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4 Balance of Payments Accounts
�___. and Analysis
Measuring and assessing the external position of a The Double-Entry Accounting System
country are essential steps in the economic policy
making process. Data on the transactions and finan The basic convention applied in constructing a
cial flows between a country and the rest of the balance of payments is the double-entry accounting
world, which are systematically summarized in the system. Every transaction recorded using this system
balance of payments, form the basis of any analysis of is represented by two entries with equal values but
a country's external position and need for adjustment. opposite signs, a debit (-) and a credit (+). Thus, by
The purpose of this chapter is to introduce the convention, certain items are recorded as debits and
accounting framework and key concepts used in others as credits, as follows:
analyzing the balance of payments and external
debt. The first part of the chapter describes the Exports of goods and services Credit (+)
framework; the second part of the chapter focuses Imports of goods and services Debit (-)
on the measurement of a country's external posi
Increase in financial liabilities Credit (+)
tion, drawing on the methodology developed in
the Fifth Edition of the Balance of Payments Man Increase in financial assets Debit (-)
ual (hereafter known as the Manua1).1 The section Decrease in liabilities Debit (-)
also examines important issues in measuring bal
Decrease in assets Credit (+)
ance of payments transactions in former centrally
planned economies. The key concepts used in ana With double-entry bookkeeping, the sum of all
lyzing the balance of payments and external debt credits should be identical to the sum of all debits,
are introduced in following sections as well as the and the overall total should equal zero. In this
main developments in Poland's balance of pay sense, the balance of payments is always in bal
ments and the exchange rate of the zloty. Finally, ance. The example in Box 4.1 illustrates how a
the last part of the chapter presents some exercises shipment of cars exported from Russia to Poland
and issues for discussion. and involving a payment by a Polish importer
through the banking system is recorded under the
above conventions.
Some key points in balance of payments account
Conceptual Framework of the ing are:
Balance of Payments • Real and financial transactions. "Real" flows in
volve transactions in goods and services
Basic Conventions (such as imports, exports, travel, and ship
ping). Such transactions contrast with finan
A country's balance of payments tracks payments cial transactions, or changes in levels of fi
to and receipts from nonresidents. According to the nancial assets and liabilities (for example, the
Manual, the balance of payments is "a statistical repayment of principal on an outstanding
statement that systematically summarizes, for a spe loan constitutes a reduction in a liability).
cific time period, the economic transactions of an Transactions in goods and services are
economy with the rest of the world." Various con recorded in the current account of the bal
ventions for recording items in the balance of pay ance of payments. Financial transactions are
ments are presented below. recorded in the capital and financial account
of the balance of payments.
I See Balance of Payments Manual, Fifth Edition (Washington:

• Transfers. Unrequited transfers across na
lnremarional Monetary Fund, 1993). tional borders are one-sided transactions.
96
©International Monetary Fund. Not for Redistribution

Conceptual Framework of the Balance of Payments
Box 4.1.
An Eu•ple of Double-Entry AccDullllni
Russia's Accounts Poland's Accounts
Exports Credit Imports Debit

Bank deposits increase Debit Decline in bank deposits Credit
Suppose, for example, that the Japanese gov not offset by under- or overestimation m
ernment donates to the Kyrgyz Republic other countries.2

buses for public transportation. To deal with • Flows and stocks. The balance of payments ac
such transactions, which involve no financial counts record flows in two directions. These
compensation, the balance of payments flows are distinguished from the stocks associ
methodology includes a category called ated with a country's international investment
"transfers." This convention allows one-sided position-that is, the value of a country's assets
transactions to he converted to standard two and liabilities vis-a-vis the re:;t uf the wurlJ.
sided transactions. The donated buses are The former are measured for a specific time pe
recorded as an import (debit) in the accounts riod, whereas the latter are recorded at a point
of the Kyrgyz Republic, having been "paid in time, often the end of the year. Two stocks
for" by a transfer (credit). More generally, all discussed in this workshop are the level of inter
transfers with an economic value, when no national reserves (external assets of a country)
quid pro quo is involved, give rise to a coun and the level of external debt (a liability) .
terentry, either a current or a capital transfer.
Current transfers include cash transfers, gifts
in kind (such as food and medicines), contri
butions to international organizations, and Residency
remittances sent by workers residing abroad
to families back home. Capital transfers may The concept of residency in the balance of pay
be in cash ( investment grants) or in kind ments is based on the transactor's center of eco
(debt forgiveness). nomic interest, not on the transactor's nationality.
This practice follows the System of National Ac-
• Errors and omissions. In practice, accounts
tend not to balance, largely because data are
derived from different sources or because
some items are underrecorded or not 2ln principle, the external current account balances of all coun·
recorded at all. All balance of payments ac tries should sum m zero, as should the sum of the countries' capi
tal account balances. For a number of years, however, global uata
counts contain the item "net errors and omis on current account balances have shown a large discrepancy in
sions," which reflects errors in estimation the form of an excess of recorded debits. Conversely, rhe global
and omissions of transactions that should capital account has shown a large positive balance or excess of
have been recorded. Entries are recorded net recorded credits (capital inflows). These discrepancies derive
from errors, omissions, and asymmetries in countries' treatment of
because of the possibility that credit errors
balance of payments statistics. Such discrepancies can undermine
will offset debit errors-that is, an underesti the credibiliry of analyses of global economic developmenrs, hin
mation of exports may be partly offset by an der the formulation of appropriate policies, and even contribute
underestimation of imports. Since credit and to protectionist pressures owing ro misr<�ken perceptions of
debit errors may offset each other, the size of countries' balance of payments situations. In 1987. under 11 spe
cially set up Working Party, the lMF investigated the causes of
the net residual cannot be taken as an indica this discrepancy and recommended procedures to improve statisti
tor of the relative accuracy of the balance of cal practices in these areas. In 1992, a similar effort was under
payments statement. Nonetheless, large and taken to ao;sess procedures for the collection of c<�piral accounr
persisting net residuals impede the interpre statistics in the light of the growth and complexiry of intema·
tiona! capital account transactions. See the final Repon of the
tation and analysis of the balance of pay
Working Party on the Swriscical Discrepancy in World Current Ac
ments for an individual country. Analo count Balance (Washington: International Monetary Fund, 1987)
gously, at the level of the world as a whole, and Report on the Measurement of International CatJical Flows
recording discrepancies in one country are (Washington: lmemational Monetary Fund. September 1992).
97

4 • BALANCE OF PAYMENTS ACCOUNTS AND ANALYSIS
counts (SNA) studied in Chapter 2 . The main Valuation

considerations relating to economic territory are as
follows: A balance of payments transaction should be val
Individuals living in a country are generally con ued at the market price, which reflects the terms of a
sidered residents if they have resided there for at specific exchange between a willing buyer and a
least 1 2 months. Nonresidents include visitors willing seller. The market price is distinguished from
a general price indicaror (such as a world market
( tourists, crews of ships or aircraft, and seasonal
price) for a specific commodity.
workers); border workers (who are considered to be
In practice, this definition creates difficulties in
residents of the country in which they live); diplo
recording certain transactions, including:
mats and consular representatives; and members of
armed forces stationed in a foreign country, irrespec • Barter transactions, which involve a direct ex
tive of the duration of their stay. change of goods for other goods rather than for
Enterprises are considered residents of the econ money;
omy where they are engaged in business, provided • Transactions between affiliated enterprises (for
they have at least one productive establishment and example, profit transfers between a sub idiary
plan to operate it over a long period of time. There and the parent company ); and
fore, subsidiaries of foreign-owned companies are • Transfers, which often do not have a market
considered to be resident in the country in which
price.
they are located.
Proxy measures are used to record these kinds of
General government, including all agencies of the transactions. For example, bartered goods are valued
central, regional, and local governments, together at market prices.
with embassies, consulates, and military establish Exports and imports are shown f.o.b. (free on
ments located outside the country, are considered to board ) , or excluding the cost of transportation be
be resident. yond national borders. Imports are usually recorded
by customs on a c. i.f. basis (including the cost of
international insurance and freight). However,
Time Periods and the Timing in the balance of payments accounts, the insurance
and freight components are recorded under
of Recording
"services."
In principle, the time period for recording bal

ance of payments flows may be of any length. How
Unit of Account
ever, it is usually dictated by practical considera
tions, especially the frequency of data collection.
Since transactions may be settled in any currency,
Many countries prepare balance of payments data
an appropriate unit of account is required for record
annually because firm estimates for some balance
ing balance of payments transactions. Although the
of payments transactions are available only once
national currency can be used, its analytical value
each year. However, since other data (for example,
loses significance over time as the exchange rate
for exports and imports) are often available quar
fluctuates. For this reason, balance of payments ac
terly and sometimes monthly, some countries
counts are often expressed in terms of a stable for
prepare quarterly balance of payments data consis
eign currency (such as the U.S. dollar or the SDR),
tent with quarterly estimates of the national
facilitating comparisons across countries. The ap
accounts.
propriate exchange rate (the market rate prevailing
By convention, both parties to an international
on the transaction date) is used to convert data from
transaction record it when there is a legal change
the currency used in a transaction into the unit of
of ownership. In principle, both parties record the
account currency)
same transaction simultaneously, according to the
principles of accrual accounting (when transac
tions such as interest payments are due to be set
3See Chapter VII of the Balance of Payments Manual for addi
tled, not when cash settlements are made). In
practice, trade, service, and financial transactions tional details. ln the case of multiple exchange rates. the conver
may be recorded at different times by the two par sion unit can be either a unitary rare (a weighted average of all
ties, so that adjustments need to be made to the official market rates) or rhe principal rate (used (or most eco
original data derived from trade returns, exchange nomic transactions). When there is a t>arallel market mre for some
transactions, this rate can be used for conversions, and the offi
cial rare for the remaining transactions.
records, or enterprise surveys.
98

Box 4.2.
Changes in the 1993 Balance of Payments Manual
Manuals
Area ofChange Fourth Edttion (1977) FifthEdiuon (1993)
Overall Only a statement on balance of payments An articulated set of accounts en

flows. compassmg both flows (balance of
payments) and stocks (net interna
tional investment posttion).
Services and income Residual category "Other goods, services, Separate and clear identification of
and mcome." all goods, servicClJ, income, and C\tr
rent transfers, to facilitate compila
tion of SNA aggregates such as
Gross National Dil>posable Income
(ONDI).
Current and capital transfers not
di:.-ringuished.
Current accoum redefined Current accowu included all unrequited The current account excludes
transfers. capital transfers.
Capital and financial Included only financial transactions, but Redesignatton to rdlect: (i) "Capital
account redefined known as the "capital account." account" (mainly capttal transfers);
and (ii) "Financial account" that
broadly corresponds to "capttal ac
count" of the Fourd1 &It tion.
Portfolio mvestmem Limited list of standard components. Expanded list to include new money
market instruments.
Valuation changes Included aU valuation change:., as well as AU valuation changes excluded from
monetization of gold and allocations of flow clara; instead, they are recorded
SDRs. in stock data.
Exceptional fmancing Ltmired coverage. Expartded coverage.
Changes in the Balance of Payments Manual Manual provides a conceptual framework fur pre
senting the external transactions and international
Changes in Coverage financial position of an economy through a compre
hensive measure of external assets and liabilities.
Between the publication of the Fourth Edition of Among other important changes, the Fifth Edition:
the Manual ( 1 97 7 ) and the Fifth Edition ( 1 993 ) , • Records interest on an accrual rather than a
there were many developments in the field of inter cash basis;
national trade and finance, including increased
trade in services, widespread abolition of capital •
Redefines the current account to exclude capi
controls, innovations in new financial instruments, tal transfers, including them instead in the
and new approaches to restructuring external debt. capital and financial account (formerly the
As a result, the methodology for recording trans capital account), which has been revised to
actions in the Manual had to be adjusted w accom provide more detailed data on these flows;
to
modate these changes. The Fifth Edition aims to • Changes the heading "nonfactor services"
improve the integration of external secror account
"income transactions";
ing with other macroeconomic accounts, particu
larly the SNA, and incorporate the changes that •
Expands the classification scheme for service
have taken place in international transactions (see transactions in recognition of their growing
Box 4.2). Unlike the previous edition, the 1993 importance;
99

•
Expands and restructures the coverage of port • Exhibit distinctive behavior, that is, its eco
folio investment to reflect the development of nomic influences should be unique;
new financial instruments such as derivatives
• Be important in a number of countries;
and financial futures;
•
•
Be measurable, requiring regular collection of
Extends coverage of emerging forms of excep
statistics; and
tional financing transactions such as debt for
giveness and debt/equity swaps; and • Coordinate with other statistical sy terns (es
pecially the SNA).
•
Develops a consistent classification scheme for
income and financial assets and Liabilities,
which relates flows to the overall investment (i) Current account
position (stocks). The current account comprises ''real" transac
tions-goods, services, income, and current trans
Throughout, the nomenclature has been revised fers. Transactions classified under "goods" relate to
to describe the increasingly sophisticated composi the movement of merchandise-exports and im
tion of international transactions more accurately. ports-and generally involve a change of owner
ship. "Services" can be of many different types.
"income" may be derived from labor (wages paid to
The Net International Investment Position employees living in neighboring countries) or from
financial assets or liabilities (for example, interest
A country's international investment position is payments on external debt).
its stock of external financial assets minus its stock Most current account entries show gross debits or
of external liabilities. The position at the end of a credits, but entries in the capital and financial ac
specific period reflects financial transactions during count are typically net. Net entrie are shown only
that period (typically one year), valuation changes as credits or debits, according to the conventions.
from movements in exchange rates and prices, and
other adjustments that affect the level of assets and (ii) Capital and financial account
liabilities. Box 4.3 shows the two major categories of the
Data on balance of payments flows and the inter capital and financial account. The main item in the
national investment position constitute the complete capital account is capital transfers. The financial ac
set of international accounts for an economy. Because count has four functional categories.
data on stocks are often used to detennine income re • Direct investment, which is further divided into
ceipts, consistent classifications of the income com equity capital, reinvested earnings, and other
ponent of the current account, the financial account capital. Direct investment is clas ified primar
of the balance of payments, and the international in ily on a directional basis ( investment in the
vestment position are essential for reconciling stocks domestic economy by residents abroad and by
and flows and for performing a meaningful analysis of nonresidents).
yields and rates of return on external investments.
• Porrfolio invesrment, which include long-term
debt and equity securities, money market debt
instruments, and tradable financial deriva
Standard Classification of the
tives, including currency and interest rate
Balance of Payments swaps.
Main Components
•
Orher invesrmem, such as trade credit and bor
rowing, including lMF credit and loans. Al
A coherent structure for classifying balance of though transactions are classified primarily by
payments transactions facilitates the process of instrument·, they may also be classified accord
adapting the data for various purposes, including an ing to their maturity strucwrc, which is impor
alyzing recent trends and developing projections. tant in the analysis of indebtedness.
The Manual's standard classification system has two •
Reserve assets that are available to meet im
key accounts: the current account and the capital mediate needs. Despite the name, reserve as
and financial account. Their major components are sets in the standard balance of payments ac
presented in Box 4.3. counts are not stocks but changes in gross
In selecting the standard components, the follow external assets. These assets include foreign
ing criteria have been given the greatest weight. exchange (currency, deposits, and securities),
Each item should: monetary gold, SDRs, and the country's re-
100

Box 4.3.
auslflaltlons of the aaa.nce of Payments
1. CUlTent account Credit Debit
A. Goods and service.
Goods Exports Imports
Services
Transporration
Travel
Government services
Other services
B. Income
Compensauon of employees
Investment income
Of which:
interest on external debt
c. C\UTent transfers Credit Debit
2. Capital and financial account
A. Capital account
Capital transfers
Acqmsition/disposal of nonproduced,
nonfinancial assets
B. Financial account
Direcr investment, net
Portfolio n
i vestment, net
Other investment, net
Loans, trade credits
Use of IMF credit and loans
from the Fund
Reserve assets
Monetary gold
SDRs
Reserve position in the IMF
Foreign exchange
Orber dauns
&lun:e: lMF. Balana of PO)-mmts Manual (Washington: lnterrutti"nal M<>netary Fund, i993).
serve position in the IMF.4 Reserve assets are resulting from fluctuations in the exchange rate,
under the effective control of the monetary and the creation of new reserve assets (the moneti
authorities and can be used either directly (to zation of gold or allocations of SDRs) are not in
finance payment imbalances), or indirectly cluded in the data on flows. These items are re
(to regulate imbalances by, for instance, in flected in the international investment position
tervening in fore ign exchange markets to (the data on stocks).5
support the value of the currency). Transac
tions with the IMF affect both reserve assets
and reserve Liabilities (see Box 4.4). Supplementary Information
According to the Fifth Edition of the Manual,
reserve asset flows exclude those that are not at In the standard presentation of the balance of
tributable to transactions. Thus, valuation changes payments, the financial account does not distin-
4Note that nonmonetary gold, possibly including stocks held SMany countries may still be following the Fourth Edition of the
by the authorities for rrading purposes, is treated like any other Manual, which included valuation adjustments and SDR alloca
commodity in rhe balance of payments. tions in rhe dara on flows, and hence in the balance of payments.
101

Box 4.4.
How IMF Transactions Affect the Balance of Payments
Three types of transactions with the LMF can directly affect a country's balance of
payments accountS:
I. Use of IMF resources. When a country purchases foreign currency from the
!MF (for mstance through a stand-by arrangement), It mcreases i ts financ1al
assets (the foreign exchange received) but at the same rime lt incurs a finan
cial liability (its obligation vis-?1-vis the IMF). Thus, a use of IMF credit is
recorded with a positLve sign in the Financial Account under "other n i vest·
menr, loans." lts counterpart is shown with a minus sign as an increase in "re
serve assets."
2. Changes in special dra�(Jing rights (SDRs). SDRs are international reserve
assets created by the lMF to supplement countries' ex1sting assets. If SDRs are
used to acqu1re foreign exchange, to serrle financial imbalances, or to extend
loans, the transactions are recorded in the balance of payments under reserve
asset flows. According to the Fifth Edition, new allocations of SDRs are nor
recorded. They affect only stocks (the net mtemarional investment position
of a country).
3. Changing a "resewe tranche position" in the rMF. TillS arises ftom (i) the
payment of pare of a member's quota in reserve assets, and (ii) the lMF's net
use of the member's currency. Changes m a cmmtry's reserve position in the
IMF, which rnclude a member's creditor position under any arrangement to
lend to rhe lMF, are assets from the country's perspective. Such shifts are
recorded as changes in reserve assets in the frnancial account.
guish between extraordinary and ordinary transac· as a scheduled interest payment is recorded as
tions. As a result, analytical presentations have an income debit in the current account, it is
been developed to highlight items, such as excep offset by a credit in the financial account
tional financing, that may be particularly impor under short-term liabilities.
tant in analyses of the balance of payments. Addi • Debt forgiveness,or the voluntary cancellation
tional data are often prepared for these
by an official crediror of all or part of a debt
presentations. The most important supplementary
specified by a contracrual arrangemenr. l t is
item-exceptional financing-has become in
recorded as an official transfer under the capi·
creasingly important in recent years, especially in
tal account.6
those countries that have experienced debt servic
ing problems. The main exceptional financing
• Equity investment, especially debt-equity swaps.
transactions are as follows: This type of investment involves the exchange
of bank claims on debtors, usually at a dis
• The rescheduling of existing debt, which involves count, for nonresident equity investment in a
replacing an existing contract with one that country.
postpones debt service payments. The main
The next part of the chapter discusses how par·
balance of payments items affected by resched
ticular subgroups of transactions-especially ex
uling are interest payments (shown in the cur
ceptional financing-are regrouped for analytical
rent account) and amortization payments
purposes.
(shown in the financial account). Debt re
structuring may cover arrears on interest or
principal as well as scheduled interest and
principal payments.
6Jf the Jeb£ forgiveness represents a write·off of debt by a pri
• Arrears on debt servicing, which can be either
vate creJiror, it LS recorded not in t:he balance of payment;: bur in
interest or amortization payments that are past the SNA under "the revaluation accoum." See Baltmce of Pay·
due. Interest arrears are treated as if they have mems Manual, Appendix IV (Washingwn: lmernational Mone·
been paid for with a short-term loan-that is, tary Fund, I 993 ).
102

Box 4.5.
Classification of Data Sources
Source Description
International trade statistics (ITS) These statistics measure the quantities and values of goods that add
to or subtract from a nation's stock of goods as a resuh of movement
into or our o( a country. These data are compiled from forms submit
ted (by exponers, importers, or their agenrs) ro customs officials or
directly to the ITS compiler.
international transactions reporting The ITRS measures individual cash t:ransactions that pass through
system (ITRS) domestic banks and the forejgn bank accounts of enrerpnses, noncash
tranSactions, and stock positions. Statistics are compiled from forms
submitted to domestic banks and by enterprises to the compiler.
Enterprise surveys (ES) These surveys collect aggregate data on enterprise acriviry.
Collections from persons and households

. These data provtde information on the circumstances of mdivaduals
and household units (for example, mtgration statistics and surveys of
travelers).
Offictal sources n.i.e. = not tncluded "Official sources n.t.e." are not mennoned elsewhere and include
elsewhere sources tbat measure the activities of the official sector and those
that are by-products of administrative systems.
Parmer country and international These sources provide data available from f
oreign government agen
organuaro
i n ctes and mremational organuanons.
Source: 1MF. Balance ofPaymenrs Compilauon Guide (Washington: lmernacaonal Monetary Fund, 1995).
Data Sources and Special Issues in Weaknesses in Data

Economies in Transition
Data may be unreliable because the information is
As indicated in Box 4.5, there are several sources not collected properly or does not provide complete
of data for the balance of payments, including the coverage. Customs records are often incomplete be
lncemational Trade Statistics (ITS), the International cause border monitoring is not adequate. Enterprise
Transaction Reporting System (ITRS), Enterprise Sur surveys have seen their coverage deteriorate in the
veys (ES), collections from households based on spe initial phases of transition, perhaps reflecting the
cialized statistical surveys, and partner country data. greater autOnomy given to enterprises (statistics for
In compiling balance of payments statistics, private enterprises and individual traders are espe
economies in transition have experienced acute dif cially deficient). The domestic banking system as a
ficulties with the coverage and valuation of transac source of data is also weak. While data from the
tions, in part because the data collected under cen banking system are probably more complete than
tral planning were not designed for preparing a enterprise survey data, they are not necessarily re
balance of payments. Also, since the state con ported to the central bank in a systematic fashion.
trolled the external trade sector, there was no need More importantly, many financial transactions are
to survey private traders. During the transition settled outside the banking system, reducing the
phase, new institutions are being put in place to comprehensiveness of these data.
record all transactions according to international
standards. In the meantime, estimates of the bal
ance of payments for these economies should be Underreporting
used with caution, since they are based on poor
quality data, especially in terms of coverage. There The integrity of data can also be compromised if
are three principal issues to consider when analyzing transactions are not fully reported. Unmeasured capi
these data: the weakness of the sources, the perva tal flight is a major problem in countries where confi
sive problem of underreporting, and the difficulty of dence in the domestic currency is low. If the author
accurate valuation. ities suspect that trade is not being reported, they
103

can often cross-check data on imports (exports) The trade balance is the difference between ex
against data on the exports ( imports) of trading ports and imports of goods. From an analytical point
partners. Cross-checks can also be made with other of view, it is somewhat arbitrary to distinguish goods
domestic data for selected items. (For example, from services. For example, a unit of foreign ex
motor vehicle registrations can be used to assess the change earned by a freight company strengthens the
validity of recorded motor vehicle imports.) Cross balance of payments to the same extent as the for
border transactions such as enterprise arrears have eign exchange earned by exporters of goods.
also been seriously underreported in many countries. Nonetheless, the trade balance is useful in practice,
The available information usually consists only of since it is often a timely indicator of trends in the
arrears notified to banks. current account balance. The customs authorities
are often able to provide data on trade in goods long
before data on trade in services-which takes longer
Valuation Problems to collect-is available.
The current account balance, one of the most use
Valuation practices vary considerably across ful indicators of an external imbalance, is the differ
countries, especially when it comes to the valuation ence between credits and debits of goods, services,
of barter trade. Although in principle transaction income, and transfers.8 As explained below, the cur
prices should be used, some countries use alternative rent account measures the component of the change
measures such as world market prices, enterprise in an economy's net foreign asset position attribut
producer prices (for exports), and domestic whole able to transactions in goods and services.
sale prices (for imports). A current account deficit does not necessarily in
dicate a need for a policy adjustment, since a deficit
may be a temporary imbalance caused by a drop in
export prices. But a current account deficit that
Analyzing the External Position7 persists necessitates policy adjustments, since a
country cannot continue to finance deficits indefi
nitely by borrowing abroad or running down inter
Notions of Balance national reserves.
The overall balance equals the current account
Under the double-entry accounting system, the balance plus all capital and financial transactions
sum of credit items equals the sum of debit items, so that are not considered to be financing items. In an
that the overall balance is zero. How then is it possi alytical presentations of the balance of payments,
ble to have imbalances-surpluses or deficits-in changes in net foreign assets of the monetary au
the external sector accounts? A surplus or a deficit thorities and nonautonomous financing items are
arises when a given subgroup of external transac placed below the line. The overall balance is an im
tions (shown above the line) is distinguished from portant indicator of the external payments position.
another subgroup of transactions (shown below the Deficits are usually financed by a decline in net for
line). If the above-the-line transactions are in eign assets that illustrates the extent to which the
deficit, then the below-the-line transactions are in central bank has been financing payments imbal
surplus, and vice versa. ances (in the case of a fixed exchange rate regime)
One of the primary purposes of the balance of or regulating imbalances indirectly by intervening
payments accounts is to provide an indication of the in exchange markets (in the case of a floating ex
need to adjust an external imbalance. The decision change rate regime).
on where to draw the dividing line for analytical
purposes requires a somewhat subjective judgment
concerning the imbalances that best indicate the
Analyzing the Current Account
need for adjustment. One approach involves distin
guishing a subgroup of items that are autonomously
The key relationship between the balance of pay
determined from transactions that are determined
ments and a country's aggregate income and absorp
by policy.
tion has been discussed in Chapter 2. Ex post, the
current account balance is identical to the econ
7Th�:: discussion in this section is based on concepts derived
omy's resource gap (as measured by the difference
from the Balance ofPayments Manual, Fourth Edition, since many
countries have yet to shift to the Fifth Edition. Moreover, analyt
ical and policy discussions around the world continue to be con
ducted on the basis of the terminology of the Fourth Edition. 8The Fifth Edition of the Manual includes only current trans·
fers in this definition (see Box 4.2).
104

Analyzing the External Position
between economywide saving and investment). sured by the current account balance9-is matched
Thus, by a corresponding change in net claims on the rest
of the world. For example, a current account surplus
S - I = CAB = X - M + Y1+ TR1. (4.1) is reflected either in an increase in net official or
Therefore, any analysis of the current account of private claims on nonresidents or in the acquisition
of reserve assets by the monetary authorities. But a
the balance of payments must consider how
current account deficit implies that the net acquisi
changes in saving and investment come about. As
seen from equation 4 . 1 , a change in the current ac tion of resources from the rest of the world must be
count position (such as an increase in the surplus paid for by either liquidating the country's foreign
or a decrease in the deficit) must be matched by an assets or by increasing its liabilities to nonresidents.
Thus, the balance of payments identity shown in
increase in national saving relative to investment.
Thus, it is important to understand how any policy equation 4.3 can be viewed as the budget constraint
for the entire economy.
measures designed to alter the current account bal
ance (through, for example, exchange rates, tariffs, As we have seen above, the current account re
quotas, or export incentives) affect saving and in flects saving and investment of the government and
vestment behavior. nongovernment sectors. A given current account
The current account also reflects the gap between balance may be consistent with a number of combi
income and absorption in the economy. Thus, nations of private and public saving and investment
behavior. For example, a deficit in the current ac
GNDI - A = CAB. (4.2) count could stem from a private consumption boom
or a sharp rise in investment or it could be brought
As this relationship indicates, improving a coun about by a sharp deterioration in the fiscal position,
try's current account balance requires that re with or without an improvement in private sector
sources be released either through a decrease in do saving. Thus the current account balance per se,
mestic absorption relative to income or through an while an important indicator, is not, by itself, in
increase in national income relative to the rise in dicative of the need for policy action and even less
absorption. It should be noted, however, that equa of the appropriate policy response. It is nevertheless
tions 4.1 and 4.2 by themselves do not provide suf useful as a warning signal-a "red flag"-that alerts
ficient information for an analysis of the current policymakers to the possibility of unsound policy. In
account, because they do not reflect the various in all cases, the need for policy response and the choice
teractions and behavior of agents in the economy. of the appropriate policy will depend on a closer ex
For example, changes in absorption are influenced amination of the source of the imbalance.
by changes in disposable income, so that equation The conventional view that a large current ac
4.2 cannot be used to analyze directly the impact count deficit, whether originating in decisions of
of a change in income on the external current ac the private or the public sector, is a cause for con
count. The two equations nevertheless incorporate cern and appropriate corrective action on the part
the basic macroeconomic framework in which the of the government has recently come under some
current account is embedded. scrutiny in an influential paper. Max Corden 10 ana
By definition, the current account balance is al lyzed the validity of the "new view" of the current
ways matched by net claims on the rest of the account, viz. the view that if the current account
world-in other words, the change in net foreign as deficit reflects entirely the decisions of private
sets of nonbank entities or nonmonetary financial savers and investors, then it should not call forth
flows (MI) and the change in net foreign assets of any governmental policy response. As Corden
the banking system or monetary financial flows noted, while the new view has an apparent plausi
(LlRES). This relationship, which is summarized bility in a world dominated by private capital flows,
below, derives from the balance of payments iden it needs to be heavily qualified on several counts. A
tity, which states that the sum of all credit items private spending boom financed by capital inflows
must be offset exactly by the sum of all debit items. could be based on unsound judgments and could
Therefore, end abruptly. Private external borrowing can have
-CAB = t.FI + t.RES
or 9Given the definition of the current account balance (CAB)
in equation 4.1, it follows that a negative balance is a current ac
CAB + Ml + t.RES = 0. (4. 3) count deficit and a positive one is a surplus for the compiling
country.
lOW. Max Corden, "Does the Current Account Matter?" Inter
Equation 4.3 shows that the net provision of re national Financial Policy: Essa)'S in Honor ofjacques ]. Polak (In
sources to or from the rest of the world-as mea- ternational Monetary Fund, Netherlands Bank, 1991 ) .
105

spillover effects on other domestic borrowers, in ef summary of such information is shown for Poland in
fect, contaminating all debts by residents and there Tables 4.3 and 4.4. Data on trade flows (desegre
fore the risks of such contamination need to be gated by trading partners) are available in the IMF's
watched by the authorities. The changes in the real Direction of Trade Stacisrics. 1 3
exchange rate brought about as a result of the cur With more detailed information on values, prices,
rent account balance also need to be watched care and volumes of desegregated trade, analysts can an
fully by the authorities because they could reverse swer questions such as the following:
themselves and lead to general macroeconomic in
• Is the change in the terms of trade concen
stability. In sum, the macroeconomic consequences
trated in a few commodities that are particu
of unsustainable current account imbalances are too
larly important or whose prices are prone to
severe for the authorities to take a "hands-off" atti
wide fluctuations? In this context, it is often
tude toward such imbalances. As a general rule,
useful to have separate data on energy and
therefore, the "new view," sometimes called the
nonenergy prices, since oil products often have
"Lawson doctrine," is not valid.
significant weight in imports (or exports, in
This framework for analyzing the current account
balance can be used in many s ituat ions indepen
the case of the oil-producing countries). Agri
cultural exporters may focus particularly on
dently of the exchange rate regime. For example, if
developments in agricultural prices and the
the exchange rate is pegged, then the net demand or
volume of agricultural exports.
supply of foreign exchange at the pegged exchange
rate will determine the reserve assets transactions • Are the changes in exports and imports con
(t:J.RES). At the other extreme, under a pure float centrated in particular geographical regions?
and with no official intervention, !:J.RES 0, and so
= This question is particularly important for
CAB = -t:J.Fl. With a managed float, foreign ex the states of the former Soviet Union and
change is bought or sold by the central bank in members of the now-defunct Council for Mu
order to adjust the path of the exchange rate . 1 1 tual Economic Assistance (CMEA), as they
Under a fixed-exchange regime and little capital integrate themselves fully into the world
mobility, countries can afford to run current account economy.
deficits only for a limited time period. If a country
continues to run a deficit beyond what can be fi
nanced through sustainable capital inflows, sooner
or later, expectations about an exchange rate deval
Trade Policies
uation will trigger a foreign exchange crisis well be
fore international reserves are exhausted.L2 This Along with exchange rate policies and the state
suggests that in the absence of capital mobility and of domestic and foreign demand, trade flows are af
under an exchange rate peg, the current account fected in an important way by trade policies, com
must be monitored closely so as to avoid a sudden prising tariffs, import or export quotas, import or ex
speculative attack on a currency and a balance of port subsidies, and other incentives or disincentives
payments crisis. to trade. Trade policy strategies are broadly divided
For a discussion of the issue of how to assess the into two groups, outward-oriented and inward-ori
sustainability of a current account position, see ented. An outwardly oriented strategy is one based
Box 4.6. on trade policies that do not discriminate between
production for the domestic market and exports or
between purchases of domestic goods and foreign
goods. This neutral or nondiscriminatory strategy is
Analyzing the Trade Account
sometimes referred ro as an export-promotion strat
egy. Evidence suggests that most successful export
Changes in the Structure of Trade ing econ01nies (such as those in East Asia) followed
An analysis of trade flows requires information

such as the commodity structure, the geographical 13The quarterly publicarion of che IMF, Oireccion of Trade Sta
destination of exports and the origin of imports. A tistics (DOTS), presents current data on the value of merchan
dise exports "nd imports for member countries. disaggregated ac·
cording to their most important trading partners. Data that are
nor current are supplemented by estimates. The publication in·
liThe above analysis draws on "Selected Issues in Balance of eludes world trade and industrial and developing counrry aggre
Paymenrs Analysis" in the 1993 Manual. gates, as well as data on individual countries. Data are presented
IZSee Paul Krugman, "A Model of Balance-of-Payments in U.S. dollars. converted at period average exchange rates. The
Crises,"journal ofMoney, Oredic, and Banking, Vol. II, No. 3 (Au data in the DOTS are an internationally recognized source o( sta
gust 1979). tistics on trade and are invaluable in analyzing trade flows.
106

Box 4.6.
Current Account Sustalnablllty
A current account surplus implies char the country changed macroeconomic environment. Thus, the
is accumulating net intemattonal assets (broadly de current stance of policies ls "sustainable" if u:s conrin·
fined). Conversely, a current account deficit implies uation in the future does not violate the solvency or
chat i t is running down its foreign assets or accumular budget constraint. ln practice, che notion of current
Lfll! foreign liabilities. Thus. the current account can account sustamability is more complex because ir re
also be defined as che change in che net international flects rhe interaction hetween saving and investment
n
i vesunent posl(ton of a country. When rhis position dec1s1ons of fore1gn investors. An alternative way of
is neganve, the country is a net debtor to the rest of as$essing current account sustainability is to ask
the world. Countries, like indiviuuals, are bound by whether chc current account and the underlying be
an inrertemporal budget constraint; therefore, if che havior of the government and the private sector, if
country is a net debtor, then che economy must run continued, would entail the need for a drastic shift in
c urrent account surpluses m the future with a present poUctes or a crisis (e.g., an exchange Tate collapse or
discounted value equal to irs initial ner debt. This an external debt default). lf the answer is yes, the cur·
ability to generate future current accoum surpluses rent account deficit is unsustainable. The policy
(excluding tnterest pnymenrs) sufficient to repay ex change or the cnsis can be triggered by a domesnc or
isting debt is known as solvency. Thw;, a country is external shock, involving a shift in investor confi
solvent 1f the present value of fu1:ure current account dence, brought abour by a change in rhe1r perception
surpluses is at leasl equal to its current external debt. of the country's ability or wiUingness to meet its ex
The notion of solvency, while important, is not ternal obligations. I
easy to assess m practice, because Lf large enough fu
ture currem account surpluses are assumed, any path
of current account deficits can be consistent with in l$ee Gian Maria Milesl-Ferreni and �af Raz.in, "PersiS•
tertemporal solvency. A more restricted notion of sus tenr Current Account Deficits: A Warning SignalI'" /mer
tainability can be defined by assuming a continuation national }Oitrno.l of Fi!lllnce and Economics,
Vol. I , No. 3
of present polic1es into the future under an un- (July 1996).
broadly neutral trade policies.l4 By contrast, an in and-ready assessment of the neutrality of the regime
wardly oriented trade strategy is one that uses trade needs to be made. It is important to take into ac
and industrial incentives that favor production for count the four principal factors that determine the
the home over the export market. overall structure of incentives for exportables: ( i )
Measuring the extent to which a trade policy the degree of any exchange rate overvaluation; (ii)
regime-involving numerous tariffs, quotas, and ex the use of direct controls on trade such as quotas
port subsidies-departs from the idea of neutrality is and import licenses; (iii) the effective rate of protec
a complex task. Several different indicators of the tion; and ( iv) the use of export incentives, including
bias of a trade regime have been developed in rhe lit direct and indirect export subsidies. I S
erature on the analysis of trade policies (see Box I t i s important t o understand the extent ro
4. 7). Quantitative restrictions on trade and a com which the volume of trade has been affected by
plex structure of tariffs are still common in many policy, both domestic and foreign. Certain domes
transition economies. Often, however, adequate in tic policy measures in particular influence the
formation to construct indicators of bias in the trade course of trade. Reductions in quotas give enter
policy regime may not be available, and a rough- prises and the private secror increased autonomy to
import and export. Changes in taxes on traded
goods and services (such as reductions in import
14For a comprehensive discussion of the issues in assessing a
country's trade policies and a synthesis of the litenuucr on the
duties, the lifting of export taxes, and domestic
empiric�d evidence on trade policy regimes, sec Vinod Thomas price liberalization) encourage trade. A stable ex-
and John Nash, Best Practices in Trade Policy Reform (New York:
Oxford University Press, 1991 ); for a brief summary of the book's
conclusions, see Vinod Thomas and John Nash, "Reform of 15For a fuller discussion of the analytical and policy issues in
Trade Policy: Recent Evidence fTom Theory and Practice," The trade policy, see Max W. Corden, Protection and Uberalizarion: A
World Bank Hesearch ObseYver, VoL 5, No. 2 (July 1991 ). For a Review of Analytical Issues," I M F Occasional Paper No. 54
discussion of the inward vs. outwarr-looking strategies, see (Washington: International Monetary Fund, 1987), and Sebast·
Jagdish N. Bhagwati, '"Export-Promoting Trade Strategy: Issues ian Edwards, "Openness, Trade Liberalization. and Growth in
and Evidence," The World Bank Research Observer, Vol. 3. No. I Developing Counrries," Journal of Economic Literawre, Vol. XXXI
(January 1988). (September 1993).
107

Box 4.7.
Meuurtnc Neutr•llty of tr•de Realmes1
A widely used measure of d1e bias in trade regi mes is based on the notion of effec
tive protection. The trade bias (tb) JS defined as:I
Average effecTive rate of protection for import.ables {1)
th :::
Average effective rate of protection for exportables
where the effective race of protecrion (ERP) for any good captures the protection ac
corded to the value added n i its production and not to the finished product. l L is
given by
v'-v
ERP= (2)
v
where
v ' = Value added at domestic prices including tariffs or subsidies; and
v = Value added at world prices.2
It is important to nore that
• A [b ratio of 1 1mplies neutrality while a ratio greater than one implies that 1m
portables have on average higher protection (nominal or effective as the case ,
may be) than exportables. This implies a bias in favor of import substitution. A
ratio of less than one implies a bias in favor of export promotion.
• The use of any aggregate measure of protection for the economy as a whole can be
misleading smce the effective rate of protection averaged across different industries
can be zero (i.e., implying no protection) whi le in fact the rates of protection vary
widely across mdusrries. Full neutrality of a trade regime must therefore require no
significant variation across the tradable goods industries.
'This box draws on the discussion of the neutrality oftrade regime.• n i World Development Re·
pon 1987 (Washsngton: Oxford University Press for the World Bank, 1987).
11f v· and v stand for the domesric and world prices of a good, then the same formula as in
equation 2 would y•elJ the nomintll rat< ofprotection, and a simpler indicator oftrade orientation
can be constructed usinl! nominal rather than effective rates of protection of irnportables and
exportables as shown In equarion 2.
change rate regime promotes confidence in an demand for traded goods, but macroeconomic analy
economy's stability. sis focuses primarily on domestic and foreign de
Policy changes in countries that are primary trad mand and the relative prices of traded goods, which
ing partners can also significantly affect trade. are in tum affected by changes in the exchange rate.
Changes in quantitative trade restrictions and tariff Analyzing demand in the domestic and principal
barriers in partner countries encourage exports. Spe foreign markets throws light on the factors affecting
cial trade agreements, especially regional trade the volumes of imports and exports, respectively.
agreements, facilitate cross-border trade within a Demand in the domestic economy can also influ
specified geographic area. ence a country's exports-for example, by making
An important objective in analyzing trade devel exporting attractive in a period of slack domestic
opments is to identify those policy changes that demand.
have had a significant impact on trade movements. The most critical influence on trade flows in the
In macroeconomic analysis, there is a trade-off be long run may well be price competitiveness, which
tween obtaining the richer understanding a detailed generally is measured by the real exchange rate or
analysis offers and identifying the main structural the nominal exchange rate adjusted for changes in
trends that are most important for projecting aggre relative unit labor costs at home as compared with
gate trade. Merchandise trade flows are influenced those in trading partner countries (Box 4.8). I n
by a variety of factors that affect the supply of and transition and developing economies, where data on
108

Box 4.8.
Assessing the Exchanp Rate1
Assesis ng the appropriateness of a country's exchange 3. The current account
rate 1S a complex undertaking that requires taking into
The size of the present and prospective levels of the
account a number of factors. The following indicators
current account balance are a maJOr criterion for judg
are often considered relevant to this assessment.
ing the appropnateness of the exchange rate. Under a
rate
fixed exchange rate regime, if projections of the cur
1 . The real exchange
rent account deficit show that it cannot be financed
The level of the real exchange rate is frequently by drawmg down reserves or through continuous bor·
used as an indicator of the need for exchange rare ad· rowing, a devaluation will eventually be necessary.
justment. A measure of the real exchange rate based This critenon suggests that a devaluation may be ap
on the ratio of unit labor costs (wage costs adjusted f
or propriate even if the current accoum is not at present
the produclivuy of labor) ar home to those tn trading in deficit. Lf, however, a current account deficit is tem
partner countries or, In the absence of unit labor co�t porary, a devaluation may not be needed. The current
n
i dexes, an mdex of relative consumer prices, is the account balance may not always be a good indicator
most appropriate real exchange rate indicator. I t is because it reacts relatively slowly to changes in the
common to compare the current real exchange rate real exchange rare.
with the real exchange rate at some date in the past
when the current account was considered to be m a 4. The parallel market exchange rate
satisfactory condition.
Many countries have parallel or black markets for
2. Foreign exchange reserves

foreign exchange. The exchange rate prevailing in
these markers often provides a reasonable indication
Falling official reserves can indicate an inappropri of the degree of disequilibrium in the official exchange
ate exchange rare. The fall m reserves can eflect
r ei· rate. However, as these markets can be thm and sub
ther a current account deficit or a movement of funds ject to the influence of a few dealer>, caution is needed
out of the domestic currency on the capttal and finan· in interpreting dus indicator. A very large discount on
cia! account, suggesting that residents and foreigners domesric currency in rhe parallel market, however, is
lack confidence in the country's policies. However, be oft en an n
i dicator of an overvalued exchange rare.
cause f ore1gn exchange reserves can be augmented by
borrowmg, and central banks can make reserves look 1Based on Stanley Fischer, "Dev11luation and lnflarion, "
larger than they are, movements m fore1gn assets may The Open Eronomy, EDI Senes tn Economic Development
nor be a good indicaror of the need co adjust the ex· (Washington: Economic Development ln,tirute ofthe World
change rate. Bank, 1992).
unit labor costs are generally not available, a real ex Services, Income, and Transfers
change rate based on relative consumer prices often
serves as a useful proxy for a cost-based measure of Service transactions are a heterogeneous group,
competitiveness. l t is useful to compare the prevail comprising 1 1 different categories in the standard
ing exchange rate with the exchange rate during a presentation of the balance of payments. The major
period in the past when the trade or the current ac subgroups include transportation and travel (credits
count was considered to be in broad balance.l6 As reflecting tourist receipts and debits reflecting
noted above, changes in the trade policy regime, in spending abroad by residents), insurance, financial,
cluding tariffs and quotas, can also have a major in and consultancy services.
fluence on trade flows. And in many economies, it is Income covers both labor income and financial
also important to consider nonprice aspects of com income flows. Labor income refers to earnings of
petitiveness such as quality, timely delivery, and nonresident workers. Financial income (or "invest
packaging, particularly when exporters are attempt ment income, net") represents receipts from and
ing to break into new markets, as they often do in payments on financial assets and l iabilities. For in·
transition economies. debted countries, interest payments due on exter·
nal foreign debt often constitute the largest in·
come subitem. This negative item is also one of the
two components of debt servicing. The important
16The equilibrium rate may change over time because of
changes in economic fundamentals such as the rates of produc·
credit items are interest earned on foreign exchange
rivity growth, technological progress, terms of trade, and the pol· reserves and, for creditor countries, interest received
icy regime (including trade barriers and capital controls). on loans.
109

Changes in generaL government current transfers are cussed above, an important policy issue a current ac
largely dependent on decisions made by donor count deficit raises is whether the government can
countries and therefore can be less predictable. The service the associated change in the net foreign in
main component of private current transfers is usu vestment position without modifying its economic
ally workers' remittances, which reflect the number policies-for example, by reducing absorption-or
of workers living abroad permanently and the in by bringing about changes in interest or exchange
centives for transferring funds, particularly expecta rates. In general, servicing the debt is easier if capi
tions concerning the exchange rate and the taxa tal inflow is used to increase productive capacity. If a
tion ofsuch income.l7 spontaneous financial inflow does not result, the
To the extent that a country modifies its restric government must adjust its policies to attract pri
tions on service transactions by liberalizing the vate investment or, alternatively, seek borrowing
amounts of foreign exchange provided for foreign abroad. If it does neither of these things, it will need
travel abroad, it is appropriate to identify the impact to draw down its international reserves. If the re
of such policy changes. IS serves have been already depleted, the country may
be forced to endure an unplanned adjustment in its
absorption. It is far better to have a planned, orderly
adjustment program that can forestall the haphazard
The Capital and Financial Account adjustment forced on a country when foreign fi
and External Debt nancing is not available.
As we have seen, a current account deficit must

Debt Stocks and Debt,Creating Flows
be financed by increases in foreign liabilities or by
declines in foreign assets. These financial flows con
The stock of gross external debe can be defined as
stitute the capital and financial account of the bal
ance of payments.l9 This section examines these the amount of outstanding contractual liabilities to
flows (excluding movements in net reserve assets). nonresidents. The amount of debt outstanding cov
ers only that part of a loan that has actually been
The capital and financial account records an econ
omy's net foreign borrowing and capital transfers. disbursed. Any undisbursed loan commitments are
The nonmonetary financial flows (t.Fl) that make up not part of gross debt and are not recorded in bal
the account are the sum of foreign direct investment ance of payments data until disbursement takes
(FDI) and net foreign borrowing (NFB) and, to place. The term contractual is also an important part
gether with monetary financing (t.RES), equal the of the definition of gross debt. Debt instruments
current account balance.20 Thus, the sources of cur such as long-term loans, bonds, short-term loans,
rent account financing can be summarized as and trade credits involve contractual obligations to
pay interest (either at a fixed or variable rate) and
CAB + FDI + NFB + t.RES = 0 . (4.4) principal. Incurring these obligations adds to a
country's gross debt.
The financial flows associated with a current ac
Within the capital and financial account, most
count deficit involve a reduction in the net foreign
flows are debt creating. There is therefore a link be
asset position of the economy. Therefore, as dis-
tween the stock of gross debt and the flows recorded
in the capital and financial account. The major
links are captured in the following equation as
11For balance of paymcms recording purposes. remittRnces
from workcrs living abroad for more than 1 2 months (classified D, = Dr-t + Br-Ar (4.5)
under "current Hansfers'') are distinguished from labor income
earned by workers living abroad temporarily for less than 12 where
months (classified under "compensation of employees").
ltrfransponation services will be underestimated tO the extent D1 Stock of outstanding and disbursed debt at
thar rrade is underestimated; the presence of strict controls on the end of period
foreign Havcl may lead ro parallel marker activity (and hence un
B1 Disbursements of new loans during time
derrecorJing); other services may be underreported owing to in
adequate surveys. period t
19ln countries where the Fourth Edition of the Manual is still Amortization of debt during time period t.
A1 =
being used, the major counterpart of the current account may be

referred to as the "capital account." The Fifth Edition of the This equation states that debt at the end of a
Manual recognizes that the tenn "capital account" is imprecise, given year is broadly equal to debt at the end of the
since most transactions are purely financial, and thus renames it
the "capital and financial account."
previous year, augmented by net debt-creating
ZOSee footnote 1 6 in Chapter 5 on Monetary Accounts and flows-that is, by new disbursements minus amorti
Analysis. zation (repayments of principal).
110

The Capital and Financial Account and External Debt
Equation 4.5 can be only a rough approximation, and services or gross domestic product (GOP). But
for many reasons. First, debt stocks are subject to such indices do not capture the impact of debt relief
valuation adjustments owing to the fact that debt is or of lower interest rates on the cost of servicing the
contracted in various currencies. The stock of debt, debt. Conceptually, analysts should compare the
measured (for example) in U.S. dollars, may change present value of future debt servicing obligations
because rhe value of debt denominated in another with the present value of future export receipts. This
currency (such as the deutsche mark) changes in approach requires a certain amount of information
dollar terms when the dollar depreciates or appreci and can be sensitive to the discount rate used ro cal
ates against that currency. Second, interest is some culate the present value. In practice, then, three ra
times capitalized, adding to the stock of debt any tios are used co analyze the debt burden:
unpaid interest obligations (interest arrears). Third, •
the ratio of scheduled debt service payments to
outstanding debt is sometimes canceled or written
exports of goods and services, which measures
off.
the impact of debt servicing obligations on the
lr is ck:ar from the above discussion that debt-cre
foreign exchange cash flow;
ating flows contained in the capital and financial
• the ratio of scheduled (or actual) interest pay
account of the balance of payments should be
viewed in the context of a country's gross external ments to exports of goods and services, which
indebtedness.21 measures the current cost of the debt stock;
and
• total outstanding debt as a ratio of GOP (or of
Indicators of External Debt exports of goods and services), which reflects
the long-term sustainability of the debt burden.
When a country borrows abroad, it must "service"
The World Bank's debt reporting system uses crit
the loan by paying interest at a rate specified in the
ical values of two debt indicators to classify coun
loan contract and by paying back principal (amorti
tries according to the severity of their indebtedness:
zation) over an agreed time period. The interest
the ratio of the present value of total debt service
component is found in the current account (under
(PV) to GNP, and the ratio of the present value of
"income, debits"), while amortization is recorded in
total debt service to total exports.22 The indicators
the capital and financial account. In general, coun
are based on the present value concept rather than
tries that have borrowed heavily abroad in the past
the value of scheduled debt service in order to ac
must devote a sizable portion of their export receipts
count for differences in the terms of the loans. A
to servicing foreign debt, limiting the amount of for
country is regarded as severely indebted if the pre
eign exchange left for financing imports. In assess
sent value of total debt service to GNP exceeds 80
ing the cost of debt servicing, it is useful to relate
percent or if the present value of total debt service
these costs to total exports of goods and services.
to exports exceeds 220 percent.
Measuring the debt burden raises a number of
Although these ratios may be helpful in signaling
complex issues. Conventionally, the debt burden is
possible debt problems, the economic circumstances
calculated as the stock of debt in relation co an
of countries with similar ratios may differ. These ra
index of available resources, such as exports ofgoods
tios should therefore be used with caution and only
as a starting point for a country-specific analysis of
l iGross debt is defined in rcrms of lialJilities. A concepr of net debt sustainability. A full assessment of a country's
debr can he derived by subtracting the stock of extemlll assets debt position must take into account the overall
from gross liabilities. Although such a notion might be useful in macroeconomic situation and balance of payments
counrrie> thm are both debtors and creditors (for instance, Rus prospects. Box 4.9 discusses the sustainability of ex
sia), rherc are a number of practical difficul ties in defining net
dcbl. Currcndy, there b no inr.emationally accepted definition of
ternal debt.
net debt, l:1rgely because (i) ir is unclear which asse ts should offset An issue of increasing concern has been the fis
liabilities-for example, should only o(ficial assets be used, or cal burden of external debt. In many countries
should bank and nonbank assets also be included; (ii) a ncr debt with external debt difficulties, scheduled debt ser
total would mask important differences in rhe maturity structure,
currency composir ion anJ risk features of liabilities and assets;
vice payments absorb a major proportion of gov
(iii) debt reporting systems may not record all gr<>ss flows in assers ernment revenues, reducing the government's
,
and liabilities; and (iv) l inking debt servicing ro net debt may dis room to maneuver in terms of fiscal adjustment.
guise the seriousness of a coumry's debt problem if assets broadly External debt sustainability is therefore closely
offset liabilitie>. For example, the quality of credit owed by Russia linked to fiscal sustainability.
differs from the quality of credit owed to Russia. It would there
fore be difficult to interpret the meaning of net debt service and
net debt indicatos. r For these reasons, in this chapter, "total debt" 22 See \Vc>rld Debt Tables, 1994-95, Vol. I (Washington: World
will always refer to gross debt. Bank, 1994).
111

4 BALANCE OF PAYMENTS ACCOUNTS AND ANALYSIS
Box 4.9. Box 4.10.

lbe Sustainability of External Debt Direct Foreign lnvesbnent1
A country's external position is consadered sus Foreagn dtrcct mvestmenr takes place when a
tainable if the government can be expected to meet firm m one country creates or expands a subsidiary
tts external obligations in full without rescheduling in another. The distinctive fearure of this type of
its debt, seeking debt relief, or accumulating arrears capital mflow IS that tt mvolves nor only a transfer
over the medium or long term. The key indicators of resources. but also the acquisition of partial or fuU
lor assessmg sustainabUity are: control. Foreign direct investment is valued by
• The ratio of scheduled debt serv1ce ro exporrs of countries nor only because it does not create a debt
obligation for the receiving country, but also be
goods and services;
cause it s
i an important vehicle for the transfer of
• The exremal fl.nandng gap that remams after technical and managerial sktlls from abroad. The
allowmg f or expected inflows in the form of benefits of such technology transfers are often seen
grant receipts, loan disbursements, and any as outweighing rhe cap1tal flow itself.
commercial capital flows; and
• The ratio of the net presenc value (NPY) of the This thinking explains why it is not only devel
opmg and transition economies that are keen co im
debt to exrorts. The NPV s i deftned as the dis
plement policies chat attract foreign investment
counted present value of all future debt service
flows, bur also industrial countries. Ir should be
paymems due on extsting external debt, relative
noted thal such investment inflows do give rise co
to the discounted value of rhe expon receipts.
some outward resource transfers when the profits
A country's external debt posttion is generally and dtvidends on the investment are repatnated.
considered sustainable over rhe projection period if However, these flows depend on the profirahility of
scheduled debr service payments decline to 20-25 rhe mvesrmem and are nor binding like contractual
rercent or less of exports of goods and services, tf fi debt service payments. Multinational firms are the
nancing gaps arc ellnunatt:d, and if the ratio of the main veh1cles through which the bulk of foreign di
NPV of debt-co-exports declines to below 200-250 rect investment takes place.
percent of exports.
The concept d sustatnability differs tmponancly
from that of medium-term external viabihry, which
precludes recourse co further exceptional financing
'For an analysis of the role of foreign direct mv�lrnenr
tn tntemauonal capi tal flows, se� Edward M. Graham,
(such as the use of IMF resources). [f exceptional fi
"Fore1gn Direct Investment in the World Economy," IMF
n<mcing I S necessary, a country's external rosition Working Paper 95/59 (Washington: international Mone
cannot be regarded as viahle. tary Fund. 1995}.
Direct Foreign Investment and Capital Flows tal markets, which indicates that foreign investors
have confidence in the financial condition of the
Direct Foreign Investment country issuing these debt instruments. Besides se
curities, portfolio investment also includes relatively
When i nvestors acquire equity in a domestic en newer money market debt instruments ( including
terrrise, there are no contractual obligations. Be tradable financial derivati ves) that allow debtors to
cause d irect foreign investment does not add to ex hedge against exchange rate or interest rate risks.
rerml l dehr, it is termed " non-debt-creat ing" (see In addition to examining liabilities by type and
Box 4.10). In this sense, it contrasts with all other maturity of debt instruments, it is also helpful to an
liabilities of the financial account, which either add alyze trends in stocks and flows by institutional sec
to gross dcht (in the case of inflows) or subtract from tor.Z4 l n particular, the general government sector
it (in the c<�se of repayments such as amortization ) . and the nongovernment sector (which can be split
Within the debt-creating flows, it is useful to iso
larc porcfnlio investment, which includes debt and
equity sccuriries.23 These are increasingly important 24The definition of debt does not mention the loan maturity,
to countries that have access to international cap i-
or loan repayment periods. Some liabilities, such as bridging
loans, have very short repayment periods and can exhibit volatile
behavior, but flows of long-term liabilities are more predictable.
For this reason. stocks and flows of short-term liabilities (which
!1An inv<.:stor acquiring equit)' securities as portfol io i nvest are defined as maturing in less than one year) are usually distin
llll'l1twill have no significam influence over the operation of guished from medium and long-term liabilities with repaymenr
cnt�.:rprisc>. periods of more rhan one year.
112

Reserves and Financing
between banks and enterprises) are analyzed sepa foreign assets minus foreign liabilities of the han king
rately, since they have separate determinants. Gov system.
ernment flows are determined mainly by budgetary
needs. The net financial flows of the government, as
recorded in the balance of payments, should be Using Reserve Assets to Finance a Deficit
identical to the external financing flows of the bud
get ( ignoring any valuation adjustments resulting Fundamentally, the appropriateness of using re
from exchange rate movements, since a country's serve assets to finance a current accounr Jeficit
budget is presented in local currency terrns).Z5
rather than adjusting domestic policies clepenJ on
the extent to which the deficit is regarded as tempo
rary or reversible. The size of a country's reserve as
Capital Flows sets and its ability to borrow to supplement these as
sets limit the extent to which reserves can be useJ
In contrast, flows of private capital respond to tO finance a deficit. ln the case of temporary hocks,
yields on assets held domestically and abroad. With such as poor harvests, reserves can be a useful hock
the growing integration of world financial markets, absorber, allowing for a temporary excess of absorp
and as more economies develop domestic financial tion over income. Reserves can also be used to fi�
market instruments, a growing volume of private nance a seasonal swing in the current accounr bal
capital flows should be seen as normal and desirable. ance. l f the current account imbalance is expected
However, in many transition economies, domestic to persist, however, adjustment measures will be
financial market instruments are underdeveloped, necessary. I t is important to note that in practice, it
and the outflow of private capital (often not is also difficult to judge ex ante whether a current
recorded in official statistics) reflects a lack of confi account deficit is temporary or permanent. It may
dence in the domestic economy, especially in the therefore be prudent to initiate some adjustment
presence of high inflation, a depreciating exchange measures in conjunction wi.th a drawdown of re
rate, and the expectation that yields from domestic serves (Box 4.8). Because reserve levels frequenrly
financial assets will be inferior to the risk-adjusted function as signals to foreign investors indicating
yields from foreign financial assets (Box 4 . 1 1 ) . the policy and investment climate in the country
(including the need for an exchange rare change),
an adequate reserve level is important in su raining
investors' confidence.26
Gross and Net Reserve Assets Recording Changes in Reserve Assets
The use of gross reserves has traditionally been With any definition of the overall balance, tt 1s
the main source of financing balance of payments important to be clear about which transactions are
deficits and for supporting an exchange rate peg. In included above the line and which appear below rhe
today's world of floating exchange rates, however, line. From an analytical perspective, it is useful to
many countries find other means of financing im group all autonomous transactions above the line
balances, including foreign borrowing or changing and to place below the line transactions authorities
domestic policies. Thus, as they are acquired and control that can be used to finance autonomous
used, gross reserve assets do not necessarily reflect flows. However, there are practical difficulties in
the size of a payments imbalance. The monetary au distinguishing autonomous and policy-controlled
thorities may also have other motives for holding re transactions; for instance, two extremes of below
serves-for instance, to maintain confidence in the the-line classifications can be distinguished. One in
domestic currency and economy, to satisfy domestic cludes only movements in gross reserve assets held
legal requirements, or to serve as a basis for foreign by the monetary authorities; the other, all tran ac
borrowing. Analysts should keep these considera tions of the domestic banking system.
tions in mind in examining the reasons for changes Under the first option, if changes in gross reserve
in reserves. Net foreign assets are calculated as gross assets are taken as the sole source of financing rhe
26See Paul Krugman, "A Model of Bal�ncc of PnymciH>

lSCemral governments in many countries often borrow not on Crises,''Journal o{Money, C>·edit, mul Banking, Vol. II, No. 1 (All
their own account but to on-lend to public enterprises. gust 1979).
113

Box 4. 1 1 .
Capital Flows and the Balance of Payments
In recent years, capital t1ows have played an increas • Capital inflows can induce growth in rhe money
ingly important role in the balance of payments o( a supply and cause domestic n
i flation to nse if the
number of countries. Capital flows, defined as the in monetary authorities intervene in the foreign ex
crease in net international indebtedness o( an economy, change marker to buy the excess supply of foreign
are measured by the balance m the capital and f'mancial exchange. These inflarionar)' conse1.1uences can
account of the balance of payments (excluding reserve be avoided if the intervention is literilized.
assets). In recent years, after a period of capital outflows • If the monetary authorities do not intervene, the
and debt ervicing
s difficulties, a number of developing capital inflows can cause the exchange rate of the
countries in Asia and Latin Amenca and some transi domesttc currency to appreciate.
tion economies m Europe have begun to experience siz
• Capital tnflows can finance a temporary boom in
able capital inflows as nonresidents begin to invest in
consumption, which will eventually lead to a cur
rhe economy and the flight of restdent's capital ts re·
versed. These capital inflows have helped co finance back in absorption in order to service rhe accu
larger current account deficits associated with higher mulated debr.l
tmporrs and higher economic growth. It also permttted
buildup of reserves. Despite these benefits, the sudden
surges of these si.:able mtlows have also caused some
concern for economic policymakers, because of rhe dif
ficulties Lhat large scale inflows of capital can cause for 1See Gulilcrmo Calvo, Leonardo LeiJcnnan, and Cannen
Remhart, "The Capital Flows Problem: Concepts and Is·
-
rhe managem�:nr of macroeconomic policy (see next

chapter on Monetary Accounts and Analysis). There sues,'' PPAA/93/10 (Washington: lntemarional Monetary
are four important concerns:
FunJ, 1993); and Guillermo Calvo, Ratna Sahay, ami Carlo�
V�gh, "Capital Flows in Central and Eastern Europe; Evi
• Capital inflows can be temporary and hence dence and Policy Options,'' IMF Workin� Paper 95{57
qutckly reversed. (Washington: lnrernarional Monetary Fund, 1995).
above-the-line transactions, then any liabilities of the Accounts and Analysis provides a fuller discussion
central bank are necessarily classified above the line. of the link between the swings in total net foreign
However, some central bank liabilities are special, in assets and the domestic money supply.
that they allow gross reserves ro be reconstituted. For Analytically then, the most useful definition of the
example, if a central bank decides to use IMF credit overaLL balance places all transactions that are under
(recorded as an increase in liabilities), then gross re the direct control of the monetary authorities below
serve assets need not be run down. Another example the line. These transactions include changes in gross
of financing that augments reserves is borrowing reserve assets held by the monetary authorities, and
abroad from a line of credit available to the central easily identified fluctuations in central bank liabili
bank. It is therefore usual, in analytical presentations ties used to finance the balance of payments.
of the balance of payments, to include such reserve It is important to remember that the overall bal
related liabilities below the line. Thus, changes in net ance is nor necessarily detennined by the trade and
foreign assets are grouped below the line. capital accounts. Indeed, as discussion of the mone
The second option-which is based on a much tary approach to the balance of payments in Chapter
broader definition of net foreign assets-includes all 5 makes clear, the opposite may be tnte. An increase
transactions of the banking system below the line. in the demand for a country's currency relative to
However, commercial banks are usually free tO other currencies may be reflected in an overaLL bal
choose their foreign asset and liability structure, and ance of payments deficit, in tum causing shifts in the
such flows are driven Largely by market forces (that current as well as financial and capital account bal
is, are autonomous transactions). It is only when the ances. More generally, the changes in assets and lia
central bank has direct and effective control over bilities of the banking system are closely linked to the
commercial banks and foreign assets that these as overall balance of payments, and this Link underpins
sets can be considered for inclusion below the Line. the monetary approach to the balance of payments.27
Including changes in net foreign assets of the bank
ing system below the line provides a direct Link be 17Sce Theoretical A.spew of the Design of Fwlli-Sut>t>orced Adjust
tween balance of payments transactions and domes men! Programs, IMF Occasional Paper No. 55 (Washington; In·
tic liquidity creation. Chapter 5 on Monetary temarional Monetary Fund. 1987).
1 14

Reserve Adequacy Gross intemational

....
.......:. �...:..
Gross intemarional rese
rves
resen1es coverage in = _______
tem1s of months Monthly impon bill

Although conventionally, the level of reserves
has been assessed in relation to the projected total
A general rule of thumb has been that gross re
import bill of goods and services, more recent indi
serves should be equal to at least three months of
cators of reserve adequacy have focused on finan
imports. Countries with six months of import cover
cial vulnerability.ZS Whichever indicator of foreign
age enjoy a relatively comfortable reserve position.
exchange adequacy is used, it is important to keep
However, this rule of thumb evolved during a period
in mind that the nature of the exchange rate
when controls on international financial flows were
regime plays a part in determining the adequacy of
much more extensive than they are today. There
the reserve level. Traditionally, as we have seen,
fore, in assessing the appropriateness of the reserve
the presumption has been that a country with a
level, analysts should keep in mind a number of fac
fixed exchange rate needs larger reserves than a
tors, including ( i ) the openness of the capital and fi
country with a floating exchange rate regime, since
nancial account; (ii) the stock of highly liquid lia
reserves are the only cushion against shocks. How
bilities; (iii) the country's access to short-term
ever, in practice, if confidence in the authorities'
borrowing facilities; and (iv) the seasonality of im
ability to maintain supporting policies is high, a
ports and exports of the country.
country with a fixed exchange rate may not require
The average level of import coverage, based on
large reserves to defend its currency. For example,
actual data for a sample of lMF members (excluding
the Polish authorities were able to maintain a fixed
those whose external position is considered diffi
exchange rate in the early stages of their reform
cult) was 4.5 months of imports in 1994, appreciably
program in 1991 despite only a moderate level of
above the three-month rule of thumb. However, the
reserves, because their economic policies com
coverage level for the Baltic countries, Russia, and
manded a high degree of confidence in financial
the other states of the former So·.,.iet Union has
markets. Even with a managed float, a lack of cred
been considerably lower, falling below the three
ible economic policies can quickly lead to capital
month benchmark in many cases.
flight and may deplete reserves, even if the author
ities allow the exchange rate to depreciate. Thus,
at a fundamental level, the credibility of the au
thorities' economic policies and the confidence Broader Concepts of Reserve Adequacy
that market participants place in them are key to
assessing the adequacy of reserves. Indeed, it is In recent years, as world capital markets have be
credible policies that allow the authorities to aug come increasingly integrated and the size and
ment reserves by borrowing abroad at favorable volatility of private capital flows have risen sharply,
terms; such borrowed reserves can potentially pro the traditional notion of reserve adequacy (three
vide a major supplement to the country's own re months of import coverage) is being reassessed by
serves. In the case of Poland, the stabilization fund policymakers as well as economic analysts. This re
provided by the IMF played an important role in assessment has been prompted, in part, by the speed
boosting the credibility of policies, although the with which even a sizable level of international re
fund was never used. serves can be depleted in the face of a crisis in confi
dence and the associated sudden capital outflow, as
was demonstrated in Mexico in late 1994 and early
1995.
Reserves in Relation to Imports
The debate on reserve adequacy in a world of
volatile capital flows has focused on indicators of fi
This indicator measures a country's gross interna
nancial vulnerability. In this context, it has been noted
tional reserves in relation to its monthly import bill
that analysts must consider not only traditional flow
(annual import bill/12).29 Thus,
variables (such as the external current account bal
ance and the fiscal balance) but also stock variables
(such as the ratio of domestic money supply, ex
28Reserves provide an insurance againsr unforeseen changes in
total foreign exchange outflows from the country. Therefore, a pressed in foreign currency, to the foreign currency
measure of expected payments is often considered the appropri value of international reserves).JO The rationale be-
are reference base. For example, if debt service payments are ex·
peered ro be heavy, rhey can be added ro the projected imports of
goods and services.
29'fhe indicawr can also be expressed in terms of weeks of im JOSee Guillermo Calvo, "Capital Flows and Macroeconomic
ports, or in extreme cases, days of imporrs, by adjusring the im Management: Tequila Lessons," lmematimwl Journal of Finance
port bill accon.lingly. and Economics, Vol. 3 (July 1996).
1 15

hind this thinking is that international reserves are •

debt/equity swaps (exceptional direct invest
used to back domestic currency in the event of a crisis ment).
in confidence. Reserves also need to be considered in Exceptional financing is not autonomous, since
the context of the maturity structure of public sector governments are often involved in negotiations to
liabilities. An excess of short-term liabilities in for arrange it, especially in debt-burdened countries.
eign currency increases a country's financial vulnera Nor is it likely to be repeated year after year in pre
bility. The degree of openness of both the economy, dictable amounts. For these reasons, and since ex
as reflected in the ratio of external trade to GOP, and ceptional financing is controlled in part by the gov
the external capital account is also important. It ernment and in part by foreign creditors, it is usual
helps to determine the extent of a country's exposure to isolate such transactions below the line in analyz
to risk from volatile capital flows and consequently ing balance of payments developments-that is, to
affects the need for a larger reserve cushion to absorb consider them as a special type of financing that will
unanticipated shocks. not be repeated on a regular basis.J 1
In some cases, reserve holdings are related to the
variability (variance) and/or volume of foreign ex
change transactions. While these measures on their
own are not good indicators of reserve adequacy, Developments in the Balance of Payments
they are useful in assessing the need for reserves in
and the Exchange Rate
countries with mature financial systems. A measure
of reserve adequacy defined as the mtio of reserves tO
the monetary base has been found useful for countries Since the inception of economic reform in 1990,
desiring to shift to a fixed exchange rate in the form Poland's foreign trade has expanded dramatically,
of a currency board. The rationale behind this indi with total foreign trade as a percent of GOP rising
cator is that if gross international reserves are suffi from an estimated 18 percent in 1989 ro 38 percent
cient to cover base money, they provide a bench in 1994. This expansion is also associated with a
mark against which the adequacy of reserves to shift from trade with markets of the former CMEA
defend the exchange rate can be measured. to markets in Western Europe and has been accom
It should be noted that while the three-month panied by a gradual widening of the inflows of capi
import coverage and the monetary base rules tend, tal, which accelerated rapidly starting in late 1 994.
on average, to indicate that broadly similar levels of If the large volume of estimated unrecorded trade is
reserves are appropriate for countries with either taken into account, Poland has registered a surplus
pegged or managed floating exchange rates, most in its external current account for most of the period
transition economies find the three-month rule since reform. With steadily rising capital account
overly demanding. inflows, Poland has added substantially to its gross
The quantitative indicators of reserve adequacy official international reserves.
discussed above, while they provide useful rules of
thwnb, are not a substitute for a careful qualitative
assessment of a country's macroeconomic situation The Current Account
and policies and of the financial markets' perception
of those policies. lt is important to note that Poland's official bal
ance of payments statistics show a deficit on the cur
rent account for 199 1-94. However, as noted above,
Exceptional Financing there is substantial evidence that a significant
amount of cross-border trade and tourism receipts
By definition, the overall balance ex post is al have gone unrecorded. Foreigners have made mil
ways in balance. Therefore, any disequilibrium will lions of visits to-and transactions in-the numer
necessarily be financed by one of several methods. ous formal and informal markets on Poland's bor
Besides using reserve assets and/or drawing on the ders. If reasonable estimates of nonresidents'
IMF, countries may resort to exceptional financing unrecorded purchases of Polish goods and services
arrangements to finance external payments imbal are included, the "true" current account shows a
ances. Exceptional financing arrangements include sizeable surplus (see Chart 4.1 ) .
the following:
• exceptional grants, including debt forgiveness;
• the rescheduling of external debt obligations; 31For more details abour exceptional financing and how excep
tional financing transactions are recorded in the balance of pay
• the accumulation of arrears of principal and ments, see Balance of Payments Textbook (Washington: Interna
interest on foreign debt; and tional Monetary Fund, 1996).
116

Balance of Payments Developments and the Exchange Rate
These "unofficial" transactions are not captured

in the current account, but two types of "official"
transactions can provide an idea of the extent of the
underreporting. First, the official data classify sales
of foreign currency for zloty in the small foreign ex
change bureaus (known as kantors) as short-term
capital inflows. These sales more likely reflect re
ceipts from unrecorded exports and tourism receipts;
therefore, they should appear under the current ac
count. Second, private transfers are estimated by the
change in the households' foreign exchange de
posits. A drop in these deposits (and therefore in net
private transfers) during 1991-94 more accurately
reflects residents' sales of dollars for zlotys as confi
dence in the domestic currency returns.
The inflows underlying these items are generated
mainly by transactions involving border trade and
tourism, as well as workers' remittances and other
Chart 4.1. Poland: Current and capital Accounts
transfers. Adjusted for these changes, the current
(In billions of U.S. dollars)
account shows estimated surpluses of 2-3 percent of
GOP in 1991-92 and again in 1994. Independent 3 .-------�
Net international reserves1
information based on surveys of border trade and
tourism support this reinterpretation of the official 2
statistics.
The Capital Account
External debt restructuring and macroeconomic -1

uncertainty dominated developments in the capital
account during 1991-93. Therefore, medium- to .. . Capital account2
-2 .
long-term inflows, foreign direct investment, and

portfolio inflows were relatively small. Overall, the
adjusted capital account deficit was equal to almost 1991 1992 1993 1994
4 percent of GOP in 1991 and still stood at the
equivalent of 0.5 percent of GOP in 1993-94. After Source: Juha Kahkonen and others, Poland-Statistical Tables,
IMF Staff Country Report No. 96/20 (Washington: International
an increase in foreign direct investment and large Monetary Fund, I 996).
portfolio inflows, especially on the short-term ac 1 Excluding valuation effects.
count, the capital account is estimated to have 20n a cash basis. Hence, these estimates differ from those in
turned around sharply in 1995, registering a large the balance of payments presentation, which are on an accrual basis.
surplus. There was a sharp pickup in foreign direct
investment, and foreign investors also became inter
ested in the equity and Treasury bill markets, reflect
ing the virtual disappearance of devaluation risk and
attractive interest rate differentials.
Exchange Rate Policy
The Polish authorities' initial choice of a fixed ex

change rate was motivated by a desire to provide the
economy with a nominal anchor and thus to calm
worries about emerging hyperinflation caused by siz
able monetary overhang and impending price liberal
ization. At the same time, the authorities were con
cerned about maintaining the competitiveness of the
117

traded goods sector, especially in view of the large ex 1993, from 1.8 percent to 1.6 percent and later to
ternal imbalance. They fixed the exchange rate at a 1.4 percent. Large capital inflows and associated
level that required devaluing the zloty by over 31 per monetary expansion have raised the exchange rate
cent in U.S. dollar terms. A parallel market respon above its projected level recently, forcing the au
sive ro market forces was allowed to operate alongside thorities to move to a managed floating regime that
the official market. permits the rate to float by ± 7 percent on either side
The authorities initially regarded the exchange of the official rate (see Chart 4.2).
rate peg as provisional, but it turned out to be more In their efforts to reconcile the objectives of low
durable than expected because of fiscal and mone ering inflation and maintaining competitiveness,
tary tightening and firm wage restraint. The in the Polish authorities moved from a fixed rate
crease in official reserves and the availability of the pegged to the U.S. dollar to a rate pegged to a bas
$1 billion Stabilization Fund also helped to under ket, then to a preannounced crawling peg, and fi
pin the exchange rate for over 18 months. nally to a managed float. Their exchange rate policy
The peg co the U.S. dollar was changed to a peg has broadly succeeded in remaining anti-inflation
to a basket of currencies in May 1991 in recognition ary while maintaining the external balance.
of Europe's increasing role in Poland's trade, and the
zloty was devalued by over 14 percent against the
basket. The authorities soon recognized that be
cause inflation was higher at home than it was Exercises and Issues for Discussion
among Poland's trading partners, a fixed exchange
rate would severely erode the country's competitive Exercises
position and place intolerable pressures on the bal
ance of payments. The exchange rate regime was 1 . On the basis of the data in Table 4 . 1 1 on
therefore changed again in October 1991, this time international transactions, compile the balance
to a preannounced crawling peg. Under this system, of payments for Transitia in the format of Table
the monetary authorities fix a preannounced path 4 . 1 2 and according to the Fifth Edition of the
for the exchange rate involving periodic and pre Balance of Payments Methodology.
dictable fluctuations. This system is especially suited
to a country that Joes not wish to abandon the dis 2. How is the balance of payments of Transitia
cipline of a fixed exchange rate completely but affected if (a) an estimated $2 billion in ex
needs to prevent the erosion of competitiveness in ports have not been reported and (b) if there
the face of a relatively high domestic inflation rate. is an estimated unreported capital outflow of
An important issue in implementing a crawling $ 1 billion?
peg regime is determining the rate of the crawl, or the
3. Consider the effect of tariffs on the shoe indus
rate at which the exchange rate is changed periodi
try in a country. Suppose that shoes sell for $10
cally. Matching the rate of depreciation to the pro
in the world market (and domestically in the
jected inflation differential during the period is tan
absence of any import restrictions) and that the
tamount to targeting the real exchange rate and is
material input-leather-costs $6 in the world
sometimes known as a "passive" crawl. An "active"
market. Assuming for simplicity that no other
crawl keeps the rate of depreciation lower than the
costs are involved, compute the nominal and
inflation differential, effectively conceding some
effective rates of protection if 20 percent tariff
loss of competitiveness but still putting downward
is levied on the import of shoes and no tariff is
pressure on the domestic inflation rate. Poland
levied on leather. What would happen if a 1 0
adopted an active crawl in October 1 9 9 1 , setting
percent tariff i s now levied on leather? How
the rate ar 1.8 percent a month, significantly below
about a 50 percent tariff on leather? As a pro
the projected inflation differential. The corrections
ducer of shoes, would you support the increase
were to take place daily rather than monthly to
in tariff on leather? Would you, as a consumer
avoid sharp movements in the exchange rate.
of shoes? Would it make sense as a matter of
As expected, Poland's inflation rate remained
policy for the government to increase the tariff
higher than the rates in the countries with which it
traded, leading to an appreciation of the real ex
on shoes to 50 percent?
change rate under the new regime. To maintain the 4. A Polish exporter of toys initially faces produc
country's competitiveness, in late 1991, the authori tion costs of 1 ,000 zlotys and an exchange rate
ties adopted a policy of occasional discrete devalua of 100 zlotys per U.S. dollar but is able to ex
tions. In February 1992, the zloty was devalued by port at a profit. Assuming domestic cost infla
1 1 percent and in August 1993, by 7.5 percent. The tion of 50 percent and zero foreign inflation,
monthly rate of crawl was also reduced in August calculate the following:
118

Exercises and Issues for Discussion
(a) The effect of a pegged exchange rate on

exports;
(b) The level of the exchange rate that would
restore the real exchange rate; and
(c) Given an exchange rate depreciation of 25
percent, the change in the real exchange
rate and the magnitude of the change in
productivity the Polish exporter needs to
restore the profitability of his exporting
activity.
Chart 4.1. Poland: Exchange Rate Developments
5. Analyze the changing structure of Poland's for
eign trade on the basis of Tables 4.1 and 4.2 with
a view toward assessing the sustainabiliry of 70 .----,
Inflation and Movements in the Exchange Rate
Poland's recent export performance, focusing on: · Against the Basket
60
(a) The extent of trade created rather than di-
verted in the shift from the old to the new 50
markets;
40
(b) The impact of growth in partner countries
and of foreign protectionism; and 30
. .
- r - - - - - - - � - - - - - �- - -
.
(c) The competitiveness of exports.
20
6. On the basis of Table 4.5, calculate the terms of Annualized rate of crawl
trade for Poland during 1990-94 and comment 10 Inflation in Partners prcpi1
on their evolution.
7. On the basis of Table 4.5, calculate the effect of 1992 1993 1994
changes in the volumes of expons and imports 120 .------,
and of prices, respectively, on the change in the Real Effective Exchange Rate Index (1 992=100)
trade balance in 1993.
8. Using the information provided on Polish ex

change rate development (Table 4.6), show 100
graphically how the preannounced crawl can
be represented. Confine your graph to the pe
, �
riod after August 27, 1993. In particular, show \
\
I \. I
' -, II
, I
how the graph changes with ( i) an increase in 80 .... "' , ,. "" - ' ,�
I I I
I I
the rate of crawl; and ( i i ) a widening in the , .� I , , , .....
v , __
,, ,.
margin permitted for fluctuation. Contrast this
Unit Iabar cost based2
graph with that of (i) a fixed rate regime; and
(ii) a fixed band.
60
9. Based on the balance of payments table for 1992 1993 1994
Poland (Table 4.3 ) , discuss the nature and Sources: IMF, Information Notice System; and IMF Institute
sources of the imbalance in Poland's external database.
accounts and the way in which this imbalance 'As measured by the percent change in CPl.
affects the external debt position of Poland. 2Unit labor cost series calculated by the IMF Institute.
Like many transition economies, Poland has
significant unrecorded cross-border trade. How
does the existence of such trade affect your
analysis of the balance of payments? Discuss
how the current account deficits in 1993 and
1994 were financed, and comment on the dif
ferences in financing patterns observed.
10. With reference to Tables 4.9 and 4.10, analyze

the external indebtedness of Poland. Construct
1 19

several indicators of external indebtedness dis outcome-such as a large current account

cussed in this chapter and comment on their deficit-may not represent the underlying trend.
evolution. Comment on the sustainability of In such cases, how should the underlying current
Polish external indebtedness. account deficit be estimated? Can you think of
1 1 . Discuss the evolution of Poland's competitive other factors affecting the balance of payments
ness during 1991-94 on the basis of Chart 4.1, that would make it necessary to attempt to esti
which shows the movements in Poland's nomi mate the underlying current account?
nal and real exchange rates (based on con 5. If a country is subject to a terms of trade shock
sumer and producer prices and unit labor costs) (such as a rise in the price of a major import
and data given in Table 4.8. such as oil or a fall in the price of a major ex
port such as coffee), how should the authorities
formulate their policy response? Discuss the
factors that need to be taken into account in
Issues for Discussion determining the mix of adjustments and fi
nancing and the type of financing that should
1 . Although the balance of payments account is a be used.
useful framework for capturing an economy's
6. In recent years, reflecting the increasing inte
transactions with the rest of the world, it is de
gration of world capital markets, the liberaliza
sirable to supplement it with other informa
tion of controls on the capital account, and
tion, such as data on external debt and arrears
policy reforms, many developing and some
and foreign direct investment. Discuss why it is
transition economies are experiencing rising
essential to use such supplementary informa
capital inflows. Are such inflows always an un
tion for Poland in order to obtain a full picture
mixed blessing? What difficulties do such in
of the country's external position. What spe
flows raise for the conduct of macroeconomic
cific supplementary information would you use?
policy? In particular, should some type of capi
2. One of the differences between the Fourth and tal inflows be preferred over others and if so,
the Fifth Editions of the Manual lies in the why?
treatment of valuation changes and new re
7. This workshop discusses the main issues ana
serve assets created by the monetization of gold
lysts should consider in assessing reserve ade
and the allocation of SDRs. What is the rea
quacy. In view of the liberalization of the capi
soning behind the exclusion of valuation
tal account in many countries, are the
changes from the balance of payments in the
conventional criteria for measuring reserve ad
Fifth Edition? How does such a treatment affect
equacy still relevant ? Why do some countries
the reconciliation of the balance of payments
seem to encounter no difficulties even while
and the monetary accounts?
holding rather low levels of reserves in relation
3. It is sometimes said that a current account sur to their imports?
plus is always desirable and a deficit undesir
8. Are the various external debt indicators pre
able. Do you agree with this statement? If not,
sented in this chapter sufficient to assess a
why? Explain your answer with examples from
country's debt situation? Why do countries such
various countries.
as Italy and Ireland, which have rather high
4. ln cases where a country is subject to internal or debt ratios, seem not to suffer from a "debt prob
external shocks such as a drought or a fall in the lem," while others countries with relatively low
price of its main export, the balance of payments ratios have debt servicing difficulties?
120

Table 4.1.
Commodity Composition of TradeI
1990 1991 1992 1993 1994

(At current prices, in millions of U.S. dollars)
Exports f.o.b. 10,863 12,760 13,997 13,585 16,950
Agriculture 1,825 2,284 2,058 1,386
Energy and raw materials 1,727 2,169 2,240 1,888
Manufacturing 7,31 1 8,307 9,700 10,311
Imports f.o.b. 8,649 11,709 13,485 15,878 1 7.786

Agriculture 1,687 1,767 1,672 1,969
Non-energy raw materials 448 497 881 997
Oil and gas 875 2,553 2,261 1,655
Manufacturing 5,639 7,892 8,671 1 1 ,258
(In percent of total)

Exports f.o.b. 100.0 100.0 100.0 100.0 100.0
Agriculture 16.8 17.9 14.7 10.2
Energy and raw materials 15.9 17.0 16.0 13.9
Industrial products 67.3 65.1 69.3 75.9
Imports f.o.b. 100.0 100.0 100.0 100.0 100.0

Agriculture 19.5 13.9 12.4 12.4
Non-energy raw materials 5.2 3.9 6.5 6.3
Oil and gas 1 0.1 20.1 16.8 10.4
Manufacturing 65.2 62.1 64.3 70.9
Sources: Juha Kahkonen and others Poland-Statistical Tables, IMF Staff Country Report No. 96/20 (Washington: International Monetary
Fund, 1996); and Liam P. Ebrill and others, Poland: The Poth to a Market Economy, Occasional Paper No. 113 (Washington: International Mone
,
tary Fund, 1994).

'Since there were considerable problems collecting trade statistics during these years, the data indicate broad orders of magnitudes for the
various categories of exports and imports.
121

Table 4.2.
Direction of Trade
(In percent of total)
1990 1991 1992 1993

Total exports 100.0 100.0 100.0 100.0
1. Non-CMEA countries 75.7 81.2 84.3 81.7

European Union 47.5 55.6 57.9 53.0
Of which: Germany 25.1 29.4 31.3 30.6
Other non-CMEA Europe 16.2 16.1 9.5 8.8
All other countries 12.0 9.5 16.9 19.9
2. Former CMEA 24.3 18.8 15.7 18.3

Of which: former U.S.S.R. 15.3 1 1 .0 9.1 15.7
Total imports 100.0 100.0 100.0 100.0
1. Non-CMEA countries 71.5 79.2 83.5 87.2

European Union 42.5 49.9 50.7 56.4
Of which: Germany 20.1 26.5 23.9 29.5
Other non-CMEA Europe 18.4 16.1 14.4 1 1 .0
All other countries 10.6 13.2 18.4 19.7
2. Former CMEA 28.5 20.8 16.5 12.8

Of which: former U.S.S.R. 19.8 14.1 11.4 1 1 .0
Source: IMF, Direction of Trade Statistics Yearbook (Washington: International Monetary Fund, 1994}.
122

Table 4.3.
Balance of Payments1
(In millions of U.S. dollars)
1989 1990 1991 1992 1993 1994

Trade balance 240 2,214 51 512 -2,293 -836
Exports 7,575 10,863 12,760 13,997 13,585 16,950
Imports 7,335 8,649 12,709 13,485 15,878 17,786
Of which: oil and gas exports 2,553 2,261 1,655 1,278
Unrecorded trade 277 1,182 1,750 3,211
Nonfactor services (net) -228 -150 236 344 369 57
Receipts 767 1,327 1,577 1,612 1,846 2,100
Payments 995 1,477 1,341 1,268 1,477 2,043
Interest (net) -3,087 -3,329 -2,862 -1,740 -1,392 -1,633
Private 382 581 541 527 400 271
Official (including debt converted) 3,469 3,910 3,403 2,267 1,792 1,904
Of which: paid 474 885 1,097 827 1,110
Transfers (net) 1,232 1,933 353 528 929 1,182
Private 1,144 1,676 308 230 821 1,025
Official (including debt converted) 88 257 45 298 108 157
Investment income 85 139 222
Transfer of profits -39 -75
Current account balance
(excluding unrecorded trade) -1,843 668 -2,222 -270 -2,287 -1,083
Current account balance
(including unrecorded trade) -1 ,843 668 -1,972 913 -537 2,128
Capital account -1,531 -2,350 -7,954 373 1,524 2,682
Medium- and long-term capital (net) -1 ,442 -2,526 -6,059 -292 -471 31
Disbursements 226 428 786 562 922 894
Amortization due 1,668 2,954 6,845 854 1,393 863
Of which: paid 369 347 443 903 503
Credit extended 42 13 -1 11 -11
Direct investment 36 10 1 17 284 580 542
Short-term capital -125 -236 -1 ,254 598 1,095 1,800
Error and omissions 360 -713 38 92 738
Valuation adjustment -58 -254 217 -418
Overall balance -3,374 -1,682 10,176 103 -764 1,599
Net reserves, official and banks (-, increase) -356 -4,442 1,317 -1,613 -634 -2,534
Net reserves (-, increase), official -200 -2,153 1,201 -485 -173 -1,153
Gross official reserves (-, increase) -415 -2,417 866 -473 7 -1 ,747
Liabilities (+, increase) 215 264 335 -12 -180 594
Of which: IMF credit, net 500 322 -138 594
Change in other NIR of banking system -156 -2,289 116 -1,128 -461 -1,381
Gross (-, increase) -1 ,989 250 -1,414 -370 -1,531
Liabilities -300 -134 286 -91 150
Debt relief 382 9,054 4,382 202 7,900
Principal (and arrears) 2,939 202 7,205
Interest 1,443 695
Change in arrears 3,192 -2,930 4,477 1,309 1,397 -6,965
Source: Juha Kahkonen and others, Poland-Statistical Tables, IMF Staff Country Report No. 96/20 (Washington: International Monetary Fund,
1 996).
1 Convertible currency trade on a payments basis from commercial banks.
1 23

Table 4.4.
Current Account of Balance of Payments in Convertible and Nonconvertible Currencies•
1989 1990 1991 1992 1993 1994

Exports, f.o.b.
In convertible currencies 7,575 10,863 12.760 13,997 13,585 16,950
In nonconvertible currencies 4,337 4,151 546 47 13 74
Imports, f.o.b.
In convertible currencies 7,335 8,649 12,709 13,485 15,878 17,786
In nonconvertible currencies 4,122 2,276 368 90 202 1 33
Trade balance
In convertible currencies 240 2,214 51 512 -2,293 -836
In nonconvertible currencies 214 1,875 178 -43 -189 -59
Services and unrequited transfers, net

In convertible currencies -2,083 -1 ,546 -2,274 -782 6 -247
Of which: interest payments, net -3,087 -3,329 -2,863 - 1,740 - 1 ,392 - 1,633
In nonconvertible currencies 77 125 63 64 38 31
Of which: interest payments, net -85 -37 15 60 31 29
Current accountl
In convertible currencies -1 ,843 668 -222 -270 -2,287 -1 ,083
In nonconvertible currencies 291 2,000 241 21 -151 -28
1996).
I Represents the summation of transactions, expressed in U.S. dollars. Transactions in transferable rubles were converted into U.S. dollars at
the cross-commercial rate.
Table 4.5.
External Trade•
(Percentage change)
1990 1991 1992 1993 1994

Exports
Value (U.S. dollar) 6.2 4.0 - 1 1 .5 7.3 21.9
Volume 13.7 -2.4 -2.6 -1.1 18.3
Price (U.S. dollar) -6.6 6.6 -9.1 8.5 3.0
Imports
Value (U.S. dollar) -8.3 6 1 .1 1.0 1 8.4 14.5
Volume -7.9 37.8 16.9 18.5 13.4
Price (U.S. dollar) 0.4 13.9 - 1 1 .3 1.0
Terms of trade -0.7 -8.8 2.5 8.5 2.0
Source: Juha Kahkonen and others, Poland-Statistical Tables, IMF Staff Country Report No. 96/20
(Washington: International Monetary Fund, 1996).
1 Data may not be consistent with the data provided in Tables 4.1-4.4.
1 24

Table 4.6.
Exchange Rate Developments
Period Exchange Rate Policy Action Comments J
Before 1990 Multiple exchange rates, Frequent and substantial
adjustable peg to a basket of devaluations
currencies
January 1, 1990 Fixed exchange rate system Unification of official and black Exchange rate: Zl 9,500 per
market rates; Devaluation U.S. dollar
{31.6 percent)
May 17, 1991 Fixed exchange rate system Devaluation (16.8 percent against Exchange rate: Zl 1 1 ,100 per
the dollar, 14.4 percent against U.S. dollar. Basket includes:
the basket); Shift from a dollar U.S. dollar (45 percent),
peg to a basket peg deutsche mark (35 percent),
pound sterling (10 percent),
French franc (5 percent),
Swiss franc (5 percent)
October 19, 1991 Preannounced crawling peg Rate of crawl announced: 1.8 per
cent per month (ZI 9 per day)
February 25, 1992 Preannounced crawling peg Devaluation (10.7 percent against Exchange rate: Zl 13,360 per
the basket); Rate of crawl: 1.8 U.S. dollar
percent per month (ZI 1 1 per day)
July 10, 1992 Preannounced crawling peg Rate of crawl: 1.8 percent per Basket unchanged
month (ZI 1 2 per day) Technical adjustment made
August 27, 1993 Preannounced crawling peg Devaluation (7.4 percent against Exchange rate: Zl 23,1 1 3 per
the basket); Rate of crawl reduced: U.S. dollar
1.6 percent (ZI 1 5 per day)
September 13, 1994 Preannounced crawling peg Rate of crawl reduced: 1.5 percent
per month
November 30, 1994 Preannounced crawling peg Rate of crawl reduced: 1.4 percent
per month
January 1 , 1995 Redenomination One new zloty equal to 10,000
old zlotys
February 15, 1995 Preannounced crawling peg Rate of crawl reduced: 1.2 percent
per month
March 6, 1995 Preannounced crawling peg Margin in interbank market widened
to +/-2 percent around official rate
May 16, 1995 Float within crawling band Rate permitted to fluctuate +/-7
percent around mid-rate that
continues to crawl at 1.2 percent
per month
1996).
125

Table 4.7.
Tariff Strudure, as of July 1 , 1995 1
(Percentage rates)
Trade-Weighted
Effective Effective
Average average average2
All commodities 14.33 12.77 9.44

Agricultural products 15.15 14.71 11.14
Animal products 33.06 33.00 3 1 .57
Vegetable products 1 5.87 1 5.74 8.28
Fats and oils 16.22 16.22 14.92
Prepared foodstuffs 29.53 28.48 26.62
Industrial products 11.96 11.16 7.95
Mineral products 3.83 2.76 2.30
Chemical products 1 1 .76 10.79 6.83
Plastics 13.37 1 1 .97 9.50
Leather products 1 1 .22 9.50 7.42
Wood products 12.33 12.02 8.99
Wood pulp products 4.30 0.09 0.01

Textile products 16.06 1 4.87 12.25
Footwear 17.15 17.15 15.68
Stone products 1 1 .66 1 1 .22 8.59
Precious materials 18.57 18.57 14.70
Base metal products 16.38 13.03 10.35

Mechanical and electrical
machinery 13.81 1 1 .29 5.44
Transport equipment 22.98 22.96 20.68
Optical products 13.39 10.08 7.12
Arms 33.00 33.00 28.67
Miscellaneous manufactured
products 15.84 1 5.84 12.96
Art
'Based on CN nomenclature excluding tariff-free quotas.
21ncluding Free Trade Agreements.
126

Table 4.8.
Effedive Exchange Rate
(Quarterly average indices January 1990 = TOO)
Nominal
Effective
Real Effective Wage Price Exchange
Exchange Rate Based• Based2 Rate
1990: I 47.9 126.4
II 57.9 125.6
Ill 60.0 1 1 9.3
IV 65.2 1 1 3.8
1991: I 95.6 82.9 1 1 5.7

II 108.0 92.1 1 1 6.4
Ill 105.6 88.9 106.8
IV 102.8 93.7 103.5
1992: I 96.9 96.3 94.9

II 86.0 92.1 83.8
Ill 82.9 92.5 78.7
IV 85.3 98.6 76.9
1993: I 90.0 103.8 74.5

II 85.0 104.0 70.5
Ill 85.3 101.0 65.6
IV 81.4 100.4 60.1
1994: I 78.6 102.6 56.9

II 79.3 103.1 53.9
Ill 76.7 102.8 50.9
IV 79.0 105.9 48.8
1Based on data on unit labor costs in Poland and partner countries.
2Nominal effective exchange rate index deflated by seasonally adjusted index of relative prices; a
decrease indicates depreciation.
127

Table 4.9.
Scheduled Debt Service by Creditor
1990 1991 1992 1993 1994

Paris Club/other guaranteed/jumbo
Interest 2,519 1,940 620 535 577
Principal 2,467 2,907 69 79 40
Former CMEA banks and Russia

Interest 198 193 133 124 89
Principal 62 114 242 292 156
London Club (including revolving facility)

Interest 856 1,030 1 , 1 40 906 832
Principal 145 3,521 165 157 266
Other commercial creditors

Interest 249 87 139 119 243
Principal 280 303 378 865 401
World Bank
Interest 17 44 43 61
Principal
International Monetary Fund
Interest 25 63 74 49 42
Principal 138 310
Other multilateral institutions

Interest 2 4 11 20
Principal
Interest on short-term debt 70 113 5 40
Total (including IMF) 6,803 10,245 3,121 3,.323 3,077

Interest 3,849 3,400 2,267 1,792 1,904
Principal 2,954 6,845 854 1,531 1,173
1996).
Table 4.10.
External Reserves and Other Foreign Assets
At End of Period 1989 1990 1991 1992 1993 1994

Official external reserves 2,503.2 4,680.3 3,814.0 4,287.3 4,230.8 5,196.7
Gold• 189.0 189.0 189.0 189.0 189.0 189.0
Foreign exchange 2,314.2 4,491.3 3,625.0 4,098.3 4,041.8 5,007.7
Other foreign assets in

convertible currencies2 2,399.9 4,521.6 4,278.9 5,746.4 6,184.5 7, 1 1 9.7
Foreign assets in nonconvertible currencies 609.1 2,384.5
1996).
•Gold is valued at US$400 per ounce.
�Includes prepaid letters of credit
128

Table 4.1 1 .
Transitia: Data on International Transactions Classified by Sourcel
(In millions of transitia dollars)
Description 1993 1994

Data provided by the customs administration
Exports of goods, f.o.b. 35,538 45,382
Imports of goods, f.o.b. 32,543 36,684
Data provided by carriers

Import freight payments to nonresident companies 3,320 3,340
Receipt by resident companies
Export freight 190 200
Foreign tourist transport 575 560
Data derived from the foreign exchange record

Purchase of foreign exchange from foreign tourists 1,300 1,350
Sale of foreign exchange to residents for travel abroad 2,815 2,880
Purchase of foreign exchange from foreign embassies 250 300
Receipts from abroad, other services 128 127
Payments abroad, other services 1,970 3,431
Remittances received from family members living abroad 80 50
Remittances abroad by foreign nationals working in
Eden (for more than one year) 262 256
Data provided by the port authorities

Receipts for port services provided to nonresidents 530 515
Data provided by the Central Bank of Eden

Interest received on foreign exchange assets 730 650
IMF charges 140 160
Total change in reserves - 1 ,796 1 , 103
Of which: revaluation changes -198 0
Use of IMF credit 1,369 0
Data provided by commercial banks

Interest accrued on deposits abroad 40 30
Interest paid to correspondent banks 27 60
Change in foreign assets 1,000 1,500
Change in foreign liabilities 1,991 1,000
Data provided by the central government

Interest on loans received from abroad 2,210 3,870
Operating expenditures of diplomatic missions abroad 350 400
Grants received from foreign governments 27 28
Drawings on loans received from abroad 5,182 4,800
Repayments on these loans 2,100 1,303
Refinanced debts 0 586
Data provided by nonfinancial public enterprises

Interest on loans received from abroad 300 820
Drawings on long-term loans from abroad 2,223 1,613
Repayments on these loans 400 300
Data provided by nonfinancial private enterprises

Interest accrued on deposits abroad 700 600
Dividends distributed to direct investors 1,200 1,400
Interest paid to nonresidents 2,400 1,700
Drawings on long-term loans from abroad 2,390 1,849
Repayments on these loans 285 250
Net change in short-term loans received from abroad -765 -400
Change in deposits held in foreign banks 1,323 -1,217
1 Exercise taken from the training material of the IMF's Statistics Department
129

Table 4.12.
Transitia: Balance of Payments Statements1
(In millions of transitia dollars)
1993 1994
Current account -7,449
Balance of trade 2,995
Exports of goods, f.o.b. 35,538
Imports of goods, f.o.b. -32,543
Services (net) -5,482
Freight on exports 190
Passenger services: credit 575
Port services: credit 530
Travel expenditure: credit 1,300
Government services, n.i.e.: credit 250
Other services: debit 128
Freight on imports -3,320
Travel expenditure: debit -2,81 5
Government services, n.i.e: debit -350
Other services: debit -1,970
Investment income (net) -4,807
Interest received by the Central Bank 730
Interest received by commercial banks 40
Interest received by nonfinancial private enterprises 700
Dividends distributed to direct investors -1,200
IMF charges -140
Interest paid to correspondent banks -27
Interest on loans received by the central government -2,210
Interest on loans received by public enterprises -300
Interest paid by private enterprises -2,400
Current transfers (net) -155
Remittances received from family members living abroad 80
Grants received from foreign governments 27
Remittances abroad by foreign nationals working in Eden -262
Capital account (capital transfers) 0
Financial account (excluding financing items) 5,913
Direct investment 0
Portfolio investment 0
Other investment 5,913
General government 3,082
Drawings on loans from abroad 5,182
Loan repayments -2,100
Bank 991
Foreign assets -1,000
Foreign liabilities 1,991
Other sectors 1,840
Public enterprises 1,823
Drawings on long-term loans from abroad 2,223
Loan repayments -400
Private enterprises 17
Short-term assets: deposits in banks abroad -1,323
Short-term liabilities: loans received -765
Long-term liabilities 2,105
Drawings on loans received 2,390
Loan repayments -285
Net errors and omissions -1,431
Overall balance -2,967
Financing 2,967
Reserve assets 1,598
Use of IMF credit 1,369
Exceptional financing 0
Debt rescheduling 0
1 Exercise taken from the training material of the IMF's Statistics Department.
130

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4 Balance of Payments Accounts

�___. and Analysis

I See Balance of Payments Manual, Fifth Edition (Washington:

©International Monetary Fund. Not for Redistribution

Exports Credit Imports Debit

ernment donates to the Kyrgyz Republic other countries.2

©International Monetary Fund. Not for Redistribution

counts (SNA) studied in Chapter 2 . The main Valuation

In principle, the time period for recording bal­

©International Monetary Fund. Not for Redistribution

Overall Only a statement on balance of payments An articulated set of accounts en­

Exceptional fmancing Ltmired coverage. Expartded coverage.

©International Monetary Fund. Not for Redistribution

©International Monetary Fund. Not for Redistribution

©International Monetary Fund. Not for Redistribution

©International Monetary Fund. Not for Redistribution

Collections from persons and households

Data Sources and Special Issues in Weaknesses in Data

©International Monetary Fund. Not for Redistribution

©International Monetary Fund. Not for Redistribution

©International Monetary Fund. Not for Redistribution

An analysis of trade flows requires information

©International Monetary Fund. Not for Redistribution

©International Monetary Fund. Not for Redistribution

©International Monetary Fund. Not for Redistribution

2. Foreign exchange reserves

©International Monetary Fund. Not for Redistribution

As we have seen, a current account deficit must

being used, the major counterpart of the current account may be

©International Monetary Fund. Not for Redistribution

©International Monetary Fund. Not for Redistribution

Box 4.9. Box 4.10.

©International Monetary Fund. Not for Redistribution

Gross and Net Reserve Assets Recording Changes in Reserve Assets

26See Paul Krugman, "A Model of Bal�ncc of PnymciH>

©International Monetary Fund. Not for Redistribution

rhe managem�:nr of macroeconomic policy (see next

©International Monetary Fund. Not for Redistribution

Reserve Adequacy Gross intemational

tem1s of months Monthly impon bill

©International Monetary Fund. Not for Redistribution

hind this thinking is that international reserves are •

©International Monetary Fund. Not for Redistribution

These "unofficial" transactions are not captured

The Capital Account

External debt restructuring and macroeconomic -1

long-term inflows, foreign direct investment, and

Exchange Rate Policy

The Polish authorities' initial choice of a fixed ex­

©International Monetary Fund. Not for Redistribution

©International Monetary Fund. Not for Redistribution

(a) The effect of a pegged exchange rate on

8. Using the information provided on Polish ex­

10. With reference to Tables 4.9 and 4.10, analyze

©International Monetary Fund. Not for Redistribution

several indicators of external indebtedness dis­ outcome-such as a large current account

©International Monetary Fund. Not for Redistribution

1990 1991 1992 1993 1994

Imports f.o.b. 8,649 11,709 13,485 15,878 1 7.786

In principle, the time period for recording bal

Overall Only a statement on balance of payments An articulated set of accounts en

The Polish authorities' initial choice of a fixed ex

8. Using the information provided on Polish ex

several indicators of external indebtedness dis outcome-such as a large current account