Debt Stocks, Debt Flows and the Balance of Payments

International Monetary Fund

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1994
• eBook ISBN: 9789264142589

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CHAPTER I MEASUREMENT AND RECONCILIATION OF EXTERNAL DEBT STOCKS AND FLOWS

DEFINITIONS

The following are some key terms important to the discussion of debt classification, measurement and data reconciliation. Also, for the convenience of the reader, a glossary of relevant economic and financial terms appears at the end of the report.

External debt

The most important conceptual issue for the compilation of debt statistics is to establish an agreed definition of “external debt”. In its first report, the IWGEDS arrived at a “core” definition as follows:

“Gross external debt is the amount, at any given time, of disbursed and outstanding contractual liabilities of residents of a country to non-residents to repay principal, with or without interest, or to pay interest, with or without principal.”

The wording of the definition was carefully chosen to take into account a number of possible ambiguities. For example, the term “gross external debt” makes explicit the exclusion of any corresponding offsetting assets or claims. The term “contractual liabilities” is intended to cover a broad range of obligations, but to exclude equity participations, which do not involve a requirement to make principal or interest payments. The specification “principal and/or interest” indicates that the definition encompasses all classes of obligation. It includes those with no maturity requiring retirement of principal as well as those that might involve payments in kind rather than cash. The term “disbursed and outstanding” makes clear that the definition does not cover undisbursed portions of existing loans. In practice, new interpretations of the definition may be necessary given the rapid pace at which innovations in financial market instruments and practices have been taking place.

Residence

In the balance of payments statistics published by the Fund in its Balance of Payments Statistics Yearbook the concept of residence is as defined in the fourth edition of the Balance of Payments Manual, and is essentially the same as that in the System of National Accounts. It states that:

“…The residents of an economy comprise the general government, individuals, private nonprofit bodies serving individuals, and enterprises, all defined in terms of their relationship to the territory of that economy. Included with the territory of an economy are its territorial waters over which the economy has or claims to have exclusive jurisdiction; overseas territories or possessions may or may not be regarded as separate economies.”

Furthermore, the Balance of Payments Manual provides an extensive explanation of the different aspects of residence that are applicable in a balance of payments context.

The World Bank specifies, in the Debtor Reporting System Manual, that countries should report all long-term external debt owed by residents of the reporting country to non-residents. The definition of the term “non-residents” for purposes of reporting to the Debtor Reporting System generally accords with that which appears in the fourth edition of the Balance of Payments Manual. It is as follows:

“…The term nonresidents includes besides nonresident individuals, all foreign public bodies, foreign corporations (except branches thereof in the reporting country), and international organisations; in short, any individual or organisation that is not physically located in the reporting country.”

The basis of the reporting directives for the OECD Creditor Reporting System is the Balance of Payments Manual concept of residence. In practice, some reports on export credits in the Creditor Reporting System include, indistinguishably, small amounts of credit which lenders in other countries extend but the reporting agency guarantees. In addition, the OECD’s published data do not adhere to the concept of residence in the case of debt or resource flows to banks in offshore banking centres, or to “flag of convenience” countries, because it is considered that, in both cases, the immediate borrower is often not the ultimate borrower.

Debt flows

The underlying conceptual framework of the System of National Accounts is the starting point for definitions and concepts used in the measurement of international debt flows. However, the terminology which the various organisations use is not entirely uniform. The 1993 System of National Accounts provides the following definition:

“Economic flows reflect the creation, transformation, exchange, transfer or extinction of economic value; they involve changes in the volume, composition, or value of an institutional unit’s assets and liabilities. Mirroring the diversity of the economy, economic flows have specific natures as wages, taxes, interest, capital flows, etc, that record the ways in which a unit’s assets and liabilities are changed. --- Economic flows are of two kinds. Most flows are transactions. Flows included in the System that do not meet the characteristics of transactions as described below are called ‘other flows.’ --- A transaction is an economic flow that is an interaction between institutional units by mutual agreement or an action within an institutional unit that it is analytically useful to treat like a transaction, often because the unit is operating in two different capacities. Other flows are changes in the value of assets and liabilities that do not take place in transactions.”^5/

It is essential to clarify the definition of debt flows, and to distinguish between them and other factors that need attention in reconciling changes in the value of outstanding external debt from one period to another. The terms “flows” and “transactions” are synonymous in the context of this report and are consistent with the capital flows that enter into the capital account of the balance of payments. The fourth edition of the Balance of Payments Manual defines the capital account as that:

“…which comprises all transactions - in the restricted sense of changes of legal ownership, including the creation and liquidation of claims - in an economy’s foreign financial assets and liabilities, together with some specified changes of other kinds that may affect its foreign assets and liabilities and the counterparts to those changes.”

The reference to “specified changes of other kinds” concerns elements of changes in the value of reserve assets and liabilities that enter into the balance of payments accounts but are not “transactions”. There are, however, several types of transaction, especially involving the renegotiation or refinancing of external debts, that may change the form, payment schedules or ownership of debt, and that may be treated differently in the balance of payments accounts and in the statistics of different members of the IWGEDS. These issues are discussed in Chapter II.

Components of changes in the value of outstanding external debt are assigned to one of two primary categories to avoid confusion: transactions, as defined in the balance of payments accounts; and valuation and other adjustments, which cover all factors causing changes in the reported values of outstanding debt flows. This division is consistent with the System of National Accounts in practice; however, in the System of National Accounts the term “economic flow” is used to encompass both of the above elements.

The term “gross flows” refers to the totals, respectively, of loan disbursements and repayments, or the equivalent credits and debits connected with other forms of debt. The term “net flows” refers to the combined effect of gross disbursements and repayments, and is the only measure of capital flow available when deriving flow data from changes in reported stocks, as is the case for the external positions of banks. The term “net flow” does not refer to a netting of assets against liabilities.

In summary, there is a major distinction between flows that involve actual cash or financial transactions (on both a cash and an accrual basis) and other flows that do not. These other flows include changes in the amount or ownership of debt that may result from an agreement, such as forgiveness of a debt, and they must be taken into account in compiling debt flow statistics.

It is useful to consider three broad subdivisions of flows and also to identify those changes in stocks that do not entail flows. The first subdivision, which the Creditor Reporting System and the Debtor Reporting System clearly identify, covers loan disbursements and repayments. The second involves primarily changes in debt that result from agreements between creditors and debtors, such as debt forgiveness, which may change total debt or shift the debt between categories. The third would be other changes, such as rephasing a debt to shift current obligations to future obligations. Chapter III provides examples of how the Creditor Reporting System, the Debtor Reporting System and the balance of payments statistics treat these changes. By contrast, there are other changes in the amount of debt stocks reported by compilers that are not flows, which result from market or external forces, such as changes in exchange rates, changes in market values, or unilateral changes such as write-offs or repudiations.

When the objective is to measure flows of resources the first two categories of flows referred to above would clearly be included; the third would be questionable. If the purpose is to measure capital flows in the balance of payments, all of the first three categories mentioned would be relevant. In order to convey clearly to the users of the balance of payments which of these activities is taking place, a schedule of “exceptional financing” is most useful (see Attachment IV). In the statement of a country’s international investment position the non-flow types of change in debt arising from causes other than actual transactions serve as a link between the capital flow data in the balance of payments and changes in reported debt stocks.

CLASSIFICATION

This section provides background information on debt classification systems as a framework for later discussion of the measurement and reconciliation of debt stocks and flows. It begins with a review of the categories in the 1993 System of National Accounts since they serve as a standard accounting framework, of which debt information is an integral part. This is followed by a description of the capital account classifications as they appear in the Balance of Payments Manual. The remainder of the section selectively reviews the treatment of debt in the World Bank’s Debtor Reporting System, the OECD’s Creditor Reporting System and the Balance of Payments Manual, highlighting similarities and differences which are important to the treatment of debt stocks and debt flows.

The three main categories for classifying both debt and debt flows are: type of creditor or debtor (e.g. official, private, international agency); type of cre...

Table of contents

• Cover Page
• Introduction
• Summary of Findings
• Chapter I. Measurement and Reconciliation of External Debt Stocks and Flows
• Chapter II. Comparative Compilation Systems and Analyses
• Chapter III. Case Studies of Reconciliations and Examples of Debt Restructuring
• Chapter IV. Conclusions
• Annex
• Glossary
• Footnotes