Fewer net errors and omissions, that is a new format of the balance of payments

Transcription

1 Fewer net errors and omissions, that is a new format of the balance of payments The size of net errors and omissions in the balance of payments decreased from 4.4% to 2.3% of GDP. This resulted from data revision by the NBP, which covered, among other things, the volume of imports of used cars from the EU, as well as other items of the balance of payments. The present balance no longer differs from figures recorded by other countries, explains Józef Sobota, Head of the NBP Department of Statistics. This paper presents several explanations why markets, while analysing the macroeconomic situation in emerging markets, pay close attention to the current account deficit and sources of its financing. In their article for Obserwator Finansowy, Józef Sobota, Head of NBP Department of Statistics, Grzegorz Dobroczek and Jacek Kocerka argue that such an approach results from the fact that the current account deficit reflects the scale of external imbalance, which, in turn, determines the country s macroeconomic stability. Countries whose development characteristics are similar to Poland, i.e. countries at a phase of a relatively rapid growth, should use external savings to finance their investments. These benefits will be sustainable provided the current trade deficit is at a safe level. In order to maintain a safe level of deficit, it is necessary to constantly monitor changes in the items of the balance of payments, not only in the current account, but also as regards mirrored changes in the financial account. Thus, these figures must be monitored constantly. The net errors and omissions In the balance of payments statistics, special attention is paid to the net errors and omissions. In the ideal world, the principle of double entry of transactions with foreign countries should enable to fully settle the deficit or the surplus in the current account through relevant changes in the financial account. For example, in the current account, the inflow of foreign currencies constituting export payments should correspond to the export of cars. In the real world, it is,however, unnecessary to collect such complete information on all operations with foreign countries given the cost of the approach. The accuracy with which the current account balance is calculated should suffice to assess its impact on macroeconomic stability. The consequence is incomplete offsetting of transactions. The difference is recognised under the net errors and omissions. In recent years, that component grew and reached 4.4% of GDP, which increasingly worried analysts and economists because of its potential consequences not only for the balance of payments, but also for the assessment of the country s external position, PLN exchange rate, etc. The International Monetary Fund, in its Balance of Payments and International Investment Position Manual (IMF, 2009) describes the size of the phenomenon as 1

2 follows: While it is not possible to give guidelines on an acceptable size of net errors and omissions, it should be assessed by compilers in relation to other items, such as GDP, positions data, and gross flows. Thus, the net errors and omissions is an important criterion in the evaluation of statistic data quality. It should also be mentioned that the net errors and omissions exists in all countries, but its size and divergence directions differ. This shows how complicated is the process of the development of the balance of payments statistics, which attempts to describe the status of mutual economic relations between the country and the rest of the world. It is not possible to fully eliminate the balance of errors. However, it may be minimised. To achieve this, data quality must be monitored constantly and further potential reasons for the significant growth of the net errors and omissions must be eliminated. Revisions of the balance of payments As a result of eliminating the reasons for data divergence, the existing statistics has been revised. This is nothing extraordinary in the global practice. Recently, the De Nederlandsche Bank, the European Central Bank and the Czech National Bank have revised data connected, among others, to problems reflected in the negative net errors and omissions. In the first two cases, the negative net errors and omissions resulted mainly from the financial account and rather than from the current account. The National Bank of Poland has also decided to revise the existing data. As a result of months-long analyses, four areas were identified where data of the balance of payments were verified. The NBP s work was supported by the special technical mission of the IMF charged with defining methodological foundations for the collection and compilation of the balance of payments statistics worldwide. The joint work of the IMF and the NBP was carried out in July 2009 and in June The IMF assessed positively the Polish reporting system and the amendments thereto. As a result of the conducted works, the net errors and omissions decreased substantially, from 4.4% of GDP to 2.3% of GDP in 2009, when the highest balance before correction was recorded. 2

3 Chart 1: Published and revised net errors and omissions (data in PLN million) PUBLISHED ERRORS AND OMISSIONS REVISED ERRORS AND OMISSIONS Legend: blue line the published net errors and omissions red line the revised net errors and omissions The revisions of data relating to the net errors and omissions are predominant in the current account of the balance of payments. Total current account corrections, depending on the year, varied from 1.1 to 1.8% of GDP. In 2010, the current account balance increased from 3.4 to 4.5%. After the correction, the size of Polish net errors and omissions is at the level comparable to other countries. It is necessary, however, to add that currently Sweden, (as well as Finland, which is not included in the chart) records one of the highest size of net errors and omissions in Europe. In Hungary, the size of net errors and omissions is similar to the Polish one, while in Slovakia it is even higher, taking into account its relation to GDP. 3

4 Chart 2: Net errors and omissions in relation to GDP in selected countries Legend: POLAND (revised data) HUNGARY SWEDEN THE CZECH REPUBLIC FRANCE SLOVAKIA Four areas of changes One of the actions taken by the National Bank of Poland to reduce the balance of errors and omissions was the introduction of a new reporting system. The work on the project had been carried on since 2006 and the new reporting system was launched at the beginning of The structure of reporting forms, the type of data to be collected and applied legal solutions should enable to present relations with foreign countries in a more comprehensive way, which reduces the risk of errors. The experience gained during the year of the system operation shows that at present certain information is available faster (e.g. already within a month after the transaction and not after a year, as it happened before) and is more accurate. The implementation of the reporting system based on surveys conducted among entities having economic relations with foreign countries enables to obtain a complete and consistent picture of such relations. 4

5 Hereunder is the detailed presentation of data revisions made in four areas of the balance of payments. Imports of used cars from the EU As of the accession of Poland to the European Union in May 2004, regulations defining taxes on imports of used cars from the EU changed. As a result of the significant tax reduction, imports increased rapidly. At the same time, regulations determining rules for the compilation of statistic data on trade in goods within the EU were amended. In Intrastat, which is used to collect information on international trade in goods within the European Union, there are no data on imports of used cars. There are two system-related reasons behind it. First, most cars are imported by private persons, who are not obliged to provide information to the Intrastat system. Second, the system imposes high reporting thresholds, which are not exceeded by most of small enterprises importing used cars. Under these circumstances, the value of imports of used cars may only be estimated, which was made by the NBP, on the basis of administrative data obtained from the Ministry of Finance, which collects them for tax purposes. According to the data of the Ministry of Finance, 730,000 cars for the total amount of PLN 11.0 billion were imported to Poland in The resulting correction of the balance of payments ranges from PLN 1.2 billion in 2004 to over PLN 11.2 billion in 2008, i.e. from 0.1 to 0.9% of GDP. Chart 3: Imports of goods comparison of data before and after corrections IMPORTS REVISED IMPORTS REVISION 5

6 Legend: Imports. Imports (revised data). Correction Other revisions of the current account Other important corrections of the current account focus on the item Other current transfers of other sectors. This category recorded a significant net inflow of funds to Poland. It should comprise transfers to Poland other than transfers of income from employment or the inflow of EU funds. This item comprises, among other things, indemnities, penalties, alimonies, old-age pensions, lottery prizes, humanitarian aid, etc. received by Polish households and enterprises. Previously, statistics in this area had been, for the most part, based on the information on payments settled by Polish banks. In 2010, it was replaced with the system based on information gathered directly from entities involved in relations with foreign countries. Such a change urges to search for new sources of information on transfers of other sectors. Data on other transfers received by Polish households were estimated by the NBP on the basis of the Household Budget Survey carried on by the Polish Statistical Office (GUS). This is a panel study based on the sample of almost 40,000 households, which systematically analyses, among other things, households cash income, including disability and old-age pension benefits from abroad, as well as other income classified in this item of the balance of payments, like, for example, family pensions, unemployment benefits from abroad, family benefits received from abroad, alimonies and other donations from abroad. As a result of the incorporation of a new source of data on income of Polish households from abroad the item Other transfers of other sectors was significantly revised downwards. The results of the Household Budget Survey, confirmed by the analysis of other information from the Ministry of Finance and Social Security Institution (ZUS), show that this item should be revised downwards by over PLN 10 billion every year. The detailed analysis of the payment data used so far showed that there was a large number of errors in coding assigned by banks in this area, which significantly overestimated transfers of other sectors. Information on transfers received (and sent) by enterprises comes from GUS studies. As part of its study on international trade in services, the Polish Statistical Office collects information both on transfers received from abroad and transfers sent abroad directly by enterprises and other reporting entities (e.g. foundations). This source has been used in the balance of payments only since the first quarter of 2010 as the study was launched by GUS at the beginning of

7 Similarly to income, information about on use of other private transfers was also revised. And these data, similarly to income, turned out to be overestimated. The NBP decided to take into account the new source of data on disability and old - age pension benefits (as well as other transfers, like funeral payments and veteran s benefits) sent by the Polish social insurance system abroad. Such funds are paid to Polish residents living abroad or foreign residents who have become eligible for such allowances in Poland. After the implementation of the direct reporting system, data on such transactions were not included in the balance of payments statistics. Starting from the first quarter of 2011, the data will be collected directly from ZUS, on a regular basis, and classified as expenditure relating to other government transfers. In 2010, such expenditure amounted to PLN 300 million. In addition, data on compensations of non-resident employees working in Poland and compensations transferred abroad have been revised. As a result of the introduction of the new direct reporting system where such transactions are not measured, the estimation method of such figures has been developed. The new estimation method is mainly based on administrative data on the number of foreign residents working in Poland (ZUS, Ministry of Labour and Social Policy) and the amount of their wages and salaries. In the case of compensation of employees (shown in the balance of payments as employment income), the corrections are not permanent and fluctuate from minus PLN 146 million in 2007 to plus PLN 716 million in In the case of the current transfers of wages, corrections increased systematically from PLN 13 million in 204 to PLN 143 million in Chart 4: Balance of current transfers comparison of data before and after corrections Data in PLN million 7

8 CURRENT TRANSFERS BALANCE CURRENT TRANSFERS BALANCE (REVISED DATA) REVISION Legend: blue: current transfers balance red: current transfers balance (revised data) green: correction Total transfers corrections range from PLN 7 billion to PLN 13.4 billion, depending on the year, i.e. between 0.5 and 1.0% of GDP. Repo transactions As a result of the analysis of potential errors and omissions, the double entry of repo transactions was identified. According to the balance of payments methodology, data on FX transactions (repo, sell/buy back, buy/sell back) should not be shown as the inflow or outflow of portfolio investments as the ownership of securities does not change from the economic point of view. Data on contingent transactions are collected from entities involved in trading with foreign countries and are presented separately under other investments as a type of securities-backed loans. The NBP found that data on foreign residents exposure to the Polish Treasury bonds market (in reports submitted to the National Depository for Securities, which constitute the data source for the balance of payments) cover both ordinary purchase/sales transactions, as well as contingent transactions. It managed to determine the volume of contingent transactions and correct the data in the balance of payments, respectively. As a result, the inflow of foreign residents investments to the Polish securities market decreased and the errors and omissions dropped accordingly. 8

9 It should be noted that at the end of 2010 and at the beginning of 2011, contingent transactions between residents and non-residents increased significantly as a result of intensified exposure of foreign entities to the Treasury securities market, possibility of opening individual accounts with the National Depository, and development of certain banks systems. The annual data were revised by PLN 49 million in 2005 to over PLN 2.1 billion in Foreign assets of the non-financial sector entities As a part of its work, the NBP also carefully analysed available sources of transactions conducted by the non-financial sector entities. The central bank focused mainly on transactions involving special-purpose vehicles. These are legal entities, usually not conducting any economic activity, employing a small number of persons, established merely for asset management. The analyses carried out by the NBP explicitly showed that in the previous years certain investments of Polish entities that were carried out abroad were not reported. Thus, the outflow of Polish investments to foreign countries was revised to decrease the net errors and omissions accordingly. Since the correction concerned single transactions, the amount of correction differed considerably in particular years. In some years, the data were not revised and in other years, the correction amounted to almost PLN 5 billion. Financing the current account deficit In order to assess the current account deficit, it is necessary to analyse not only its scale, but also sources of financing. This is important in order to evaluate the country s macroeconomic stability. Data on errors and omissions have been revised, but, at the same time, the increased current account deficit has already been financed in a safe manner. The inflow of investments from abroad has already been recorded in the balance of payments statistics. It was also reflected in the previously published reports on foreign debt and international investment position. 9

10 Chart 5: Financing the revised current account deficit INFLOW of DIRECT INVESTMENT to POLAND CAPITAL ACCOUNT CURRENT ACCOUNT DEFICIT Legend: red: the inflow of direct investment to Poland blue: capital account green: current account deficit (revised data) In the previous years, the revised current account deficit was financed in a safe manner from the point of view of the country s external stability. The inflow of foreign direct investments (FDIs), constituting a relatively reliable method of importing savings from abroad, ranged between PLN 27 and 65 billion, depending on the year. The decline in the inflow of direct investments in the years was connected with the crisis in the global financial markets and, in 2010, was additionally supported by withdrawal of one of direct investors from investing in Poland. If one excluded this single transaction, the inflow would largely exceed the one recorded in the previous year. The available forecasts concerning the inflow of direct investments show that the inflow of such capital will rise in the coming years, which is consistent with the global trends. This is also confirmed by the preliminary data of the balance of payments for the first four months of 2011, which show that the inflow of direct investments to Poland has already exceeded PLN 23 billion and accounts for almost 80% of the 2010 direct investments. 10

11 The year-by-year increasing amounts presented in the capital account reflect mainly the inflow of EU funds earmarked to finance investments. Its scale is expected to increase in the coming years in accordance with the EU budget perspective. For Poland, the high inflow of capital transfers from the EU budget, which will continue to be positive in the coming years, is an extremely important factor largely changing the traditional method of assessing the impact of the current trade deficit on macroeconomic imbalance. From the economic point of view, such funds have a positive impact on the reduction of the negative balance of current account, similarly to current transfers. They are distinguished and broken down into different items of the balance mainly for statistical, and not economic, reasons. In such a situation, a measure that better reflects relations with foreign countries is the current and capital account balance to GDP ratio. It is much lower than the current account balance to GDP ratio. This also shows that strict adherence to traditionally recognised measures used for external stability assessment does not always give a true picture of the economy. Polish entities have not faced any problems with the acquisition of other forms of capital, considered theoretically as somewhat less safe. Contrary to concerns, banks which lacked liquidity at the end of 2008 were provided with loans by their foreign shareholders. The Polish government efficiently conducts bond issues, both in the international and domestic markets, achieving yields which largely exceed the ones obtained by certain euro area countries. Polish enterprises have access to foreign sources of financing and utilize this capital. High safety level is also guaranteed by adequately maintained foreign currency reserves, which almost doubled (from USD 37 billion to nearly USD 94 billion) between January 2004 and December The amount of such reserves is adequate to the generally applied measures. Safety is also ensured by the appropriate structure of foreign debt, which comprises mainly long-term instruments (almost 80%). In the case of short-term forms of financing, however, commercial loans, which reflect normal business activity, prevail. At the same time, a significant part of such loans are granted within international capital groups. Finally, it should be mentioned that corrections of historical data of the balance of payments close a certain stage of work, which enabled, on the one hand, to identify some sources of the growing net errors and omissions, and, on the other hand, show how to obtain more complete data in the future. It should also be noted however, that corrections of the balance of payments are not likely to influence GDP. Yet, the distribution of GDP will be revised. Incorporation of imports of used cars will decrease net exports and, is likely to boost private consumption. The knowledge gained and the experience of other countries show that phenomena accompanying economic relations with foreign countries must be constantly 11

12 monitored and reporting systems must be accordingly modified to register, on a current basis, new types of operations for statistical purposes, and adjust, on the basis of representative studies, parameters of the models used to estimate the value of transactions connected with the balance of payment which are not directly observed, e.g. income from employment of Polish residents abroad and foreign residents in Poland. The on-going globalisation leads to growing number and higher level of complications in international transactions that are recorded in the balance of payments. This makes it necessary to constantly monitor the sources of excessive rise in errors and omissions. The work up to date has also enabled to initially identify other factors behind the previously recorded high net errors and omissions than those described in this paper. Their detailed analysis and quantification will be possible after conducting comprehensive studies and acquiring reliable source data confirming the study hypotheses. Given the exceptional complexity of the balance of payments statistics and the need to integrate them with other macroeconomic statistics, this requires a certain amount of time. Józef Sobota is the Head of the Department of Statistics of the National Bank of Poland. Grzegorz Dobroczek and Jacek Kocerka work in the same department. 12