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Balance of Payments
Conceptual framework
RESIDENCE
The Balance of Payments registers the transactions between the residents of one
country and those of the rest of the world, independently of their nationality. The
IMF considers an institutional unit to be a resident unit when it has a centre of
economic interest in the territory of the country. A company has a centre of
economic interest and is a resident unit of a country when it produces a
significant amount of services in the said country or possesses land or buildings
located in it. In practice, the IMF recommends the pattern of remaining in the
country for one year or more to be considered a resident.
MOMENT OF REGISTRATION OF THE TRANSACTION: ACCRUAL PRINCIPLE
In the Balance of Payments, transactions must be registered in accrued values.
Using IMF terminology, this means that they must be registered with reference
"to the moment at which an economic value is created, transformed, exchanged,
transferred or extinguished". Thus, the flows collected need not coincide with the
liquid received effects or payments generated. In fact, on numerous occasions,
the transactions of the Balance of Payments do not yield liquid received effects
or payment and, on others, their registration takes place at a different time. In
practice, the application of this principle to all operations with non-residents is
difficult and costly, and therefore, many transactions are registered at the time of
received effect or payment origin.
VALUATION. FLOWS AND STOCKS
As of 1999, the Spanish Balance of Payments is prepared in euros. The
transactions are stated in their original currency, having used the ten-yearaverage exchange rate for their conversion to euros, in the case of operations
declared by financial institutions, and using the monthly average for the rest.
This is a quite precise approximation of the theoretical valuation principle
referred to in the Fifth Manual of the IMF, which states that all transactions must
be valued at the market prices that are valid on the date of the operation. The
estimations of the different headings of the Balance should not refer to variations
caused by the fluctuations in the exchange rates or in the market prices of the
different financial assets or liabilities. Nor should the Balance of Payments
account for the differences that might arise on valuing, in a common currency,
the received effects and payments of compensation or sale of currencies that are
identical, by definition, to the original transaction agreed on by the parties to the
operation.
This valuation criterion is fundamental for understanding the relationship
between flows and stocks, in other words, the relationship between the Balance
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of Payments and the International Investment Position. The Fifth Manual defines
the International Investment Position as the value of the stock of each of the
financial assets and liabilities defined in the normalised components of the
Balance of Payments. For each normalised component of the financial account,
the International Investment Position must reflect the value of the stock of that
type of asset or liability, at the beginning of the year, and its value at the end.
The difference between the two values should be the same as the sum of the
transactions actually carried out with those assets and liabilities, plus the
variation of the value of the stock caused by alterations in the exchange rate, plus
that caused by the variations in the price of the corresponding assets or
liabilities, in addition to other different adjustments.
ORGANISING THE FINANCIAL FLOWS REGARDING THE VARIATION OF ASSETS AND
THE VARIATION OF LIABILITIES. SIGNS USED
The operations of the financial account are accounted for as the net variation of
the assets or the net variation of the liabilities of the resident units as compared
to the non-resident units. The data collect only net asset flows (acquisitions of
assets by residents as compared with non-residents, minus sales and
depreciation) and net liability flows (acquisitions by non-residents of assets
issued by residents, minus sales and depreciation).
The annotation signs of the Balance of Payments require an accounting
convention. Even in the case of current account transactions, the sign could be
different, depending on whether trying to note the perspective of the resident or
that of the non-resident involved in the operation. In the Balance of Payment in
Spain, the perspective of the resident is used. In the financial account, this
accounting convention by itself would not be sufficient to define unequivocally
the phenomenon that must therefore be reflected in each chart detailing the
accounting convention used.
The Errors and Omissions heading is a mere adjustment of the difference
between the total received effects and the total payments. If the sign is positive
(negative), this means that there is an undervaluation (overvaluation), due to
errors or omissions of the net balance of the current account plus the capital
account, that is, the nation's financing capacity or need, as related to the net
balance of the financial account.
Classification of the operations by heading and institutional sector
CLASSIFICATION BY HEADING
The operations of the Balance of Payments are organised around three basic
accounts: current, capital and financial.
Current Account: specific notes for each heading
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Subdivision into four balances: goods, services, income and transfers.
• Trade balance
This heading includes both goods that cross country borders and those others
whose trade is carried out without the physical transfer across them. This also
includes the supply of goods, both of fuel and of any other type, to means of
transport.
• Tourism and travel
This heading includes the goods and services acquired in an economy by
travellers residing in another economy, who travel for business or personal
purposes -- including health and education --, with stays shorter than one year.
• Transport
The transport heading includes both charters and passage and auxiliary services.
The supply of fuel and other goods, which are accounted for in the trade balance,
are excluded under this heading. Crewed chartered travel is included.
• Communications
This heading accounts for the post and courier services, those related to the
transmission of sound, image, telex and fax, telegram, cable, radio broadcasting,
satellite communication, electronic mail, etc.
• Construction
The construction services data have been obtained based on a precise definition
of the concept of residence of the companies involved, to define, in accounting
for the operations of this nature, those that may be registered specifically as
construction services and those that should appear as flows between companies
related by direct investment links.
• Insurance
Insurance services include the estimations provided by the National Accounts
regarding the value of the service itself. In addition to commercial insurance, this
section includes life insurance, pension fund contributions, personal accident
insurance, health insurance, vehicle accident insurance, etc., and activities
auxiliary to insurance and pension funding. Social Security benefits and
contributions, which are registered in the balance of transfers, are excluded.
Export credit insurance is also excluded, already accounted for under the
Financial Services heading.
• Financial Services
This heading includes the broad range of financial intermediation services. This
includes commissions and expenses related to foreign investment, such as the
issue, placement, redemption and amortisation of shares, the intermediation
commissions in direct or portfolio investments or the sale of buildings, the
commissions and expenses related to obtaining and placing funds in deposits,
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transfers, check payment and approval, currency exchange, travellers' checks,
etc. Received affects and payments associated with the principal and the returns
from the mentioned operations, accounted for in the financial and income
balances, are excluded.
• Information technology and information services
Register the received effects and payments for hardware services, understanding
as such those corresponding to consultancy and the configuration of information
technology equipment, including their maintenance and repair; software
services, such as those involving their development and fine tuning, including
the analysis, design, implantation, documentation and system maintenance;
information services, such as those of news agencies, reports, etc.; automatic
data processing, including recording, change of support, etc., and, in general,
database services. It is appropriate to warn that this heading does not include the
purchase of general -- non-bespoke -- software packages, nor training services,
which are included under the heading of Other services provided to companies.
• Services provided to companies
In addition to commercial and operative leasing services, this heading includes,
under the generic denomination Other services provided to companies, a broad
range of transactions of this type that cannot be considered within other
concepts.
• Personal, cultural and recreational services
This heading encompasses audiovisual services and the group of personal,
cultural and recreational services. Among the audiovisual services, this includes
the production of films and radio and television programs, and the right to their
distribution granted to the mass media; this also includes the remuneration of
actors, producers, etc. It excludes the granting of rights, by the authors
themselves, of films, recordings of musical pieces, books, etc., which are
registered under the heading of Royalties and income from intangible property.
The section regarding Other cultural and recreational services registers the
received effects and payments derived from services of this nature that are not
included under the previous heading, such as theatres, museums, libraries,
sports, etc. This heading accounts for subscriptions to newspapers and
periodical publications.
• Government services
Group the received effects and payments linked to the expenses of embassies,
consulates, military units, etc., and the expenses related to the provision, by the
Spanish government, of health and education services, administrative expenses,
tourism offices, educational institutions, etc.
• Royalties and income from intangible property
This heading registers the received effects and payments of exploitation rights of
patents, trademarks, models and inventions, as well as copyrights. The rights
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derived from the distribution of films and audiovisual materials, which are
accounted for under the heading of services designated with that name, are
excluded.
• Work income
Includes the remuneration of border, seasonal and temporary workers. The
heading data include, starting in 1995, the social contributions and direct taxes of
the remunerations received (paid) by (to) resident (non-resident) workers.
• Investment income
Investment income is presented with the same breakdown by instrument as
those corresponding headings from the financial account, accounting for the
income generated by each asset and liability considered therein.
• Current transfers
According to the IMF, first of all, a transfer in kind is a transfer of capital when it
involves: a) the transfer of ownership of a fixed asset or b) the debt forgiveness
of a liability by a creditor without receiving a counterpart in exchange. Secondly,
a cash transfer is a transfer of capital when it is linked to or conditioned by the
acquisition or transfer of a fixed asset by one or both parties to the transaction. A
transfer of capital should cause a variation of the same magnitude in the
holdings of assets of one or both parties to the transaction. Current transfers
comprise all those that are not transfers of capital. They directly affect the level
of disposable income and should influence the consumption of goods or
services; they reduce the possibility of income and consumption of the donor in
that they raise the possibility of income and consumption of the beneficiary.
Capital Account: specific notes for each heading
Capital accounts include capital transfers and the acquisition and disposal of
non-financial non-produced assets. In the case of Spain, capital transfers are, by
far, the most important heading in this account.
• Capital transfers
Capital transfers in the private sector mainly include those movements of funds
that are generated by the liquidation of the capital gains of emigrants or
immigrants, including changes in the ownership of their assets and liabilities,
upon their changing residence. The coverage of these operations, given the
information collection system of the Spanish Balance of Payments, is
incomplete. The quantitatively most important part of this heading is that which
considers the income through capital transfers of the Public Administrations with
the EU. Among these, it is worth noting the funds for regional development
(FEDER) and the so-called "cohesion funds". Funds originating from the
European Agriculture Guidance and Guarantee Fund (EAGGF) are also included.
In addition, in accordance with Eurostat guidelines, the indemnities paid by the
Spanish Export Credit Insurance Company (CESCE) for risks assumed by the
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company on behalf of the Spanish Treasury, are being registered as payments in
capital transfers of the Public Administrations.
• Acquisition of non-produced intangible assets
This heading considers the transactions related to tangible assets that might be
used or needed for the production of goods and services, but that in themselves
have not been produced -- for example, land and subsoil resources --, and the
transactions related to non-produced intangible assets -- for example, patents,
copyrights, trademarks, concessions, etc., and leases or other transferable
contracts --. Nevertheless, in the case of land transactions -- including subsoil
resources -- between residents and non-residents, all acquisitions/transfers are
considered to take place between resident units, and the non-resident is
considered to acquire a financial asset as compared to a hypothetical resident
unit. The only exception is the purchase or sale of land by an embassy, when the
operation involves the transfer of the asset of an economic territory to another.
In these cases, the transaction of land between residents and non-residents is
registered as the acquisition/transfer of non-produced non-financial assets.
Financial Account: specific notes for each heading
Financial accounts have been structured in such a way that the operations of the
Bank of Spain have a separate treatment, considering one account with the
operations of the different sectors, excluding the Bank of Spain, and another
account with the operations of the Bank of Spain. Within the first account , four
balances are offered, differentiated by the type of assets and liabilities in which
the corresponding operations are carried out: direct investments, portfolio
investments, other investments and financial derivatives. The first three offer
separate information on asset and liability operations, while the financial
derivatives are accounted for as a variation of liabilities minus a variation of
assets. The assignation of operations to the different institutional sectors is
carried out in accordance with that pertaining to the resident owner of the
operation. Institutional sectoring is also used in the balance of investment
income.
• Direct investments
Include those reflecting an investor objective of obtaining a permanent
profitability in the company in which they invest, reaching a significant degree of
influence over their management bodies. The practical rule specified in the Fifth
Manual defines 'direct investor' as the owner of 10% or more of the capital of the
direct investment company. In addition, the Direct investment heading must
include not only the flows of the original transaction by which the condition of
direct investor is established, but also all subsequent financing flows, whatever
there nature may be, both in the form of new acquisitions of shares, bonds and
debentures, and in those carried out through commercial or financial loans of
any term.
• Portfolio investments
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Include transactions in negotiable shares, excluding those which, materialised as
shares, fulfil the requirements to be considered as direct investments. These do
not include financial derivatives, even if they are negotiable. This balance is
divided into three main components: shares, bonds and debentures and
instruments of the monetary market.
• Other investments
Include operations of loans -- commercial and financial --, separating the short
and long term, and the operations of deposits, including foreign currency
holdings.
• Financial derivatives
Include all instruments of this nature that may be valued because a market price
exists for the core asset, independently of whether it is negotiated or not, in
organised markets, and independently of what the core asset is.
• External operations of the Bank of Spain
Include the variation in the reserves, the variation in the account of the Bank of
Spain with the Eurosystem and the remaining assets and liabilities external to
this institution.
CLASSIFICATION BY INSTITUTIONAL SECTOR
The balance of investment income and the different headings of the financial
account are subdivided into the three following institutional sectors:
1. Monetary Financial Institutions Sector
1.1 Bank of Spain
1.2 Other monetary financial institutions
2. Public Administrations Sector
2.1 Central Administration
2.2 Autonomous Communities
2.3 Local Corporations
2.4 Social Security Administrations
3. Other Resident Sectors Sector
3.1 Non-monetary financial institutions, except insurance and pension fund
companies
3.2
Insurance and pension fund companies
Public and private non-financial companies
Non-profit households and institutions, NPIs serving households
3.3
3.4
The assignation of operations to the different institutional sectors is carried out
in accordance with that pertaining to the resident owner of the operation.
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