## Arrears in the International Investment Position

## Source details

**Canonical URL:** [Arrears in the International Investment Position](https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/b7-arrears-in-international-investment-position.pdf)

## Other formats

- [Markdown version](/-/media/files/data/statistics/bpm6/approved-guidance-notes/b7-arrears-in-international-investment-position.pdf.md)
- [Structured JSON version](/-/media/files/data/statistics/bpm6/approved-guidance-notes/b7-arrears-in-international-investment-position.pdf.json)

---

### Background: why arrears in the IIP matter
- Modern financial systems evolve rapidly, causing turbulence on financial markets and sharp increases in insolvencies of financial market participants.
- Arrears and their dynamics are indicators of potential problems in a country’s financial system and can be a reason for loss of a country’s debt stability.
- A significant increase in arrears may be a harbinger of an impending economic crisis (example cited: 2008 subprime debt crisis).
- The pandemic has exacerbated global debt accumulation, with differing implications for developed versus emerging economies.
- Additional granularity of arrears data by institutional sectors, financial instruments, and currency composition is important for users of external sector statistics.
- Breakdown by institutional sector:
  - Reveals risk concentration centers that may cause debt instability.
  - Arrears related to government debt reveal a partial loss of government’s ability to service external debt and an additional burden on government finance.
  - Arrears under direct investment may be managed by the parent company without litigation and thus may not increase systemic risk in the same way.
- Breakdown by financial instrument:
  - Some debt instruments have rigid restrictions (debt covenants) that can trigger immediate repayment of other instruments if arrears occur, producing spillovers and cross-defaults.
- Breakdown by currency:
  - Currency composition of arrears estimates risk related to exceptional borrowing on foreign capital markets.
  - Debt liabilities denominated in different currencies may have various effects on financial soundness; national currency liabilities might be redeemable via additional currency issuance by the central bank.

### Definition and current recording practice (BPM6 / 2013 EDS)
- Arrears are defined as amounts that are both unpaid and past the due date for payment (BPM6, paragraph 5.99).
- Arrears can arise from:
  - Late payment of principal and interest on debt instruments (recorded in the original debt instrument).
  - Late payments for non-debt instruments and other transactions (recorded in a new debt instrument) (2013 EDS, Appendix 7, paragraph 3).
- Arrears should be presented as supplementary items where significant (BPM6, paragraph 3.57).
- 2013 EDS provisions:
  - Total value of arrears is separately identified by sectors in memorandum items to Table 4.1 (2013 EDS, paragraph 4.4).
  - Memorandum Table 4.2 provides information on external debt arrears of the total economy, presenting arrears at nominal value by sector detailed by principal and interest (2013 EDS, paragraphs 4.9–4.10).
  - Total value of arrears and debt securities by sector are also separately identified in memorandum items to Table 5.1 (2013 EDS, paragraph 5.8).
- BPM6 changes:
  - Recording of arrears moved to the accrual basis to harmonize recording across macroeconomic statistics and avoid artificial imputations required under the due-for-payment basis.
  - Under accrual: repayment of debt is recorded at the time of liquidation; arrears continue to be recorded with the same instrument until liquidation.
  - After BPM6 adoption, arrears related to exceptional financing are included in the analytical presentation as memorandum items in balance of payments (BPM6, paragraphs A1.1 and A1.22). Other arrears not related to exceptional financing may be recorded as supplementary items (BPM6, paragraph 5.101).
- Historical practice under BPM5:
  - Arrears were reclassified from the original debt instrument to other assets or liabilities, short-term, with transactions recorded as if paid and counter-entry made to reflect the new liability (BPM5, paragraphs 458 and 528–529).

### Problems and concerns with current treatment and reporting
- Presentation and analytical limitations:
  - Arrears are not presented as a separate item in standard components of the IIP; this reduces analytical value from a financial stability perspective and prevents external users from estimating the exact amount of arrears.
  - Data on arrears are available for only one-third of countries that contributed to EDS data in the QEDS Database.
- Conceptual and valuation shortcomings:
  - Arrears should be recorded at nominal value (BPM6, paragraph 5.99; 2013 EDS, Appendix 7, paragraph 8). Presenting arrears as part of the appropriate instrument makes it impossible to estimate instrument liquidity or market value, and may overstate assets because nominal prices persist while market values fall for insolvent instruments.
  - Debt securities past due and included in portfolio investment are currently included in the total stock for that functional category (BPM6, paragraph 3.56); there is no methodological justification or practical evidence for this treatment given lack of liquidity—such securities require reclassification but current manuals lack guidance.
  - Arrears recorded as part of long-term instruments lack economic rationale; past-due long-term instruments should be reclassified to short-term instruments.
- Special-case ambiguities and operational issues requiring guidance:
  - Short-duration technical settlement delays (e.g., 1–2 days) can produce arrears that do not reflect insolvency; such technical arrears might be excluded from arrears reporting.
  - Postponed or canceled incoming payments by a counterparty bank during global instability may not reflect debtor solvency; BPM6 paragraph 8.59 notes such arrears may be shown as supplementary items.
  - Classification of unpaid amounts on financial derivatives once settlement dates are reached lacks clarity in practice (BPM6, paragraph 5.82 indicates unpaid overdue derivative amounts are classified as accounts receivable/payable).
  - If a bank issues a bill and sells it to a nonresident who does not present it for repayment at maturity, that liability should not be treated as arrears if the bank is ready to meet it; however, 2013 EDS paragraph 2.32 states operational arrears outstanding at the reference date should, in principle, be reported as arrears.
  - Delays at settlement depositories that prevent bondholders from receiving funds despite issuer repayment create cases where issuer obligations have been met and should not be classified as arrears; practice shows such cases recorded as redemption of a debt security with a corresponding increase in accounts receivable.

### Issues for discussion: Alternatives for presentation and further guidance
- Alternative I: maintain methodological and presentational status quo
  - Avoids adding information that would not reflect users’ needs in countries with low evidence of arrears.
- Alternative II: separately identify arrears for each debt instrument in the IIP via “of which” memorandum items for accumulated arrears
  - Requires changes in the core IIP framework and additional methodological guidance in the updated manual for presentation of accumulated arrears as a sub-item in the IIP.
  - Advantages:
    - Enables users to evaluate the amount of arrears and its share in the IIP.
    - Dissemination of memorandum items on accumulated arrears provides additional analytical information and enables comparison with other data sources.
    - Provides additional granularity and the opportunity to analyze arrears separately for each debt item.
  - Costs/considerations:
    - Some inconvenience for external users due to additional data treatment and need to aggregate arrears across sectors for broader analysis.
- Alternative III: supplementary integrated presentation of arrears (similar to integrated IIP format) including flows, revaluation, and other changes
  - Enables in-depth analysis of arrears and underlying reasons.
  - Allows compilation of arrears data by foreign and national currencies.
  - Requires considerable resources for data compilation and dissemination.
  - Requires consistent methodological guidance on integrated IIP for arrears, covering stocks, flows, revaluation, and other changes.
  - Does not imply additional presentation of geographical breakdown; arrears data shown as a whole in relation to the rest of the world.
- Relationship to existing guidance:
  - Alternatives II and III do not contradict Guidance Note F.8 “Valuation of Debt Securities at Both Market and Nominal Value” and facilitate separate analysis of nominal debt instrument values and arrears amounts.

### Purposes and benefits identified for Alternatives II and III
- Allow users to estimate the liquidity of an IIP item by subtracting the amount of arrears from the total of the item.
- Enable users to estimate more accurately the amount of long-term instruments.
- Contribute to the additional methodological guidance in the updated manual, which is supposed to remove at least some questions raised in paragraph 20.

### SECTION II: OUTCOMES — Recommendations from BPTT consultations
- BPTT consultations showed members split: half supported Alternative II and the others preferred maintaining the status quo (Alternative I).
- Arguments for Alternative I among BPTT members:
  - Data on arrears are mostly relevant for liabilities.
  - The 2013 EDS appropriately covers these data (e.g., Table 4.1); inclusion in IIP is questioned.
  - Other members preferred status quo on the premise that Alternatives II/III would impose additional burden and most countries may not be able to provide such data.
  - Data on arrears may not be significant for all countries.
- Arguments for Alternative II among BPTT members:
  - Enables analysis of IIP positions in arrears for each debt instrument.
  - Allows combining arrears data across analytical breakdowns to assess insolvency risks by sector.
  - While this requires revision of data collection systems and imposes resource burdens, benefits of more detailed arrears data were judged to override compilation costs.
  - Suggestions to collect arrears of public and private sectors, if possible.

### REJECTED ALTERNATIVES
- Alternative III received no support and is rejected for these reasons:
  - Compilation costs will exceed potential analytical value and a supplementary status may discourage prompt dissemination.
  - Alternative III requires significant additional guidance on presentation of arrears in the IIP compared with the extra guidance under Alternative II.
  - Not all countries disseminate the integrated IIP; they will be unable to compile such supplementary presentations on arrears.
  - Consequently, Alternative III does not meet the cost-benefit principle and should be rejected.

### JUNE 2021 IMF COMMITTEE ON BALANCE OF PAYMENTS STATISTICS MEETING — Committee-level views
- All Committee members broadly acknowledged the analytical relevance of arrears data for external sector statistics.
- A large majority supported Alternative I (maintaining status quo) over Alternative II (separate “of which” items for arrears).
- Arguments for Alternative I at Committee level included:
  - Other alternatives are not appropriate at this stage considering collection burden and costs.
  - Questioning whether arrears information is relevant for all IIP categories (e.g., assets or direct investment).
  - Reconciliation of flows/stocks in an integrated IIP would necessitate substantial resources.
  - Preference to leave the IIP unchanged but strengthen external debt statistics and collect additional arrears data only for liabilities.
  - Given competing priorities, allocate BPM6 update resources to more relevant issues.
  - Consideration that additional guidance is more appropriate for the next update of the EDS Guide rather than a separate Guidance Note (GN).

### Annex II: Supplementary presentations of arrears proposed under Alternative III (summary of proposed breakdowns)
- Table 1: Proposed breakdown of arrears by institutional sectors (Assets and Liabilities with sectoral rows including Central Bank; Deposit-Taking Corporations, Except Central Bank; General Government; Other Sectors; Other Financial Corporations; Nonfinancial Corporations, Households, and NPISHS).
- Table 2: Proposed breakdown of arrears by type of instrument (Assets and Liabilities with instrument rows including Debt Securities; Financial Derivatives; Loans; Deposits; Trade Credit and Advances; Other Accounts Receivable/Payable).
- Table 3: Proposed breakdown of arrears by currency (Assets and Liabilities with Domestic Currency and Foreign Currency rows).
- Note: The supplementary data on arrears are not limited by exceptional financing.

*Prepared by Robert Pupynin, Natalia Kupriyanova, and Sergey Elizarov (all from the Bank of Russia). June 2021 IMF Committee on Balance of Payments Statistics meeting.*

### SECTION I: THE ISSUE

### SECTION I: THE ISSUE

### Background: why arrears in the IIP matter
- Modern financial systems evolve rapidly, causing turbulence on financial markets and sharp increases in insolvencies of financial market participants.
- Arrears and their dynamics are indicators of potential problems in a country’s financial system and can be a reason for loss of a country’s debt stability.
- A significant increase in arrears may be a harbinger of an impending economic crisis (example cited: 2008 subprime debt crisis).
- External debt is among the most important factors to monitor; the pandemic has exacerbated global debt accumulation, with differing implications for developed versus emerging economies.
- Additional granularity of arrears data by institutional sectors, financial instruments, and currency composition is important for users of external sector statistics.
- Breakdown by institutional sector:
  - Reveals risk concentration centers that may cause debt instability.
  - Arrears related to government debt reveal a partial loss of government’s ability to service external debt and an additional burden on government finance.
  - Arrears under direct investment may be managed by the parent company without litigation and thus may not increase systemic risk in the same way.
- Breakdown by financial instrument:
  - Some debt instruments have rigid restrictions (debt covenants) that can trigger immediate repayment of other instruments if arrears occur, producing spillovers and cross-defaults.
- Breakdown by currency:
  - Currency composition of arrears estimates risk related to exceptional borrowing on foreign capital markets.
  - Debt liabilities denominated in different currencies may have various effects on financial soundness; national currency liabilities might be redeemable via additional currency issuance by the central bank.

### Definition and current recording practice (BPM6 / 2013 EDS)
- Arrears are defined as amounts that are both unpaid and past the due date for payment (BPM6, paragraph 5.99).
- Arrears can arise from:
  - Late payment of principal and interest on debt instruments (recorded in the original debt instrument).
  - Late payments for non-debt instruments and other transactions (recorded in a new debt instrument) (2013 EDS, Appendix 7, paragraph 3).
- Arrears should be presented as supplementary items where significant (BPM6, paragraph 3.57).
- 2013 EDS:
  - Total value of arrears is separately identified by sectors in memorandum items to Table 4.1 (2013 EDS, paragraph 4.4).
  - Memorandum Table 4.2 provides information on external debt arrears of the total economy, presenting arrears at nominal value by sector detailed by principal and interest (2013 EDS, paragraphs 4.9–4.10).
  - Total value of arrears and debt securities by sector are also separately identified in memorandum items to Table 5.1 (2013 EDS, paragraph 5.8).
- BPM6 changes:
  - Recording of arrears moved to the accrual basis to harmonize recording across macroeconomic statistics and avoid artificial imputations required under the due-for-payment basis.
  - Under accrual: repayment of debt is recorded at the time of liquidation; arrears continue to be recorded with the same instrument until liquidation.
  - After BPM6 adoption, arrears related to exceptional financing are included in the analytical presentation as memorandum items in balance of payments (BPM6, paragraphs A1.1 and A1.22). Other arrears not related to exceptional financing may be recorded as supplementary items (BPM6, paragraph 5.101).
- Historical practice:
  - Under BPM5, arrears were reclassified from the original debt instrument to other assets or liabilities, short-term, with transactions recorded as if paid and counter-entry made to reflect the new liability (BPM5, paragraphs 458 and 528–529).

### Problems and concerns with current treatment and reporting
- Arrears are not presented as a separate item in standard components of the IIP; this reduces analytical value from a financial stability perspective and prevents external users from estimating the exact amount of arrears.
- Data availability gap:
  - Data on arrears are available for only one-third of countries that contributed to EDS data in the QEDS Database.
- Conceptual and practical shortcomings:
  - Arrears should be recorded at nominal value (BPM6, paragraph 5.99; 2013 EDS, Appendix 7, paragraph 8). Presenting arrears as part of the appropriate instrument makes it impossible to estimate instrument liquidity or market value, and may overstate assets because nominal prices persist while market values fall for insolvent instruments.
  - Current treatment of debt securities past due and included in portfolio investment (BPM6, paragraph 3.56) implies inclusion in the total stock for that functional category; there is no methodological justification or practical evidence for this treatment given lack of liquidity—such securities require reclassification but current manuals lack guidance.
  - Arrears recorded as part of long-term instruments lack economic rationale; past-due long-term instruments should be reclassified to short-term instruments.
- Special-case ambiguities and operational issues requiring guidance:
  - Short-duration technical settlement delays (e.g., 1–2 days) can produce arrears that do not reflect insolvency; such technical arrears might be excluded from arrears reporting.
  - Cases of postponed or canceled incoming payments by a counterparty bank during global instability may not reflect debtor solvency; BPM6 paragraph 8.59 notes such arrears may be shown as supplementary items.
  - Classification of unpaid amounts on financial derivatives once settlement dates are reached lacks clarity in practice (BPM6, paragraph 5.82 indicates unpaid overdue derivative amounts are classified as accounts receivable/payable).
  - If a bank issues a bill and sells it to a nonresident who does not present it for repayment at maturity, that liability should not be treated as arrears if the bank is ready to meet it; however, 2013 EDS paragraph 2.32 states operational arrears outstanding at the reference date should, in principle, be reported as arrears.
  - Delays at settlement depositories that prevent bondholders from receiving funds despite issuer repayment create cases where issuer obligations have been met and should not be classified as arrears; practice shows such cases recorded as redemption of a debt security with a corresponding increase in accounts receivable.

### Issues for discussion: Alternatives for presentation and further guidance
- Alternative I: maintain methodological and presentational status quo
  - Avoids adding information that would not reflect users’ needs in countries with low evidence of arrears.
- Alternative II: separately identify arrears for each debt instrument in the IIP via “of which” memorandum items for accumulated arrears
  - Requires changes in the core IIP framework and additional methodological guidance in the updated manual for presentation of accumulated arrears as a sub-item in the IIP.
  - Advantages:
    - Enables users to evaluate the amount of arrears and its share in the IIP.
    - Dissemination of memorandum items on accumulated arrears provides additional analytical information and enables comparison with other data sources.
    - Provides additional granularity and the opportunity to analyze arrears separately for each debt item.
  - Costs/considerations:
    - Some inconvenience for external users due to additional data treatment and need to aggregate arrears across sectors for broader analysis.
- Alternative III: supplementary integrated presentation of arrears (similar to integrated IIP format) including flows, revaluation, and other changes
  - Enables in-depth analysis of arrears and underlying reasons.
  - Allows compilation of arrears data by foreign and national currencies.
  - Requires considerable resources for data compilation and dissemination.
  - Requires consistent methodological guidance on integrated IIP for arrears, covering stocks, flows, revaluation, and other changes.
  - Does not imply additional presentation of geographical breakdown; arrears data shown as a whole in relation to the rest of the world.
- Relationship to existing guidance:
  - Alternatives II and III do not contradict Guidance Note F.8 “Valuation of Debt Securities at Both Market and Nominal Value” and facilitate separate analysis of nominal debt instrument values and arrears amounts.

*Prepared by Robert Pupynin, Natalia Kupriyanova, and Sergey Elizarov (all from the Bank of Russia).*

### 25.      In relation to the issues, highlighted in paragraphs 19–20, both Alternatives II and  III:

### 25. In relation to the issues, highlighted in paragraphs 19–20, both Alternatives II and III:

### Purposes and benefits identified for Alternatives II and III
- Allow users to estimate the liquidity of an IIP item by subtracting the amount of arrears from the total of the item.
- Enable users to estimate more accurately the amount of long-term instruments.
- Contribute to the additional methodological guidance in the updated manual, which is supposed to remove at least some questions raised in paragraph 20.

### SECTION II: OUTCOMES — Recommendations from BPTT consultations
- Consultations within the Balance of Payments Task Team (BPTT) showed that the views of the members were somewhat split with half of the members supporting Alternative II and the others expressing preference for maintaining the status quo (i.e., Alternative I).
- Those supporting no change to the current framework (Alternative I) argued:
  - Data on arrears are mostly relevant for liabilities.
  - The 2013 EDS appropriately covers these data (e.g., Table 4.1), so the need to include them in IIP is questioned.
  - Although one member acknowledged the analytical usefulness of arrears on asset side, the status quo was preferred on the premise that other alternatives would impose additional burden and most of the countries may not be able to provide such data.
  - Data on arrears may not be significant for all the countries.
- Members supporting Alternative II (i.e., separately identify arrears for each debt instrument in the IIP via “of which” items through memorandum information in IIP) noted:
  - It enables users of external sector statistics to analyze IIP positions in arrears for each debt instrument.
  - It allows combining data on arrears in different analytical breakdowns to get an economic intuition of current insolvency risks related to particular sectors of the country under consideration.
  - While this alternative requires a revision of the data collection systems for various sectors and instruments, and imposes burden on the resources, the benefits of more detailed arrears data will override the costs of its compilation.
  - There were suggestions to collect arrears of public and private sectors, if possible.

### REJECTED ALTERNATIVES
- Alternative III, which requires only supplementary presentation of arrears data, received no support and is rejected for the following reasons:
  - Compilation costs will exceed potential analytical value and a supplementary status of the presentation may discourage compilers from prompt actions to disseminate such data.
  - Alternative III requires significant additional guidance on the presentation of arrears in the IIP (in comparison with extra guidance in case of Alternative II) to be included in the updated IMF’s Balance of Payments and International Investment Position Manual.
  - Not all countries disseminate the integrated IIP, thus they will be unable to compile such supplementary presentations on arrears.
  - Consequently, Alternative III does not meet the criteria of cost-benefit principle and should be rejected.

### JUNE 2021 IMF COMMITTEE ON BALANCE OF PAYMENTS STATISTICS MEETING — Committee-level views
- All Committee members broadly acknowledged the analytical relevance of data on arrears from the perspective of external sector statistics.
- A large majority of the members supported Alternative I (i.e., maintaining status quo on methodology and presentation of arrears) compared to Alternative II (i.e., separately identifying arrears for each debt instrument in the international investment position via “of which” items).
- Arguments for supporting Alternative I at the Committee level included:
  - Other alternatives are not appropriate at this stage considering the collection burden and costs associated with their implementation.
  - Questioning whether arrears information is relevant for all IIP categories (e.g., assets or direct investment).
  - Reconciliation of flows/stocks in an integrated IIP will necessitate substantial resources, so additional requirements on this framework should be limited.
  - Strong suggestion to leave the IIP unchanged but strengthen external debt statistics and collect additional data on arrears only for liabilities.
  - Given competing priorities, importance of allocating BPM6 update resources to address more relevant issues.
  - Consideration that it is more appropriate to address any need for additional guidance in the next update of the EDS Guide rather than under a separate Guidance Note (GN).

### Annex II: Supplementary presentations of arrears proposed under Alternative III (summary of proposed breakdowns)
- Table 1: Proposed breakdown of arrears by institutional sectors (Assets and Liabilities with sectoral rows including Central Bank; Deposit-Taking Corporations, Except Central Bank; General Government; Other Sectors; Other Financial Corporations; Nonfinancial Corporations, Households, and NPISHS).
- Table 2: Proposed breakdown of arrears by type of instrument (Assets and Liabilities with instrument rows including Debt Securities; Financial Derivatives; Loans; Deposits; Trade Credit and Advances; Other Accounts Receivable/Payable).
- Table 3: Proposed breakdown of arrears by currency (Assets and Liabilities with Domestic Currency and Foreign Currency rows).
- Note: The supplementary data on arrears are not limited by exceptional financing.

---


_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/b7-arrears-in-international-investment-position.pdf_