||||
| Deposit money banks | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Other deposits | ||||||
| Other loans received | ||||||
| Other liabilities | ||||||
| Nonmonetary financial institutions | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Other deposits | ||||||
| Other loans received | ||||||
| Other liabilities | ||||||
| Other sectors | ||||||
| Liabilities constituting foreign authorities' reserves | ||||||
| Other loans received | ||||||
| Trade credits and other suppliers' credits | ||||||
| Other loans | ||||||
| Other liabilities | ||||||
| B. | Reserves | |||||
| Monetary gold | ||||||
| Total change in holdings | ||||||
| Counterpart to monetization or demonetization | ||||||
| Counterpart to valuation changes | ||||||
| SDRs | ||||||
| Total change in holdings | ||||||
| Counterpart to allocation or cancellation | ||||||
| Counterpart to valuation changes | ||||||
| Reserve position in the Fund | ||||||
| Total change in holdings | ||||||
| Counterpart to valuation changes | ||||||
| Foreign exchange assets | ||||||
| Total change in holdings | ||||||
| Counterpart to valuation changes | ||||||
| Other claims | ||||||
| Total change in holdings | ||||||
| Counterpart to valuation changes | ||||||
| Use of Fund credit | ||||||
| Total change in holdings | ||||||
| Counterpart to valuation changes | ||||||
Note: “N.i.e.” indicates “not included elsewhere.”
Where appropriate, a distinction is made between long-term and short-term capital flows on the basis of original contractual maturity of more than one year and one year or less, respectively. In the SNA, long-term financial assets and liabilities are defined in terms of an original contractual maturity of one year or more. It is suggested that the one day's difference between the two classifications be eliminated and that, in the revised version of the SNA, this difference be brought into line so that long-term capital is defined in terms of an original contractual maturity of more than one year.
A distinction is drawn between assets and liabilities, and the residual functional category of “other capital” is also broken down by sector. The next level of disaggregation suggested is by financial instrument.
Reserves
Reserves constitute a separate category owing to their characteristic as assets that are conceived of as available for use by an economy's central authorities in meeting a balance of payments need. Availability is not necessarily closely linked in principle to formal criteria such as ownership, currency of denomination, or maturity of assets. The coverage of this group derives from an analytic concept rather than from precise definitions based on observable characteristics possessed by the financial items concerned. In contrast to nonreserve capital flows, the list of standard components of the capital account calls for supplementary information on the total change in holdings of reserve assets and on the counterpart of any portion of that change that is not the result of a transaction between two parties. For these counterpart items, a separate entry is shown for the monetization or demonetization of gold, the allocation or cancellation of SDRs, and valuation changes (defined to include reclassifications as well as fluctuations in market values). Experience has shown that, for the category of reserves, information on the total change in holdings and on the counterpart to changes not due to transactions provides for the construction of a variety of analytic presentations of the balance of payments, including the identification of a performance balance in addition to a payments imbalance whose magnitude is explained by the change in the stock of reserves. Furthermore, data on the total change in holdings of reserves are generally available on a monthly basis; thus, in the absence of other data, information on the total change in the stock of reserves provides a preliminary assessment of the payments imbalance.
In the present SNA, gold is classified both as a commodity and as a financial asset. Under the conventions of the SNA, gold could be held as a financial asset not only by the central authorities (that is, the central bank and the central government) but also by other sectors of the economy. Any reclassification of commodity gold to a financial asset is recorded as an export or import and as an increase or decrease in holdings of gold as a financial asset. Furthermore, any interna-capital account. In the BPM, however, gold is classified either as a commodity or as a monetary asset (monetary gold) when held or controlled (owned by other entities, such as commercial banks) by the central authorities. When gold is held, supposedly as a financial asset, by entities other than the central authorities, it is classified as a commodity or nonfinancial asset under the conventions of the BPM. Consequently, any reclassification of gold—that is, a monetization or demonetization—is recorded in the reserves category in the capital account of the balance of payments with a counterpart entry (also in the same category) denoting the monetization or demonetization. In addition, international purchases or sales of gold held as a financial asset by entities other than the central authorities are recorded as commodity transactions under imports or exports.
With a view to aligning the SNA and the BPM, the BPM treatment of gold transactions should be adopted in a revised version of the SNA because this would obviate the need for making entries under exports or imports when gold is reclassified from a nonmonetary to a monetary asset and would thereby avoid asymmetries both in the current account and in the capital account of the balance of payments. Furthermore, the joint UN-IMF questionnaire sent to a sample of countries during 1983/84 and the follow-up discussions that took place on the countries' responses revealed that few countries had data on holdings of financial gold by the nonfinancial sector, although in a few countries (for example, Germany and the United Kingdom) the practice was to classify gold as a financial asset if held by the commercial banks.
Since 1970, the Fund has issued SDRs at intervals to its member countries as a means of augmenting international reserves. Because for the recipient country the SDR allocation has the effect of increasing the authorities' international means of payment, and because the issuance of SDRs is not construed as a transaction in the sense of a change of ownership between two parties, a counterpart entry denoting the allocation of SDRs is reflected in the balance of payments statement.
A change in the level of reserves held in the form of foreign exchange may come about through the assumption or relinquishment of effective control by the monetary authorities over asset holdings of, say, the commercial banks. Because a transaction is not involved in this case, the BPM convention is to make a counterpart entry denoting the change in reserves stemming from the process of the assumption or relinquishment of control by the authorities.
To make the balance of payments statement responsive to a variety of analytical needs, the BPM extends the strict notion of a transaction (that is, provision of economic values by one transactor to another) to encompass changes in reserves stemming from gold monetization or demonetization, allocation or cancellation of SDRs, and reclassification of reserves to nonreserve assets and vice versa. In a related vein, the BPM also includes valuation changes (together with their counterpart entries) in reserve assets.
Direct Investment
Direct investment, identified as a separate category in the capital account because of its distinctive behavior, is made to acquire a long-term interest in an enterprise operating in an economy other than that of the investor, the investor's purpose being to have an effective voice in the management of the enterprise. The foreign entity or group of associated entities that makes the investment is called the direct investor. The unincorporated or incorporated enterprise—a branch or subsidiary, respectively—in which the direct investment is made is referred to as a direct-investment enterprise. At the request of the Committee on International Investment and Multinational Enterprises of the Organization for Economic Cooperation and Development (OECD), the OECD Group of Financial Statisticians undertook a study during 1981–82 to expand the Fund's definition of direct investment and make it more operational. The OECD Group's report was approved by the Committee in June 1982.3 Although concurring with the BPM's definition of the concept of direct investment, the OECD Group recommended (paragraph 13, page 7) that
… A direct-investment enterprise be defined as an incorporated or unincorporated enterprise in which a single foreign investor … either:
(a) controls 10 percent or more of the ordinary shares or voting power of an incorporated enterprise or the equivalent of an unincorporated enterprise, unless it can be established that this does not allow the investor an effective voice in the management of the enterprise; or
(b) controls less than 10 percent (or none) of the ordinary shares or voting power of the enterprise but has an effective voice in the management of the enterprise.
The OECD Group's report recognized that the stipulation of 10 percent equity participation would have to be applied flexibly to encompass marginal cases of a direct-investment relationship. In encompass marginal cases of a direct-investment relationship. In such cases the OECD Group's report proposed that evidence of a direct-investment relationship could be suggested by such factors as (1) representation on board of directors, (2) participation in the policymaking process, (3) interchange of managerial personnel, (4) provision of technical information, and (5) provision of a long-term loan that bears no relationship to the existing market rates.
It is interesting to note that, whereas the BPM (paragraph 410) states that “foreign influence that is not accompanied by at least some ownership of voting stock is rarely, if ever, seen as constituting direct investment,” the OECD Group's report recognizes that, in exceptional circ*mstances, an effective voice in the management of an enterprise could be exerted without any equity participation, such as through the provision of vital technical know-how.
Because there is general concordance between the BPM's and the OECD Group's “Benchmark Definition” of the concept of direct investment, the adoption of the Group's elaboration of the concept in a future revision of the BPM should be considered.
The scope and classification of direct-investment capital flows discussed in this paper remain the same as in the present BPM and in the OECD Group's “Benchmark Definition.” A distinction is made between direct investment abroad and direct investment in the reporting economy rather than strictly in terms of assets and liabilities. Consequently, any flows between affiliated enterprises should be reported on a net basis without regard to whether certain flows pertain to changes in assets or in liabilities, since the direct investor and the enterprise in question may have claims on each other. Both categories of direct investment are broken down into equity capital, reinvestment of earnings, other long-term capital, and other short-term capital. As in the current edition of the BPM, it is also suggested that flows of short-term capital between monetary institutions and their direct-investment affiliates be allocated to the “other” category of capital rather than to direct investment, on the grounds that the flows presumably reflect the regular business activities of those institutions more than the direct-investment relationship.
Other Capital
In contrast to the approach taken in the BPM, this paper proposes that portfolio investment be merged with other capital movements and that the relevant capital flows be distinguished in terms of the domestic sector of the creditor or debtor. In the context of the Fund's operational and analytical work, a sectoral approach to analyzing nonreserve and nondirect investment flows appears to be generally favored over the strict functional approach. Furthermore, a sectoral specification of capital flows not only facilitates reconciliation with related bodies of economic statistics—for example, money and banking, government finance, and external debt—but also lends itself to a variety of economic analyses, such as the extent of financing provided by the domestic banking system, and the construction and analyses of flow-of-funds (FOF) accounts. In addition, since the compilation of balance-sheet data is done on a sectoral basis, it would facilitate the link between flow and stock data.
The use of sectorization as the primary organization principle for the presentation of statistics on nonreserve and nondirect investment capital flows does not preclude the derivation of data on portfolio investment that may be needed in a particular analytical context. Indeed, the sector specification, in conjunction with the proposed breakdown of financial claims by instrument, could yield the desired measures through a “building block” approach.
In the interest of not overextending the list of standard components of the capital account, only the following sectors are distinguished: general government, monetary authorities, deposit money banks, nonmonetary financial institutions, and a residual category representing other sectors. These sectors are deemed, from a global perspective, to be the most important transactors in external financial assets and liabilities. Individual countries may find it necessary, for their presentation of data, to modify the sectoral classification somewhat to reflect varying circ*mstances with regard to the quantitative importance of the capital account transactions of the groups of transactors. For example, it may be useful in particular circ*mstances to highlight the external borrowing transactions of the public nonfinancial enterprises within the category “other sectors.”
The proposed BPM coverage of sectors—in particular, general government, monetary authorities, deposit money banks, and other non-monetary financial institutions—represents a slight departure from the SNA, which emphasizes an institutional approach. Thus, the scope of general government is intended to be identical with that defined in the SNA except for the exclusion of monetary authority functions—for example, issue of currency, management and holdings of international reserves, and transactions with the Fund. These functions are classified under the monetary authorities sector. At the same time, the monetary authorities classification differs from one centering on the central bank through the inclusion of certain governmental units that perform monetary functions, such as an exchange equalization fund and governmental entities in charge of the currency issue. In principle, any commercial banking activity undertaken through a separate department in the central bank is excluded from the coverage of the monetary authorities sector and included under deposit money banks. Conceptually, the functional approach is also applied to the other subsectors of the financial system; that is, deposit money banks and other nonmonetary financial institutions. To facilitate a reconciliation of balance of payments data on external financial claims with related statistical systems on government finance and money and banking data, this paper follows the principle of sectorization as reflected in the Fund's draft of A Guide to Money and Banking Statistics in International Financial Statistics (MBS Guide) rather than the strict institutional approach espoused in the SNA.
II. Classification of Financial Instruments
The following types of financial instruments are separately identified in the capital account: monetary gold, SDRs, reserve position in the Fund, use of Fund credit, bonds, corporate equities, loans (distinguishing between trade and suppliers' credits and other loans), currency and deposits, and reinvested earnings.
Monetary Gold
Monetary gold covers gold owned by the authorities (or gold owned by others that is effectively subject to the control of the authorities) that is held as a financial asset.
SDRs
SDRs are unconditional reserve assets created by the IMF to supplement existing reserve assets. They are allocated to Fund members, in proportion to their quotas, that are participants in the Fund's SDR Department. Six SDR allocations totaling SDR 21.4 billion have been made by the Fund (in January 1970, January 1971, January 1972, January 1979, January 1980, and January 1981).
Entities authorized to conduct transactions in SDRs are the Fund itself, participants in the Fund's SDR Department, and prescribed “other holders.” SDRs can be used for a wide range of transactions and operations—for instance, to acquire other members' currencies, settle financial obligations, make donations, and extend loans. They may also be used in swap arrangements and as security for performance in meeting financial obligations. Forward as well as spot transactions may be conducted in SDRs.
Reserve Position in the Fund
A member's reserve position in the Fund is determined by its reserve tranche position and the creditor position under the various borrowing arrangements (except for lending with a maturity of less than three and one-half years under the policy on enlarged access to Fund resources).4 A reserve tranche position in the Fund arises from the payment of part of a member's subscription in reserve assets and from the Fund's net use of the member's currency. Usually, a member's reserve tranche position is equal to its quota less the adjusted Fund holdings of its currency, less subscription receivable, and less the balances held in the administrative accounts of the Fund to the extent that they do not exceed 0.1 percent of a member's quota, if positive.
Use of Fund Credit
Use of Fund credit is the sum of a member's outstanding drawings (“purchases”) and the Fund's net operational receipts and expenditures in that currency that increase the adjusted Fund holdings above the member's quota. This item measures the amount that a member is obligated to repay to (to repurchase from) the Fund. Outstanding purchases are equal to purchases other than reserve tranche purchases, less repurchases, less other members' purchases of that member's currency, and less any other use by the Fund of that member's currency (except administrative expenditures) that the member wishes to attribute to specific purchases.
Bonds
Bonds, debentures, and similar instruments cover those securities that give the holder an unconditional right to a money income (that is, an income in the form of interest, which is not dependent on the earnings of the debtor), and they are usually issued and traded in organized markets. Bonds, except for perpetual bonds, also give the holder the unconditional right to a stated fixed sum on a specified date or dates. Bonds are considered to include negotiable certificates of deposit, preference shares (except participating preference shares), and marketable promissory notes. Mortgages are not classified as bonds.
Corporate Equities
Corporate equities, including capital participation, refer to instruments and records acknowledging claims to the residual value and residual income of incorporated enterprises after the claims of all creditors have been met. Ownership of equity is usually evidenced by shares, stocks, participation, or similar documents.
Loans
Trade and other suppliers' credits refer to loans between the principals in the change of ownership of merchandise as well as transactions in services that are directly related to these flows. In the present SNA, trade and other suppliers' credits are not defined precisely, although short- and long-term loans are. Hence, one can infer that the coverage of trade and suppliers' credits would be restricted to open-book accounts and that any suppliers' credits financed through trade bills drawn on the importer would be classified as short-term bills and bonds. Country practices in the compilation of statistics suggest, however, that trade and other suppliers' credits encompass credits on open-book accounts as well as those financed through trade bills. Therefore, in conformity with country practices, trade and other suppliers' credits should be defined to include both open-book accounts and trade bills, except those negotiated by banks.
Other loans n.i.e. (not included elsewhere) refer to direct transactions between a borrower and a lender, when the lender either does not receive any security (for example, a bill, bond, or corporate equity) evidencing the transaction or else receives a nonnegotiable instrument, such as a lien or mortgage created as a surety.
Currency and Deposits
Currency refers to notes and coins, other than coins primarily of numismatic value. Deposits refer to claims on financial institutions that are represented by evidence of deposit, including shares in small denominations or similar evidence of deposit issued by savings and loan associations, building societies, credit unions, and the like that are legally, or in practice, redeemable on demand or on relatively short notice.
Reinvested Earnings
The reinvestment of earnings by direct-investment enterprises represents the counterpart entry to the amounts reflected in the current account with respect to undistributed earnings of direct-investment enterprises. Any portion of the earnings of direct-investment enterprises that is not formally distributed and is attributable to the direct investors is conceived of as providing additional capital to the enterprises, thus increasing the value of an economy's stock of foreign assets and liabilities.
III. Application of the Breakdown of Instruments
The classification of financial assets and liabilities is not uniformly applied in each functional category of capital movement (that is, reserves, direct investment, and other capital). Instead, it is applied selectively to each category of capital movement in order to highlight those flows that would contribute to an analysis of balance of payments developments and to keep the list of standard components manageable. In other analytical contexts, such as the construction of FOF accounts, there undoubtedly would be a need for not only a uniform application of the breakdown of instruments but also, in certain cases, for a further specification.
In the category of reserves, the breakdown of instruments covers only monetary gold, SDRs, reserve position in the Fund, and use of Fund credit. The standard component “foreign exchange” covers the claims that are shown as the foreign exchange component of the series for “international liquidity” published in the IMF's International Financial Statistics (IFS). It includes monetary authorities' claims on foreigners in the form of bank deposits, treasury bills, short- and long-term government securities, and other claims usable in the event of a balance of payments deficit, including nonmarketable claims arising from intercentral bank and intergovernmental arrangements whether or not the claim is denominated in the currency of the debtor or the creditor. Other claims cover any additional claims that constitute reserve assets. In the cases of foreign exchange and other reserve claims, the emphasis is on their availability for balance of payments financing rather than on formal criteria, such as maturity or the nature of the underlying financial instrument.
In the case of direct investment, all flows other than equity capital and the reinvestment of earnings are grouped together as other short-term or other long-term capital. This classification recognizes that, given the special relationship between the direct investor and the direct-investment enterprise, there is considerable similarity in the nature of financial flows, so that any further specification of instruments would not contribute materially to an analysis of the behavior of direct-investment capital flows.
In the case of other capital flows, a standard component is provided within each sector's liabilities for identifying liabilities that constitute foreign authorities' reserves. In the rearrangement of standard components of the balance of payments for the purpose of constructing analytic presentations, users of statistics may wish to group with reserve assets those liabilities that perform a function similar to reserves in the context of the approach that analysts are following. For example, although a country may freely draw on its reserve position in the Fund when it has a balance of payments need, it may use Fund credit only if it pursues policies designed to overcome its problem; this distinction is not usually seen as relevant in measuring the size of the deficit that has been financed by the authorities. Therefore, the use of Fund credit—construed as a liability for the member—is customarily included with changes in reserve assets in analytic presentations, a practice that has been followed by setting out the functional category for reserves in the BPM.
Relationships between most other liabilities and reserve assets, however, are not as straightforward. First, reserve assets may be viewed as performing more than one function, and the liabilities that may be related to them in each of those functions could be somewhat different. Second, the underlying cause of changes in particular liabilities may be impossible to assign with any reasonable degree of assurance. Liabilities classified in the category for direct-investment capital would never be regarded as constituting a close substitute for reserve assets, but the same does not necessarily hold true for other types of liability.
It is not easy to find objective criteria that would help to single out liabilities to be identified as building blocks for an analytic presentation of the balance of payments that focuses on some version of an “overall” balance. A reasonable approach is to specify that any liabilities that constitute reserve assets when seen from the side of the creditor are to be shown as separate standard components, even though the compiling country itself (the debtor) may not actually regard some or any of them as a supplementary means of financing its payments imbalance or as an offset to its own reserves.
How the behavior of liabilities of this kind is to be interpreted will depend on the purpose of the analysis and the factors that brought about the changes recorded in the balance of payments. The figures—along with those for reserves, of course—clearly do not purport to be a satisfactory measure under all circ*mstances, either of the means that a country's authorities may have used to finance a payments imbalance or, thus, of the size of that imbalance. Moreover, the figures may be difficult to interpret. For example, a shift in holdings of claims on deposit money banks in a reserve-currency country, from a foreign central bank to foreign private deposit money banks, may or may not be taken as an indication of strength in the reserve-currency country's own payments position. Nevertheless, changes in the liabilities that are the counterpart of another economy's reserve assets may aid one's understanding of the global process of reserve creation or destruction.
Because identifying certain assets as reserves is not always clear-cut, even for their holders, the problem of identification is likely to be even more complicated for the debtor, who presumably has less access to the facts on which to base judgment. In many cases, the only practicable procedure will be for the compiler in the debtor country to adopt a rule of thumb.
In formulating such a rule, the compiler should bear in mind that a foreign creditor will probably classify as reserve assets any liability of the compiling country that is (1) repayable on demand or in the short run, marketable, or that the debtor is in fact prepared to redeem on short notice; (2) repayable in an asset that the debtor would regard as a reserve asset; (3) owed to a central bank, central government, or other agency of the central authority except a public nonmonetary enterprise.
Although each of the sectors distinguished under the category of other capital could conceivably incur liabilities that would constitute foreign authorities' reserves, data reported to the Fund's Bureau of Statistics suggest that the bulk of such liabilities are likely to be short-term liabilities of the monetary institutions (that is, the monetary authorities and deposit money banks).
IV. Supplementary Information on Balance of Payments Financing Transactions
Although the classification of transactions in financial assets and liabilities, as shown in Table 1, provides for the identification of reserves (including use of Fund credit) and liabilities constituting foreign authorities' reserves, categories of instruments that are generally conceived of as instruments typically used by a country's authorities to meet a payments imbalance, the authorities may in certain circ*mstances engage in other financial transactions to meet a balance of payments need. The Fund has had a particular interest in eliciting information on these transactions, with a view to constructing and publishing analytic presentations for countries that show, “;below the line,” all forms of transactions undertaken in balance of payments support. In the Fund's IFS and Balance of Payments Statistics (BOPS), three categories of balance of payments financing transactions are distinguished: reserves, liabilities constituting foreign authorities' reserves, and exceptional financing. The term “exceptional” in the context of balance of payments financing transactions simply represents a shorthand descriptor for all forms of balance of payments financing, other than use of reserves and liabilities constituting foreign authorities' reserves, that the authorities have either engaged in themselves or have encouraged other sectors to conduct. As with reserves, the coverage of this group of financing transactions derives from an analytic concept rather than from precise definitions.
The following types of transactions are usually deemed to be motivated by balance of payments considerations: (1) accrual of payments arrears; (2) rescheduling of existing debt; (3) borrowing (including bond issues) by the government or the central bank for balance of payments support (for example, from foreign commercial banks); (4) borrowing (including bond issues) by other sectors of the economy that is induced by the authorities with some kind of exchange rate guarantee or interest subsidy; (5) deferment of loan repayments pending negotiations with creditors for debt rescheduling; and (6) grants received for balance of payments financing—for example, from the Fund's Subsidy Accounts, the Stabilization System for Export Earnings (STABEX) under the Lome Convention, and other intergovernmental grants. Given their importance for analyzing balance of payments developments, the question arises whether these types of transactions should be introduced as standard components within the category for “unrequited capital transfers” and “other capital” movements. This would entail further expanding the standard components that are listed in Table 1. In light of this concern, it is suggested that, instead of introducing additional standard components, countries furnish supplementary information on all balance of payments financing transactions other than the use of reserves (including use of Fund credit) and the incurrence of liabilities constituting foreign authorities' reserves. A suggested format for the provision of such supplementary information in this regard is provided in Table 2.
Table 2.
Proposed Supplementary Information on Balance of Payments Financing Transactions Other Than the Use of Reserves and Liabilities Constituting Foreign Authorities' Reserves
For “other long-/short-term capital: liabilities,” the sector involved and the standard component of which this is a sub-item should be specified.
Table 2.
Proposed Supplementary Information on Balance of Payments Financing Transactions Other Than the Use of Reserves and Liabilities Constituting Foreign Authorities' Reserves
| Capital Transfers | |
| Government | |
| Other sectors | |
| Other long-term capital: liabilitiesa | |
| Drawings on new loans received | |
| Rescheduling of existing debt | |
| Rescheduling of payments arrears | |
| Bond issues | |
| Other short-term capital: liabilitiesa | |
| Drawings on loans | |
| Net change in payments arrears | |
| Deferred payments | |
For “other long-/short-term capital: liabilities,” the sector involved and the standard component of which this is a sub-item should be specified.
Table 2.
Proposed Supplementary Information on Balance of Payments Financing Transactions Other Than the Use of Reserves and Liabilities Constituting Foreign Authorities' Reserves
| Capital Transfers | |
| Government | |
| Other sectors | |
| Other long-term capital: liabilitiesa | |
| Drawings on new loans received | |
| Rescheduling of existing debt | |
| Rescheduling of payments arrears | |
| Bond issues | |
| Other short-term capital: liabilitiesa | |
| Drawings on loans | |
| Net change in payments arrears | |
| Deferred payments | |
For “other long-/short-term capital: liabilities,” the sector involved and the standard component of which this is a sub-item should be specified.
V. Conclusions
This paper has put forth proposals for revising the structure of the capital account of the balance of payments reflecting the IMF's analytical and operational needs and the need for harmonization with the classification of financial transactions in the external transactions account of the SNA. Consistent with the structure of the rest of the capital finance accounts, the external sector account of the SNA is structured almost exclusively in terms of a classification of financial transactions by instrument. The classification scheme proposed in this paper advocates combining characteristics relating to capital flows: functional role, sectorization, and instrument specification. A review of data reported for publication in the Yearbook of National Accounts Statistics suggests that only 9 countries report data in the format of the capital account of the external transactions account of the SNA, but more than 100 countries furnish information on the capital account of the balance of payments for publication in the Fund's BOPS. In light of this finding, the classification scheme proposed in this paper may be considered as a point of departure for the external transactions account of the SNA. Alternatively, if only a breakdown by financial instrument along the lines of Table 26 of the present SNA is desired for national accounts purposes, one may wish to consider further expansion in the breakdown of instruments in the context of compiling balance of payments statistics either as standard components or as supplementary information, bearing in mind the need to limit the list of standard components to a manageable number. Additional points for consideration are the following.
•Should the BPM reclassification of commodity gold to a monetary asset and vice versa (gold monetization or demonetization) be adopted in the SNA? In addition, should gold holdings be viewed as financial assets only when they are either held as financial assets by the monetary authorities or (if held by other sectors of the economy) when they are subject to the control of the central authorities?
•The Fund's systems of balance of payments and government finance statistics classify financial items as long term if the original contractual maturity of the instruments is more than one year. On the other hand, the SNA, the European System of Integrated Economic Accounts (ESA), and the Fund's system of money and banking statistics classify financial instruments as being long term if their maturity is one year or more. A criterion for differentiating between short-term and long-term financial instruments should be devised that could be uniformly applied to all economic statistics.
•Should the distinction between current and capital transfers be introduced in the balance of payments and, if so, should capital transfers be incorporated in the capital account?
•Currently, the coverage of the capital account in the BPM includes certain changes (together with their counterparts) in external assets and liabilities that are conceived of as reconciliation and revaluation items in the SNA (Section I, under “Transactions in Financial Assets and Liabilities”). The desirability of explicitly incorporating and explaining all changes in the stock of reserves in the balance of payments statement and the external transactions account of the SNA should be considered.
•Should standard components be introduced with respect to balance of payments financing transactions (other than reserves and liabilities constituting foreign authorities' reserves) or should information on these flows be collected as supplementary details, as proposed in this paper?
1
See the BPM, paragraphs 191–97 and the list of standard components of the capital account on pp. 67–69.
2
The proposed scheme contrasts with that of the fourth edition of the BPM and the one for external transactions in the SNA.
3
See OECD, “Detailed Benchmark Definition of Foreign Direct Investment’ General Distribution, BOP.B2 (Paris, February 1983).
4
Loans extended to the Fund under its enlarged access policy involving a maturity of less than three and one-half years, and also involving the issuance of negotiable bearer notes by the Fund, are classified as part of foreign exchange reserves.
