Item 9: Balance of Payments ESTP course ESA 2010 National Accounts Luxembourg, 15 May - 19 May 2017 Eurostat

What is balance of payments? The balance of payments is a statistical statement that summarizes transactions between residents and nonresidents during a given time period. According to BPM6 it consists of the current account (divided into goods, services account, primary income and secondary income), the capital account, and the financial account.

What is it used for? To monitor imbalances and how they are financed To monitor exposure to external financing To assess the competitiveness of an economy BOP related statistics (goods, services, FDI) are useful in trade negotiations To assess the sustainability of the exchange rate Useful tool for monetary policy Last but not least, input for NA  RoW account

BOP in the EU To fulfil its tasks, the ESCB requires comprehensive and reliable balance of payments and international investment position statistics. The Treaty requires the Commission to investigate the positions of Member States seriously threatened by BOP/IIP imbalances and to recommend corrective measures. The implementation and the review of trade agreements, as well as the current and future negotiations on further agreements require availability of the relevant BOP statistics.

EU legal framework Regulation (EC) No 184/2005 of the European Parliament and of the Council of 12 January 2005 on Community statistics concerning balance of payments, international trade in services and foreign direct investment as amended by ➥ Commission Regulation (EU) No 555/2012 as regards the update of data requirements and definitions ➥ Regulation (EU) No 2016/2013 Implementing regulations on quality reporting and transmission format. ECB Guideline ECB/2011/23 as amended by ECB Guideline (EU)/2016/231 on the statistical reporting requirements of the European Central Bank in the field of external statistics.

International standards IMF publishes the Balance of Payments and International Investment Position Manual (BPM) 6 editions have been issued (1948, 1959, 1961, 1977, 1993, 2009) Specific manuals for FDI (BD4) and ITS (MSITS2010) BPM6 is used in the EU since 2014 – together with ESA2010

Links with national accounts GDP  goods and services account GDP = C + I + (X-M) GNI  primary income account GNI = GDP + NY GNDY  secondary income account GNDY = GNI + NCT Saving  current account I = S + CAB Net lending / borrowing  financial account NLB = balance (CA+KA) = net (FA)

International Investment Position IIP is the “Balance Sheet” of the BOP system, Shows stocks of cross-border financial assets and liabilities, Functional classification, IIP at end of the period should be equal to the sum of IIP at the end of previous period, BOP financial account transactions, revaluations due to exchange rate changes, revaluations due to other price changes and other changes in the volume of assets/liabilities.

Accounting system The balance of payments is constructed on a double-entry accounting system Every transaction is recorded twice, once as a credit, once as a debit. Credit entries: exports, income receivable, reduction in assets, increase in liabilities Debit entries: imports, income payable, increase in assets, reduction in liabilities The overall balance of payments (i.e. the combined current and capital account and the financial account) should sum to zero. If not – EO (N) = FA(N)-CA (B) – KA (B)

Time of recording Accrual basis Accrual accounting records flows at the time economic value is created, transformed, exchanged, transferred, or extinguished Flows that imply a change of economic ownership are recorded when ownership passes and services are recorded when provided Effects of economic events are recorded in the period in which they occur, irrespective of whether cash was received or paid or was due to be received or paid Goods/financial assets: change of economic ownership Services: service is provided Income and transfers: when the claim arises (dividends: ex- dividend date)

Debtor/creditor approach BOP/IIP are compiled following the debtor/creditor approach, instead of the “transactor” approach - the geographical allocation of assets/credits is to be done on the basis of the residency of the issuer/debtor and not of the “transactor”. Particularly relevant for portfolio and direct investment functional categories of investment income, financial transactions and stocks.

Balance of payments presentation

SNA - Rest of the world in the sector accounts Viewed within sector accounts, the RoW sector has some special features In a reverse of BOP, items are recorded from RoW point (eg. credit=resources, debit=uses) As a result, balancing items have an opposite sign than corresponding ones in BOP Net lending/net borrowing must have the same value for RoW and Domestic economy but with the opposite sign

RoW account

Relationship BOP-RoW There is complete concordance between the SNA and BPM6 with respect to the delineation of resident units, valuation, time of recording, conversion procedures, and coverage of goods, services, income, capital transfers, and foreign financial assets and liabilities. The coverage and terminology of major aggregates have been fully harmonized. There is a major presentational difference in that the international accounts use functional categories as the primary level of classification for investment income, the financial account, and the IIP, whereas the SNA uses instruments and sectors.

Goods account Goods breakdown: General merchandise, Merchanting, Nonmonetary gold. ITGS is the main source of good BOP data Reasons for adjustments: Classification, Coverage, Valuation, Timing

Services account Services breakdown: Manufacturing services on physical inputs owned by others, Maintenance and repair services, Transport, Travel, Construction, Insurance and pension services, Financial services, Charges for the use of intellectual property, Telecommunication, computer and information services, Other business services, Personal, cultural and recreational services, Government goods and services.

Primary income Compensation of employees Investment income Other primary income: Taxes on production and on imports, Subsidies, Rents.

Investment income (1) Breakdown by functional category: direct investment , portfolio investment , other investment, reserve assets. Breakdown by instrument: Equity, Investment fund shares, Debt, Income attributable to policyholders.

Investment income (2) Breakdown by international accounts item: Dividends - the distributed earnings allocated to the owners of equity for placing funds at the disposal of corporations. Reinvested earnings - the direct investors’ share of the retained earnings of the direct investment enterprise. Interest - investment income receivable by the owners of deposits, debt securities, loans, and other accounts receivable, for putting the financial assets at the disposal of another institutional unit.

Secondary income Sector breakdown – general government and other sectors: Current taxes, Social contributions, Social benefits, Current international cooperation, Miscellaneous current transfers (includes personal transfers) VAT and GNI-based EU own resources Adjustments for change in pension entitlements

Functional classification in BOP For financial flows and stocks, BOP functional classification distinguishes: Direct investment Portfolio investment Financial derivatives (other than reserves) and employee stock options Other investment Reserve assets Each category is broken down by instrument

Differences between BOP and RoW Since ESA2010 and BPM6 propose a fully consistent concept of BOP and NA statistics, theoretically no respective adjustments for the compilation of NA and GNI should be necessary. BOP focuses on detailed breakdown by counterpart area. In RoW no such breakdown. Functional classification (BOP) vs National accounts classification (Row): bridging problem for EU sector accounts, notably property income.

European Union 28 BOP (2016)

Euro Area 19 BOP (2016)

CAB by MS (2016, % GDP)

Thank you for your attention! Contact: olaf.nowak@ec.europa.eu