Balance of payments

The balance of payments is a record of all monetary transactions produced between a country and the rest of the world in a given period. These transactions may include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. The balance of payments summarizes international transactions for a specific period, normally one year, and is prepared in a single currency, typically the domestic currency of the country concerned. The sources of funds for a country, such as exports or income from loans and investments, are recorded in positive data. The use of funds, such as imports or investment in foreign countries, are recorded as negative data.

When all the components of the balance of payments are included, the total must add up to zero, with no possibility of a surplus or deficit. For example, if a country is importing more than it exports, its trade balance (exports minus imports) will be in deficit, but the lack of funds in this account will be offset by other means, such as funds obtained through foreign investment., the decrease in central bank reserves or obtaining loans from other countries.

While the overall balance of payments account must always be in balance when all types of payments are included, it is possible for imbalances to exist in the individual accounts that make up the balance of payments, such as the current account, the capital or financial account excluding the change in central bank reserves account, or the sum of all three. An imbalance in the last sum can result in a surplus country accumulating wealth, while a deficit nation can become progressively indebted. The term "balance of payments" often refers to this sum: there is said to be a balance of payments surplus (equivalently, the balance of payments is positive) of a certain amount if the sources of funds (such as exports of goods and bonds sold) exceed the use of those funds (such as the payment for imported goods and the payment for the purchase of foreign bonds) by that amount. It is said that there is a balance of payments deficit (the balance of payments is negative) if the reverse occurs.

In a fixed exchange rate system, the central bank accommodates these flows by buying any flow of funds coming into the country or by providing foreign currency funds in the foreign exchange markets, so that match any outflow of capital abroad, thus preventing the flow of funds from affecting the exchange rate between the country's currency and other currencies. Thus, the annual net change in the central bank's foreign exchange reserves is sometimes called the balance of payments surplus or deficit. There are alternatives to fixed exchange rate systems, such as a floating management regime where certain changes in exchange rates are allowed, or at the other extreme a pure floating exchange rate system (also known as a pure exchange rate). flexible). With a pure floating exchange rate system, the central bank has no need to intervene to protect or devalue its currency, allowing its rate to be set by the market, and the central bank's foreign exchange reserves are not altered.

Historically, there have been different approaches to the question of how or even whether it would be necessary to eliminate current account imbalances.

Structure of the balance of payments

The balance of payments (BP) is structured into four subdivisions:

• Current account.
• Capital account.
• Financial account.
• Account of errors and omissions.

Current account

"Article 302 of the General Law on Credit Instruments and Operations provides the concept namely under the current account contract where the credits derived from the reciprocal desks of the parties are recorded as credit items or charge to an account and only the balance resulting from the closure of the account constitutes a demandable and available credit"

Now, applied to the exercise of import and export, the current account registers receipts, payments and remuneration from the trade of goods and services and income in the form of profits, interest and dividends obtained from capital invested in another country. The purchase and sale of goods will be recorded in the trade balance, services in the services balance, benefits in the income balance, and money transfers in the transfer balance.

The current account balance will be divided into two sections. The first is known as the visible balance and is made up entirely of the trade balance. The second section is called the invisible balance and is made up of the services balance, income and the transfers balance.

Goods and services account

According to the VI Manual of the Balance of Payments and International Investment Position of the IMF, the balance of goods and the balance of services, previously separated, come to be grouped in an account called "goods and services account&# 34;, with two subaccounts, one for each transaction.

The goods account, also called the "commercial" or "merchandise" balance, uses the data collected by the Customs Department of the Tax Agency as a source of basic information. It records payments and receipts from imports and exports of tangible goods, such as cars, clothing or food.

One thing to keep in mind is that imports and exports in the balance of payments have to appear with an "FOB for export" and "CIF for import" valuation, which is how customs prepare them. FOB prices (Freight On Board) differ from CIF prices (Cost, Insurance and Freight) in that the latter include freight and insurance. When preparing the balance of payments, freight and insurance have to be accounted for as services and not as goods.

The services account will include all the income and payments derived from the purchase and sale of services provided between the residents of one country and the residents of another, as long as they are not factors of production (labor and capital) since the latter form part of the income. The services are:

• Tourism and travel, which collects the services and goods acquired in an economy by travelers, therefore not only encompasses the provision of services, but also collects the goods consumed as greater amount of the item, it is considered that such products, despite not being sent to another country, are consumed by foreign residents who come to visit a country. As it is sometimes impossible to determine that it is a product sale and that it is a service delivery, all this is always included within the service line.
• Transportation, which includes both freight charges and payments made as well as any other transportation costs (e.g. insurance). It is an important heading, since many countries are engaged in transporting goods between third parties.
• Communications, collect postal services, e-mail, etc.
• Construction.
• Insurance is estimated by the difference between premium income and compensation payments.
• Financial services include financial brokering services, which include funds collection and placement commissions, transfers, payment, currency exchange, etc.
• Computer and information services, such as consulting and configuring computer equipment, repair of computer equipment, software development services, news agencies, news reports, press reports, etc.
• Services provided to companies, such as commercial services and operating leasing
• Personal, cultural and recreational services
• Government services, including collections and payments related to embassies, consulates, representations of international agencies, military units, etc.
• Royalties and intangible property rents.

Primary income account

The primary income account, or factorial services balance, or factor income, collects the income and payments registered in a country, by way of interest, dividends or profits generated by the factors of production (labor and capital), or what is the same, of investments made by the residents of a country in the rest of the world or by non-residents in the country itself.

Receipts are the rents received by the holders of the factors of production who are residents and are invested abroad, while payments are the rents that are delivered to the non-resident holders of the factors of production and who are invested abroad. invested in the country itself. Work income includes the remuneration of cross-border workers, whether seasonal or temporary.

Secondary income account

In the secondary income account (previously, "current transfers"), transactions received or paid abroad without counterparty will be recorded. These transfers are normally of the donation or reward type and can be both public (eg, donations between governments) or private (eg, remittances that emigrants send to their countries of origin).

The main problem with the secondary income account is that it is sometimes difficult to determine which transfers are part of this current account and which are part of the capital account. Remittances from emigrants, taxes, donations, artistic prizes, scientific prizes, gambling prizes and international aid transferred in the form of donations will be considered current account transfers.

Capital Account

Component of the Balance of Payments that shows the change in the country's assets abroad and foreign assets at home, other than official reserve assets. This account includes direct investments, the Purchase or Sale of foreign securities and bank and non-bank liabilities with foreigners by the country during the year.

This includes capital transfers and the acquisition of non-produced non-financial assets (land and subsoil resources). Capital transfers encompass all those transfers whose purpose is to finance an investment asset, including those received from international organizations for the purpose of building infrastructure.

Financial Account

Map of countries for reserves in foreign currency and gold minus external debt on the 2010 CIA database Factbook

Records the variation of financial assets abroad. Therefore, it includes the financial flows between the residents of a country and the rest of the world. The different headings of the financial account include the net variation of the corresponding assets and liabilities.

• Direct investments.
• Portfolio investments.
• Other investments.
• Financial instruments derived.
• Variation of reserve assets.

"The financial account will therefore reflect whether we are the ones who are lending money to the rest of the world or if, on the contrary, they lend to us"

Count of errors and omissions

The errors and omissions account covers what is known as the indeterminate capital, it is an adjustment for the statistical discrepancy of all the other accounts of the balance of payments.

It is therefore an adjustment due to omission rather than error, and these short-term commercial credits are also the quantitatively most notable part of said omissions. It must be clarified that it is precisely the omissions, rather than the errors, that maintain the greatest link with other macroeconomic variables (such as interest rates or exchange rates) so that their evolution can be determined based on fluctuations in those.

The balance of payments entry system is double-entry, that is, each entry has its counterpart, so if the statistical information is correct the balance is zero, in practice it is not so, so, due to the deficiencies in the information systems, it is necessary to use this item to correct the differences. This item of the balance of payments establishes the corrections to determine the adjusted balance.

Meaning of Balance of Payments Balances

Although the balance of payments is balanced at the aggregate level, it does not have to be so at the internal level. There may be and in fact there are imbalances between the different accounts that directly affect the economy of a country.

The balances of the different components of the balance of payments provide information about the situation of a country with respect to the exterior, in order to provide a foundation for its economic policy.

With this purpose, certain parts of the balance of payments with economic content are taken to interpret its balance, some of the most used are:

• Trade balance, the difference in value between imports and exports of goods, tells us to what extent exports finance imports.
• Balance of goods and services, is the export difference and the import of the corresponding trade and service balances. The thirdization of some economies makes it necessary to use this indicator.
• Current account balance is the difference in income and payments of the trade balance, services, income, and current transfers. It expresses whether or not a country has spent more than its rent capacity allows it, so it has to go well to loans or asset reductions abroad.

When a country buys more than it sells, it has to finance the difference with loans; Conversely, if you sell more than you buy, you can lend to others with the surplus generated. This principle is a characteristic of the balance of trade.

For this reason, if there is a deficit in the current account balance and in the capital account, we will have to have a surplus in the financial balance.

The central bank reduces its foreign exchange reserves when the balance of payments shows a deficit. The opposite happens when it presents a surplus.

The balance of payments and residence

For the purposes of balance of payments, residents of a country are considered to be those persons who have their habitual residence in it, and therefore neither tourists nor foreign diplomatic and consular personnel are residents. In the case of companies, those domiciled therein are considered national for balance of payments purposes, even if they were subsidiaries of foreign companies.

The balance of payments in Spain

In Spain, the Royal Decree of the Ministry for Public Administrations 1651/1991, of November 8, entrusted the Bank of Spain with the preparation of the Balance of Payments. Said preparation will be carried out in accordance with the rules established in the Sixth Manual of Balance of Payments and International Investment Position of the International Monetary Fund (BPM6), which entered into force in Europe in 2014. In recent years, the elaboration of the Balance of Payments has been encountering the elaboration difficulties inherent to the liberalization of trade and the abolition of customs.

Sources of information on the balance of payments in Spain

Commodity balance

The Spanish Balance of Payments uses as a source of basic information, for the merchandise balance, the foreign trade statistics prepared by the Customs Department of the State Tax Administration Agency, although with the pertinent adjustments.

Other operations

For the preparation of the other headings of the Balance of Payments, the Bank of Spain collects information directly from the following groups of filers:

• Deposit entities

These entities, made up of banks, savings banks and credit cooperatives, must report the operations they carry out with non-residents, both in their own name and on behalf of clients, in accordance with the regulations contained in the Circulars of the Bank of Spain. Customer transactions are, for information purposes, the responsibility of the resident owner of the transaction, who must provide the entity with the transaction details so that they can be transmitted to the Bank of Spain.

• Other financial entities registered in the official records of the Banco de España or the National Securities Market Commission.

Entities of this nature (financial credit institutions, credit institutions with a limited operational scope, which have disappeared since January 1997, and securities companies and brokers) that carry out operations with non-residents on behalf of clients report directly to Banco de Spain, both of the operations carried out on behalf of its resident clients and of all their own, if any. Therefore, for reporting purposes, they operate as those included in point a) above, and the same regulations contained in Circular 15/1992 apply to them.

Institutions of this nature that operate with non-residents exclusively for their own account may choose, at will, between directly declaring all their operations to the Bank of Spain, in accordance with the Bank of Spain regulations, or using the services of the deposit institutions to declare transactions with non-residents that settle through them. In the latter case, and for these purposes, the same regulations apply to non-financial individuals and legal entities.

• Accounts at sight or savings in non-resident credit institutions

All residents who maintain accounts of this nature must inform the Bank of Spain of their opening and cancellation, and of the operations they settle through them, for their gross amounts, in accordance with the regulations contained in the Bank of Spain.

• Inter-business accounts with non-resident enterprises

All resident companies that maintain accounts with non-resident non-banking companies -normally, with companies of the same economic group, but not necessarily- must inform the Bank of Spain of their opening and cancellation, and of the operations paid and owed in them for their gross amounts.

• Non-resident compensation operations

Compensation is understood as the operation that, because it involves a collection and payment of the same amount and opposite sign, does not give rise to any settlement by means of a credit or debit to a bank account or intercompany account. Residents who carry out transactions of this nature with non-residents must declare them directly to the Bank of Spain.

The information obtained from the aforementioned groups is intended to cover, in principle, the entire range of possible operations with non-residents: those carried out through resident financial institutions, those carried out directly by them in their own name, those settled through bank or inter-company accounts abroad and those that do not originate any settlement -compensations-. In practice, however, both the minimum exemptions and the errors and omissions that are not detected make it necessary to use other sources of information: on occasions, as a mere contrast and, on others, as alternatives for the estimation of some headings.

Finally, it should be noted, as far as information sources are concerned, that the estimate of the data for that part of foreign direct investment in Spain that is carried out through negotiable securities acquired in organized markets incorporates, as a source of information, that provided, for these purposes, by the General Directorate of Foreign Investment Trade Policy, of the Ministry of Economy and Finance.