The balance of payments (BOP) is a statistical statement that systematically summarises, over a given period of time, all the transactions of an economy with the rest of the world. The balance of payments records all economic transactions undertaken between the residents and non-residents of a country during a given period. A transaction is defined in the IMF Balance of Payments and International Investment Position Manual (BPM6) as an economic flow that reflects the creation, transformation, exchange, transfer, or extinction of economic value and involves changes in ownership of goods and/or financial assets, the provision of services, or the provision of labour and capital.
The concept of resident in the BPM6 is identical to that used in the 2008 System of National Accounts (2008 SNA) and 2010 European System of National and Regional Accounts (ESA2010). The concept is not based on nationality or legal criteria. It is based on the notion of a centre of economic interest. An institutional unit is a resident unit when it has a centre of economic interest in the economic territory of a country for a period of at least one year.
The balance of payments provides information on the total value of credits (or exports), debits (or imports), net acquisition of financial asset and net incurrence of liabilities for each BOP item and on the balance (credits minus debits) or net (net acquisition of financial asset minus net incurrence of liabilities) of the transactions with each partner.
BOP statistics are expressed in value terms. The trends observed depend also on the volume of transactions, market prices and exchange rates. Variations in prices and exchange rates are often considerable, making it difficult to analyse value flows. Time series analysis or comparisons across countries, especiallyoutside the Euro area should take into account such variables.
The balance of payments accounts are constructed on a double-entry accounting system, so that every transaction is - in principle - recorded in twice, once as a debit, once as a credit. If for example, a country exports goods and receives foreign currency in return, it will record the export by a credit in the Current account (more specifically in the Goods account) and the increase in the asset (foreign currency) in the Financial account. Thus, given complete and accurate recording, the overall balance of payments (i.e. the combined current and capital account and the financial account) should sum to zero. In practice, however, this is seldom the case.
The balance of payments is broken down into three broad sub-balances: the current account (a), the capital account (b) and the financial account (c).
a) Current account (BOP item CA = sum of items G + S + IN1 + IN2)
The Current account shows the flows of goods, services, primary income and secondary income between resident and non-resident units.
a.1 - Goods (BOP item G)
BOP item Goods covers general merchandise, non-monetary gold and, since the implementation of the BPM6, net export of goods under merchanting..
The most important component, General merchandise, includes all movable goods whose ownership is transferred from a resident to a non-resident and vice versa.
When calculating the balance of payments, both exports and imports of Goods should be valued free-on-board (f.o.b.). When a cost-insurance-freight (c.i.f.) valuation is provided, freight and insurance components have to be estimated separately and eliminated from the trade figures to arrive at a f.o.b. valuation. These components are then recorded in the services account.
a.2 - Services (BOP item S = sum of items SA +SB + SC + SD+SE+SF+SG+SH+SI+SJ+SK +SL)
Services are the second major category of the current account. In the production of data on International Trade in Services the references are the IMF’s BPM6 and the United Nations’ Manual on Statistics of International Trade in Services 2010.
Services' items Manufacturing services on physical inputs owned by others (SA) and Maintensance and repair services n.i.e (SB) were newly introduced in services account under BPM6.
Transport (SC) covers services provided by all modes of transport -sea, air, and other, which includes space, rail, road, inland waterway and pipeline - that are performed by residents of one economy for those of another. The different types of services offered include transport of passengers, transport of freight, other supporting and auxiliary services (e.g., storage and warehousing), postal and courier services and electricity transmission.
The debit side of the item Travel (SD) consists of goods and services which are acquired by residents who stay abroad for less than one year. The credit side includes purchases of the same type made by foreign travellers on the national territory. This item contains two main categories of travel: business travel and personal travel (leisure, study, health-related purposes, etc.). Note that international transport costs of the traveler to destination are recorded under the heading "transport", but all movements within the country, including cruises, are entered under "travel".
Other categories of services are:
- Construction services (SE),
- Insurance services (SF),
- Financial services (SG), which include explicitly charged and other financial services, and financial intermediation services indirectly measures (FISIM),
- Charges for the use of intellectual property n.i.e. (SH),
- Telecommunications, computer and information services (SI),
- Other business services (SJ) which include research and development services, professional and management consulting services, and techncal, trade-related and other business services,
- Personal, cultural and recreational services (SK),
- Government goods and services n.i.e (SL).
a.3 - Primary income (BOP item IN1)
Primary income covers three types of transactions between residents and non-residents.
Compensation of employees records wages, salaries and other benefits, in cash or in kind, earned by individuals for work performed for economic units whose place of residence is different from their own (border workers, seasonal workers, employees of international organisations, etc.). BOP item Compensation of employees records money paid to non-resident workers or received from non-resident employers.
Investment income is income derived from ownership of external financial assets and liabilities and payable by residents of one economy to residents of another economy. In line with the related financial account, Investment income is classified in Direct investment, Portfolio investment, and Other investment and reserve assets income. It includes interest, dividends, remittances of branch profits, and direct investor's shares of the retained earnings of direct investment enterprises; income on equity and investment fund shares, as well as on debt securities from prortfolio investment; income from interest, withdrawals from income of quasi corporations and income attributable to policyholders in insurance, pension schemes and standarised gurarantee schemes.
Other primary income includes rent, taxes and subsidies on products and production.
Detailed data for annual Foreign Direct Investments income (FDI), with a breakdown by partner country and by kind of activity, are available in a separate table.
a.4 - Secondary income(BOP item IN2)
IT is a counterpart entry, required by the double-entry system used in BOP compilation, that offsets the provision of a non-financial, or financial, item by a resident to a nonresident (or vice versa) without a counterpart return of an item of economic value. Secondary income consists of all transfers, which are not capital (see below). Current transfers are broken down, according to the sector of the compiling economy, into two subcomponents: general government and other sectors.
General government transfers are broken down into:
(a) Current taxes on income, wealth, etc.,
(b) Social contributions,
(c) Social benefits,
(d) Current international cooperation, and
(e) Miscellaneous current transfers.
Other sectors' transfers are broken down into:
(a) Current taxes on income, wealth, etc.,
(b) Social contributions,
(c) Social benefits,
(d) Net nonlife insurance premiums,
(e) Nonlife insurance claims,
(f) Miscellaneous current transfers, which includes personal transfers between resident and non-resident households, including workers' remittances.
b) Capital account (BOP item KA)
This item covers all transactions that involve (a) the receipt or payment of capital transfers (debt forgiveness, nonlife insurance claims, investment grants, one-off guarantees and other debt assumption, capital taxes and other capital transfers) and (b) the acquisition/disposal of non-produced, non-financial assets, which includes transactions associated with tangible assets (e.g., land and subsoil assets) and transactions associated with intangible assets (e.g., patents, copyrights, trademarks, franchises, etc.).
c) Financial Account (BOP item FA)
The Financial account covers all transactions associated with changes of ownership in the foreign financial assets and liabilities of an economy. The financial account is broken down into five basic functional categories: Direct investment (divided by instrument into equity and investment fund shares, reinvestment of earningsand debt instruments), Portfolio investment (divided by instrument into equity and investment fund shares, reinvestment of earnings for investment fund shares and debt securities), Financial derivatives and employee stock options, Other investment (divided by instrument into other equity, currency and deposits, loans, insurance, pension schems and other standarised guarantee schemes, trade credits and advances, other accounts receivable/payable and special drawing rights) and Official reserve assets (divided by instrument into monetary gold, special drawing rights, reserve position in the International Monetary Fund and other reserve assets).
Short descriptions of balance of payments and international investment position items are included in Annex II of Commission Regulation (EU) No 555/2012.
International investment position shows stock of financial assets and liabilities at the end of quarter of year. Stocks at the end of period ‘T’ should be equal to the sum of the value of stocks at the end of period ‘T-1’ (equal to the value at the beginning of period ‘T’), value of transactions during period ‘T’ (“T”) and value of changes in positions other than transactions Changes in positions other than transactions consist of revaluations due to exchange rate changes, revaluations due to other price changes and other changes in the volume of assets/liabilities.
Detailed data for Foreign Direct Investment (FDI), with a breakdown by partner country and by kind of activity, are available in a separate table.
For the current and capital account items, Credits and debits are to be recorded with a plus sign (even though some exceptions, such as for reinvested earnings in direct investment income, insurance services or for net exports of goods under merchanting, can occur). For the most part, only balances in accounts carry a negative sign. The balance is calculated as credits – debits and may be positive or negative.
For the financial account items, in BPM6 the headings and signs in BoP financial account have been changed from “credit” and “debit” to “net acquisition of assets” and “net incurrence of liabilities”. The new terminology and sign convention for the BoP financial account are consistent with those for the IIP i.e. a positive sign represent an increase, and a negative sign represents a decrease, in the asset or a liability to which it relates. Thus, for “net acquisition of assets” in the financial account of the BoP, a plus sign denotes a net increase in financial assets, while a minus sign refers to a net decrease in financial assets. The net is calculated as net acquisition of assets - net incurrence of liabilities and may be positive or negative.
The net balance on financial account has the opposite sign in BPM6 compared to BPM5 (e.g. a net inflow in the financial account is represented with a minus sign in BPM6, whereas it has a positive sign in BPM5).
In international investment position data for assets and liabilities, values should be positive and negative ones could be observed in exceptional circ*mstances, as described in the international manuals. These very rare exceptions may occur, for example in the context of FDI equity where the accumulated losses (reported as negative reinvestment of earnings) are larger than the total equity (other than reinvestment of earnings).
For revaluations due to exchange rate change, revaluations due to other price changes and other changes in the volume of assets/liabilities, data are to be reported with a plus sign, whereas decreases in assets and liabilities are to be reported with a minus sign.
The net is calculated as net acquisition of assets - net incurrence of liabilities and may be positive or negative.
For net external debt, net liabilities are calculated as liabilities - assets.
The balance of payments is constructed on a double-entry accounting system. Thus, the overall balance of payments should sum to zero. However, several factors (timing, valuation, data sources, etc.) cause imbalances in the information recorded. BoP item EO – Net errors and omissions is used to balance the Current and Capital account with the Financial account. In principle, FA-CA-KA=0. If it is not the case, countries use EO as balancing item (FA-CA-KA-EO= 0).
When the balance of payments is said to be in or out of balance, this does not refer to the balance of payments as a whole but simply to one of the sub-balances, that is, one item or a set of items. For instance, the goods account will be in deficit/surplus when the total value of imported goods is greater/smaller than the total value of exported goods.
