## b-4-reconciliation-between-flows-stocks

## Source details

**Canonical URL:** [b-4-reconciliation-between-flows-stocks](https://www.imf.org/-/media/files/data/statistics/bpm6/bptt/b-4-reconciliation-between-flows-stocks.pdf)

## Other formats

- [Markdown version](/-/media/files/data/statistics/bpm6/bptt/b-4-reconciliation-between-flows-stocks.pdf.md)
- [Structured JSON version](/-/media/files/data/statistics/bpm6/bptt/b-4-reconciliation-between-flows-stocks.pdf.json)

---

### SECTION I: THE ISSUE — Background, motivation, and current status
- Motivation:
  - External assets and liabilities as a share of GDP more than tripled from the early 1990s to the years preceding the COVID-19 crisis.
  - Widening gaps between changes in positions and cumulative financial transactions for many countries.
  - Returns on assets and liabilities play a significantly larger role in driving external flow and stock imbalances.
- Data availability constraint:
  - IMF surveys show that out of 52 countries, the compilation systems of only around 10 economies would support production of a complete set of integrated international accounts with full reconciliation between stocks and flows.
  - An additional 20 economies present stock-flow reconciliation and metadata details in a varying degree of completeness.
  - Lack of stock-flow reconciliation data forces most studies to estimate revaluation components as the numerical discrepancy between changes in the IIP and financial transactions, disregarding market volatilities and statistical changes (e.g., discovery of new assets and liabilities).
- BPM6 coverage and terminology:
  - BPM6 references integrated IIP presentation in Chapter 2 (paragraph 2.10), defines other flows and their types in Chapter 3 (paragraphs 3.19–3.21), includes an example integrated IIP presentation in Chapter 7 (table 7.1), and covers other changes to financial positions in Chapter 9 (Table 9.1 on the Other Changes in Financial Assets and Liabilities Account).
  - The term “Accumulation Accounts” from 2008 SNA (paragraph 1.20) is proposed for alignment: accumulation accounts for IIP are (i) transactions from the financial account, (ii) revaluations, and (iii) other changes in volume.
- Concerns and shortcomings:
  - The integrated IIP with full reconciliation is not a Standard Component in Appendix 9; examples are expository and not included in Appendix 9.
  - OCA breakdown into “Exchange Rates Changes”, “Other Price Changes”, and “Other Changes in Volumes” may mask economically distinct volume changes (e.g., statistical reclassifications vs. debt cancellation/write-offs).
  - BPM6 does not sufficiently elaborate on analytical value of an integrated view of flows and stocks (external sustainability, external vulnerability, financial interconnectedness).
  - Missing analytical guidance highlighted: risk measurement uses of IIP/revaluations, interpretation of revaluations (valuation paradox), nexus between current account and IIP, and dedicated discussion of rates of return.

### Issues for discussion and proposed options
- Task Team (TT) recommendation: give greater prominence to the integrated IIP presentation and its analytical value in the next Manual update, balancing policy needs and country compilation capacity.
- Option 1 (lesser change):
  - Highlight integrated presentation where relevant in the Manual.
  - Add analytical section on selected IIP issues to Chapter 14.
  - Add integrated IIP statement in Appendix 9C as additional analytical position data.
- Option 2 (bold change; recommended):
  - Present external statistics framework as three intertwined elements: (i) the balance of payments, (ii) the IIP, and (iii) the accumulation accounts (transactions, revaluations, other changes in volume).
  - Include an integrated IIP statement with same line items as existing standard components in Appendix 9B, and make it an additional standard component in Appendix 9.
  - Encourage separate reporting within “Other Changes in Volumes” of debt cancellation and write-offs, and reclassifications.
  - Encourage sectoral presentation of stock-flow reconciliation for different financial instruments under encouraged reporting items.
  - Add an analytical section on selected IIP issues to Chapter 14 explaining analytical power of revaluations and other changes in volume to incentivize compilation.
- Implementation caveats:
  - Compiling integrated IIP information is a significant endeavor likely to take substantial time and resources for many countries; treat as a medium-term aspiration.
  - Reporting under this option is not mandatory; no immediate resource burden is envisaged.
  - Include an “unallocated” item in the integrated IIP template to allow countries to record extent of knowledge while capacity is developed; further research and a guidance note are proposed to elaborate purpose, justification, content, interpretation, and placement.

### Outcomes and recommendations (TT / Guidance Note)
- Recommended option:
  - Option 2 is recommended by the Guidance Note (GN) for BPM7 to make integrated presentation of flows and stocks a central piece of the new Manual.
  - Rationale: underscores sizable contribution of other flows (revaluations and other changes in volume) to net changes in external positions and increases analytical importance of stock-flow reconciliation.
  - Including integrated IIP as a standard component is expected to send a stronger message and aid compilers in convincing policymakers to compile these data regularly.
- Implementation considerations:
  - Treat compilation as medium-term; encourage best-effort reporting with flexibility.
  - Encourage separate reporting of debt cancellation and write-offs, and reclassifications under “Other Changes in Volumes”.
  - Encourage sectoral presentation of stock-flow reconciliation for different financial instruments as an encouraged reporting item.
  - Regular availability of these data would boost surveillance quality by international financial institutions such as the IMF through its External Sector Report (ESR).

### Recommendation and Rationale: Adopt Option 2 — timing and scope
- Timing:
  - The TT considers the option forward looking, to come into effect when BPM7 is launched five years from now, in 2025.
- Rationale:
  - Including integrated IIP and accumulation accounts under standard components indicates direction in which external sector accounts are likely to evolve in next 20 years.
  - Option 1 rejected because inclusion among many supplementary tables would lower prominence and undermine aim of making integrated IIP central.

### Current reporting coverage and capacity building needs
- Current reporting coverage to the IMF:
  - 197 countries report balance of payments.
  - 172 countries report IIP.
  - Around 12 countries report the currency composition of IIP data to IMF (a necessary first step to produce a full reconciliation between stocks and flows).
- BPM6 uptake detail:
  - Of the balance of payments reporters, 175 countries compile on a BPM6 basis.
  - Of the IIP reporters, 158 countries compile on a BPM6 basis.
- IMF implementation strategy proposed:
  - Develop detailed guidance and establish a medium to long-term implementation strategy focusing on technical assistance/training.
  - Reporting of detailed components on a best effort basis with flexibility.
  - Guidance should address: compilation of currency composition of IIP (specify minimum set of currencies), compilation of other changes (e.g., for direct investment), amending reporting requirements, and templates for banking and securities holding statistics.

### Supplementary analytical and accounting framework (terminology, tables, and identities)
- Proposed terminology:
  - Introduce the term "accumulation accounts" for accounts that explain the change of the IIP between two points in time.
- Proposed Integrated IIP Statement tables:
  - Beginning of period IIP
  - Accumulation accounts (Flows / Transactions from BOP's financial account / Other Flows)
  - Revaluations (due to exchange rate changes; due to other price changes; of which: write-offs and cancelations; of which: reclassifications)
  - End of period IIP
- Accounting identities and nexus with the current account:
  - Change in net IIP expressed as:
    - ∆IIP = NFA + VAL + OC     (13)
      - where NFA = net financial account entries, VAL = net revaluation, OC = net other changes in volume
  - Substituting identity (12) in (13):
    - ∆IIP = CAB + KAB + VAL + OC     (14)
    - That is, the change in the net IIP equals the current account and capital account balances plus valuation effects and other changes in volume, each of which might take a positive or negative value.
  - Alternative decomposition distinguishing components dependent on current IIP stock:
    - ∆IIP = (CAB – II + KAB) + (II + VAL) + OC    (15)
      - where II = investment income balance
    - Interpretation:
      - First term: external primary balance (capital account balance and current account balance less investment income).
      - Second term: net total return on a country’s net external position (income rate of return plus revaluation rate of return).
- Practical considerations:
  - To balance accounts in practice, errors and omissions of the balance of payments have to enter the equation added to OC.
  - Change in a country’s net IIP ultimately hinges on the current account balance, although revaluations and other changes in volume can dominate in particular periods.
  - Policy implication: If an IIP is out of balance with fundamentals, adjustment requires change in current account balance; exchange rate depreciation may improve trade balance and over time the IIP, but valuation effects must be taken into account given currency composition of the balance sheet.

### Three-dimensional account system and reconciliation of flows and stocks
- Three pillars presenting changes in net IIP:
  - Pillar 1 (generation account): breaks down total net IIP change into components according to (15) and shows origin/source of change.
  - Pillar 2 (instrument account): standard IIP presentation showing how changes are reflected in functional categories.
  - Pillar 3 (sector account): allocates changes to domestic sectors involved.
- Each account captures a specific aspect of change in net IIP for a period (quarter, year, or multi‑year).
- Numerical example from Figure 14.1:
  - Net IIP increased by 40 billion units in the period.
  - Generation account documents that approx. 45 billion units originate from the current account balance, whereas valuation effects and other changes have a negative impact.
  - Instruments account identifies portfolio investment as the largest increase: approx. 30 billion units.
- Sector account example:
  - External positions of the government sector and the non‑financial corporations, households and NPISHs sector deteriorate.
  - Other financial corporations sector records a strong increase in net IIP.

### IIP and risk analysis — liquidity, interest rate, currency, and credit risk
- Liquidity and interest rate risk:
  - BPM6 provides breakdowns (listed vs unlisted equity; deposits overnight vs other deposits) and original maturity for debt instruments; remaining/residual maturity classification is encouraged.
  - Table A9-IV of BPM6 requests short-term remaining maturity of debt liabilities by sector.
  - Duration is a complementary measure: weighted average term to maturity; price revaluations relate to duration and yield curve slope; footnote: for fixed‑rate instruments, duration equals remaining maturity only for zero coupon instruments.
- Currency risk:
  - Currency mismatches are frequent macro risk sources, especially for emerging market and developing economies.
  - Currency breakdown of debt liabilities is crucial for macroprudential analysis and creditor risk assessment.
  - Existing initiatives: IMF FSI, ESRB risk dashboard, G-20 Data Gaps Initiative (Table A9-I of BPM6) request sector and original maturity breakdowns and notional amounts of foreign currency derivatives.
  - Analytical limits: IIP by currency and derivatives notional amounts give structural exposure but do not immediately assess impact on net external position; analysis requires examining price revaluations of foreign currency derivatives and net impact of revaluations due to exchange rate changes.
  - Typical outcome: currency-driven revaluations generally negative for economies with net liability position in foreign currency combined with inflationary domestic depreciation.
- Credit risk:
  - Credit risk informed by IIP statistics by counterpart area/geography; counterpart sector detail is increasingly important (CPIS data for portfolio investment; some jurisdictions provide direct investment and other investment counterpart sector detail).
  - Cross‑classification by instrument, counterpart country and sector is powerful to assess portfolio or credit risk.
  - Credit derivatives and guarantees require notional amounts by counterpart area/sector; for guarantees, the underlying notional value of the debt is the relevant credit risk measure.
  - Rating information and breakdown of portfolio investment by rating grade would enhance creditworthiness analysis but are generally missing.
  - Price revaluations and other changes in volume provide information on credit dimensions: revaluation returns vs benchmarks for tradable instruments; write‑offs and write‑downs history for non‑tradable instruments.

### Valuation paradox and mitigation
- Valuation paradox:
  - Revaluations adjust IIP stocks to market values but do not necessarily reflect realized gains or losses; IIP captures only external part of sector balance sheets.
  - Marking bonds to market can mechanically improve a crisis country’s reported net external position as prices fall while payment obligations remain unchanged; the reverse can worsen reported net IIP when prices rise.
  - The paradox may be more pronounced in currency unions where exchange rates cannot adjust.
- Suggested mitigation:
  - FITT GN F.8 proposes a reconciliation table presenting nominal and market valuation of debt securities liabilities (similar to 2013 External Debt Statistics guide).

### Consistency with national accounts and accumulation accounts
- Rest of the world sector in national accounts and balance of payments/IIP portray the same cross‑border reality.
- Joint development of BPM6 and 2008 SNA yields analytical benefits: integration aids analysis of sector/geographical imbalances, shock propagation, and cross‑border exposures.
- National accounts accumulation accounts decompose flows into transactions, revaluations, and other changes in volume.
- A position‑accumulation framework in BOP/IIP would deepen synergies, aid monitoring of financial risk exposures, integrate cross‑border assets/liabilities with domestic determinants, and illuminate links such as the valuation paradox.
- Enhancements should aim for broad consistency with the SNA framework.

### Rates of return — definitions, computation, and analytical use
- Definitions:
  - Income rate of return = investment income / corresponding average asset or liability position in the IIP.
  - Revaluation rate of return = revaluations / corresponding average asset or liability position.
  - Total rate of return = income rate of return + revaluation rate of return.
- Scope and computation notes:
  - Rates can be computed for assets excluding financial derivatives and for liabilities excluding financial derivatives.
  - FISIM considerations: excluding FISIM from investment income causes rates of return on loans and deposits to differ from rates estimated from actual interest.
  - Estimating rates using both pure interest and actual interest provides a more complete picture.
- Analytical benefits:
  - Systematic rates of return estimation highlights different investment characteristics across functional categories.
  - Revaluation rates are important when positions are marked to market and in assessing the valuation paradox.
  - Direct investment marked to market can generate larger revaluations than book value measures.
- Rate differential implications:
  - Rate of return differential = rate of return on assets minus rate of return on liabilities.
  - Income rate differential affects destabilizing feedback loops between current account and financial account:
    - Positive differential reduces impact on net investment income.
    - Neutral differential means proportional impact.
    - Negative differential increases impact, potentially exacerbating instability.
  - Income and revaluation rates, tax rates, and expected future price changes determine expected real after‑tax total rates of return on foreign assets and liabilities.
- Financial derivatives:
  - Omitted from suggested rates framework because they do not pay interest and capital gains are difficult to relate to original principal; revaluation rates on financial derivatives suggested as topic for additional research.

### Implementation issues and research agenda
- Suggested research items:
  - Whether to introduce a category "unallocated" in the integrated IIP statement.
  - How to specify a minimum set of currencies for currency composition reporting.
  - Templates and reporting formats to ensure consistency and comparability across countries.
- Questions posed to Task Team members:
  1. Do TT members agree with option 2 recommended in the GN even though implementation will be a medium to long-term goal for many countries?
  2. Do TT members agree to introduce the term accumulation accounts for accounts explaining change of the IIP between two points?
  3. Do TT members agree to put the question of an “unallocated” category on the research agenda?
  4. Do TT members have other views/suggestions on the issues discussed and proposed outcomes?

*Source: International Monetary Fund.*

### SECTION I: THE ISSUE

### b-4-reconciliation-between-flows-stocks - SECTION I: THE ISSUE

### Background and motivation
- Reconciliation between flows from the balance of payments’ financial account and stocks from the international investment position (IIP) has increased in importance due to:
  - External assets and liabilities as a share of GDP having more than tripled from the early 1990s to the years preceding the COVID-19 crisis.
  - Widening gaps between changes in positions and cumulative financial transactions for many countries.
  - Returns on assets and liabilities playing a significantly larger role in driving external flow and stock imbalances.
- Data availability constraint:
  - IMF surveys show that out of 52 countries, the compilation systems of only around 10 economies would support production of a complete set of integrated international accounts with full reconciliation between stocks and flows.
  - An additional 20 economies present stock-flow reconciliation and metadata details in a varying degree of completeness.
  - Lack of stock-flow reconciliation data forces most studies to estimate revaluation components as the numerical discrepancy between changes in the IIP and financial transactions, disregarding market volatilities and statistical changes (e.g., discovery of new assets and liabilities), thereby limiting understanding of exchange rate valuation changes, asset price valuation changes, and other changes (e.g., debt write-offs).

### Current state in international statistical standards (BPM6)
- BPM6 coverage:
  - Chapter 2 (paragraph 2.10) briefly explains an integrated IIP presentation linking the IIP, the financial account, and the other changes in financial assets and liabilities account.
  - Chapter 3 defines other flows (paragraph 3.19) and elaborates on types: (a) other changes in volume and (b) revaluations (paragraphs 3.20–3.21).
  - Chapter 7 includes an example integrated IIP presentation (table 7.1) and references IIP analytical relevance (paragraphs 7.5, 7.7, 7.8, 7.13).
  - Chapter 8 (paragraph 8.5) highlights the financial account’s contribution within the integrated IIP framework.
  - Chapter 9 focuses on non-transactional changes to financial positions and includes Table 9.1 on the Other Changes in Financial Assets and Liabilities Account (OCA).
  - Chapter 14 covers selected BOP and IIP analysis but focuses mainly on BOP issues; only Section G emphasizes the balance sheet approach and IIP data.
- Terminology alignment:
  - The term “Accumulation Accounts” from 2008 SNA (paragraph 1.20) is proposed to align BPM terminology with SNA; accumulation accounts for IIP are: (i) transactions from the financial account, (ii) revaluations, and (iii) other changes in volume.

### Concerns and shortcomings identified
- Standard component status:
  - The integrated IIP with full reconciliation is not a Standard Component in Appendix 9; its examples (table 7.1 and table 9.1) are expository and not explicitly included in Appendix 9, which may have contributed to low reporting of stock-flow reconciliation information.
- Insufficient breakdown in OCA:
  - OCA breakdown into “Exchange Rates Changes”, “Other Price Changes”, and “Other Changes in Volumes” may mask economically distinct volume changes (e.g., statistical reclassifications vs. debt cancellation/write-offs), the latter having clear external-sustainability implications.
- Terminology divergence:
  - BPM6 terminology differs from 2008 SNA; introducing “Accumulation Accounts” is proposed to better reflect components that explain changes between opening and closing positions.
- Analytical gaps:
  - BPM6 does not sufficiently elaborate on the analytical value of an integrated view of flows and stocks (e.g., for external sustainability, external vulnerability, and financial interconnectedness).
  - Specific missing analytical guidance includes:
    - Risk measurement: limited considerations on how the IIP and the revaluations account can be used in risk analysis and forward-looking vulnerability assessment.
    - Valuation paradox: limited guidance on interpreting revaluations; example given where marking sovereign bonds to market can mechanically improve a crisis country’s reported net external position as prices fall despite unchanged payment obligations.
    - Nexus between current account and IIP: no dedicated section summarizing reconciliation between IIP stocks and both financial and current account flows, nor alternative presentation schemes that visualize interactions (Annex I referenced for supplementary information).
    - Rates of return: BPM6 mentions rates of return but lacks a dedicated section; defined concepts include:
      - Income rate of return = investment income / corresponding average asset or liability position in the IIP.
      - Revaluation rate of return = revaluations (holding gains and losses) / corresponding average asset or liability position.
      - Total rate of return = income rate of return + revaluation rate of return.

### Issues for discussion and proposed options
- Task Team (TT) recommendation: give greater prominence to the integrated IIP presentation and its analytical value in the next Manual update, balancing policy needs and country compilation capacity.
- Two options considered:
  - Option 1:
    - Highlight integrated presentation throughout the Manual where relevant.
    - Add an analytical section on selected IIP issues to Chapter 14.
    - Add the integrated IIP statement in Appendix 9C as additional analytical position data.
  - Option 2:
    - Put the integrated presentation at the center of the Manual by presenting the external statistics framework as three intertwined elements: (i) the balance of payments, (ii) the IIP, and (iii) the accumulation accounts (transactions, revaluations, other changes in volume).
    - Include an integrated IIP statement with the same line items as existing standard components in Appendix 9B, and make it an additional standard component in Appendix 9.
    - Encourage separate reporting within “Other Changes in Volumes” of debt cancellation and write-offs, and reclassifications.
    - Encourage sectoral presentation of stock-flow reconciliation for different financial instruments under encouraged reporting items.
    - Add an analytical section on selected IIP issues to Chapter 14 explaining the analytical power of revaluations and other changes in volume to incentivize compilation.

### Outcomes and recommendations
- Recommended option:
  - Option 2 is recommended by the Guidance Note (GN) for BPM7 to make the integrated presentation of flows and stocks a central piece of the new Manual.
  - Rationale: underscores sizable contribution of other flows (revaluations and other changes in volume) to net changes in external positions and increases analytical importance of stock-flow reconciliation.
  - Including the integrated IIP as a standard component is expected to send a stronger message on importance than Option 1 and to aid compilers in convincing policymakers to compile these data regularly.
- Implementation considerations:
  - Compiling integrated IIP information is a significant endeavor likely to take substantial time and resources for many countries; it should be treated as a medium-term aspiration.
  - Reporting of data under this option is not mandatory; no immediate resource burden is envisaged for countries.
  - Separate reporting of debt cancellation and write-offs, and reclassifications under “Other Changes in Volumes” is encouraged to support external sustainability analysis.
  - Sectoral presentation of stock-flow reconciliation for different financial instruments is included under encouraged reporting items to provide priorities for compilers.
  - Regular availability of these data would boost surveillance quality by international financial institutions such as the IMF through its External Sector Report (ESR).
- Handling incomplete reconciliation:
  - The TT proposes including an “unallocated” item in the integrated IIP template to allow countries to record the extent of their knowledge of changes in positions while capacity is developed.
  - The TT recognizes the complexity and cross-cutting implications (including SNA/BPM consistency) of introducing an unallocated category and suggests further research and a guidance note to elaborate purpose, justification, content, interpretation, and appropriate placement within the integrated IIP statement.

*Prepared by Bureau of Economic Analysis US, Deutsche Bundesbank, European Central Bank, International Monetary Fund, and Statistics Canada.*

### 20.       While bearing in mind that many countries have limited resources and low statistical

### b-4-reconciliation-between-flows-stocks

### Recommendation and Rationale: Adopt Option 2 (Integrated IIP and Accumulation Accounts)
- The TT considers the option forward looking, to come into effect when BPM7 is launched five years from now, in 2025.
- Including integrated IIP and accumulation accounts under standard components indicates the direction in which external sector accounts are likely to evolve in the next 20 years.
- Option 1 is rejected in favor of option 2 because including an integrated IIP among a large basket of supplementary tables would lower its prominence and undermine the aim of making it a central piece of the new manual.

### Current Reporting Coverage and Capacity Building Needs
- Current reporting coverage to the IMF:
  - 197 countries report balance of payments.
  - 172 countries report IIP.
  - Around 12 countries report the currency composition of IIP data to IMF (a necessary first step to produce a full reconciliation between stocks and flows).
- Additional detail on BPM6 uptake:
  - Of the balance of payments reporters, 175 countries compile on a BPM6 basis (i.e., close to 90 percent of the countries producing a BOP).
  - Of the IIP reporters, 158 countries—or close to 92 percent—compile on a BPM6 basis.
- Implementation strategy proposed:
  - The IMF should develop detailed guidance and establish a medium to long-term implementation strategy focusing on technical assistance/training.
  - Reporting of detailed components should be on a best effort basis with flexibility.
  - Guidance should address:
    - Compilation of the currency composition of IIP including specifying a minimum set of currencies to be considered.
    - Compilation of other changes (e.g., in the case of direct investment).
    - Amending reporting requirements.
    - Templates for banking and securities holding statistics.

### Consistency with 2008 SNA and International Alignment
- Option 2 enhances consistency with the 2008 SNA, which assigned the same level of importance to integrated balance sheets as other accounts in the sequence of accounts of institutional sectors.
- Aligning BPM7 and 2025 SNA updates would strengthen the balance of payments/IIP and the rest of the world sector account.
- Some advanced economies, including Euro Area member states, already compile integrated IIP data regularly and others are moving towards it; without standardized guidelines content and format may differ across countries and across national accounts and balance of payments publications.
- A proposed template for implementation of option 2 is included in Annex II of the document.

### Supplementary Analytical and Accounting Framework
- Proposed terminology: introduce the term "accumulation accounts" for accounts that explain the change of the IIP between two points in time.
- Proposed tables: Integrated International Investment Position Statement including:
  - Beginning of period IIP
  - Accumulation accounts (Flows / Transactions from BOP's financial account / Other Flows)
  - Revaluations (due to exchange rate changes; due to other price changes; of which: write-offs and cancelations; of which: reclassifications)
  - End of period IIP
- Accounting identities and nexus with the current account:
  - Change in net IIP expressed as:
    - ∆IIP = NFA + VAL + OC     (13)
      - where NFA = net financial account entries, VAL = net revaluation, OC = net other changes in volume
    - Substituting identity (12) in (13):
      - ∆IIP = CAB + KAB + VAL + OC     (14)
      - That is, the change in the net IIP equals the current account and capital account balances plus valuation effects and other changes in volume, each of which might take a positive or negative value.
  - Alternative decomposition distinguishing components dependent on current IIP stock:
    - ∆IIP = (CAB – II + KAB) + (II + VAL) + OC    (15)
      - where II = investment income balance
    - Interpretation:
      - The first term might be labelled external primary balance (encompassing capital account balance and current account balance less investment income).
      - The second term represents the net total return on a country’s net external position (income rate of return plus revaluation rate of return).
- Practical considerations:
  - To balance accounts in practice, errors and omissions of the balance of payments have to enter the equation added to OC.
  - The change in an economy’s net IIP ultimately hinges on the country’s current account balance, although revaluations and other changes in volume can dominate in particular periods.
  - Policy implications: If an IIP is out of balance with economic fundamentals, an adjustment requires a change in the current account balance; policy measures should target the corresponding current account imbalance as an intermediate target. Exchange rate depreciation may improve the trade balance and, over time, the IIP, but valuation effects must be taken into account given the currency composition of the balance sheet.

### Implementation Issues and Research Agenda
- Suggested items for further consideration and research:
  - Whether to introduce a category "unallocated" in the integrated IIP statement as an additional item on the research agenda.
  - How to specify a minimum set of currencies for currency composition reporting.
  - Templates and reporting formats to ensure consistency and comparability across countries.
- Questions for TT discussion included:
  1. Do TT members agree with option 2 recommended in the GN even though its implementation will be a medium to long-term goal for many countries?
  2. Do TT members agree to introduce the term accumulation accounts, for those accounts, which explain the change of the IIP between two points in time?
  3. Do TT members agree to put the question, whether to introduce a category “unallocated” in the integrated IIP statement as an additional item on the research agenda?
  4. Do TT members have any other views/suggestions on the issues discussed and proposed outcomes?

*Source: International Monetary Fund.*

### 14.18   The three-dimensional account system presenting changes in the net IIP visualizes the nexus

### b-4-reconciliation-between-flows-stocks - 14.18   The three-dimensional account system presenting changes in the net IIP visualizes the nexus

### Three-dimensional account system and reconciliation of flows and stocks
- The three-dimensional account system presents changes in the net IIP through three pillars:
  - Pillar 1 (generation account): breaks down total net IIP change into components according to (15) and shows the origin/source of the change in the IIP.
  - Pillar 2 (instrument account): reuses standard IIP presentation to show how changes in the net IIP are reflected in functional categories.
  - Pillar 3 (sector account): allocates changes to domestic sectors involved.
- Each account captures a specific aspect of the change in the net IIP in a given period (quarter, year, or multi‑year).
- Numerical example from Figure 14.1:
  - Net IIP increased by 40 billion units in the period.
  - Generation account documents that approx. 45 billion units originate from the current account balance, whereas valuation effects and other changes have a negative impact.
  - Instruments account identifies portfolio investment as the functional category with the largest increase: approx. 30 billion units.
- Sector account highlights sectoral shifts:
  - External positions of the government sector and the non-financial corporations, households and NPISHs sector deteriorate.
  - Other financial corporations sector records a strong increase in net IIP.

### IIP and risk analysis — overview and analytical enhancements
- Historical role: balance of payments measured external imbalances; IIP (added in fifth edition) enables forward‑looking vulnerability analysis.
- BPM6 further integrates flows and stocks; guidance focuses on link between transactions and positions and analytical value of revaluations and other changes in volume.
- Objective: develop the IIP and the revaluation account to increase analytical value for risk analysis.

### Liquidity and interest rate risk
- Liquidity dimensions in current standards:
  - Distinction between listed and unlisted equity; breakdown of deposits between overnight and other deposits.
  - Breakdown by original maturity for debt instruments (loans and debt securities) provides liquidity dimension but does not fully capture financing needs by maturity.
- Need for remaining/residual maturity:
  - Collecting remaining maturity shows financing needs due (e.g., within the year); classification by remaining maturity is encouraged and short-term remaining maturity of debt liabilities by sector is requested in Table A9-IV of BPM6.
- Duration as complementary approach:
  - Duration = weighted average term to maturity; measures sensitivity of instrument value to interest rate changes.
  - Price revaluations (holding gains/losses) are intrinsically related to portfolio duration; sign depends on slope of yield curve.
  - Longer duration implies greater gains or losses for a given interest rate change; mismatched asset/liability durations expose corporations to gains or losses as rates change.
- Footnote on duration computation:
  - For fixed‑rate instruments, time to receipt/payment of each cash flow is weighted by present value of that cash flow as a proportion of total present value; duration equals remaining maturity only for zero coupon instruments.

### Currency risk
- Currency mismatches:
  - Differences in currency composition of financial assets and liabilities vis‑à‑vis the rest of the world are frequent macroeconomic risk sources, especially for emerging market and developing economies.
  - Large positions in foreign‑currency‑denominated debt pose risks if foreign currency inflows diminish and fixed debt payments are due.
- Data needs:
  - Currency breakdown of debt liabilities is crucial for macroprudential analysis and creditor risk assessment.
  - Detail on currency composition of financial portfolios supports identification of over‑exposure to idiosyncratic shocks to certain currencies.
- Existing indicators and initiatives:
  - IMF financial soundness indicators (FSI) include foreign‑currency‑denominated loans and liabilities relative to total loans and total liabilities for deposit taking corporations.
  - ESRB risk dashboard reports percentage of total loans denominated in foreign currency.
  - G-20 Data Gaps Initiative: IMF/FSB/BIS sponsor collection of data defined in Table A9-I of BPM6 requesting assets and liabilities broken down by sector and original maturity and notional amounts of foreign currency derivatives to adjust for hedged exposures (noting limitation that underlying purpose—hedging vs. speculation—is not available).
- Analytical limits of IIP currency breakdown:
  - IIP by currency and derivatives notional amounts give structural exposure picture but do not immediately assess impact on net external position.
  - Analysis supported by examining price revaluations of foreign currency derivatives and net impact of revaluations due to exchange rate changes.
  - Currency-driven revaluations generally negative for economies with net liability position in foreign currency combined with inflationary processes causing domestic currency depreciation; impact depends on whether a country has net asset or liability position in foreign currency and on domestic currency stability.

### Credit risk
- Sources and dimensions:
  - Credit risk (loss from borrower default) arises from liquidity and currency considerations and is informed by IIP statistics by counterpart area/geography.
  - “Country” risk includes political and social stability, rule of law, corruption—historically covered in balance of payments/IIP statistics.
- Counterpart sector detail:
  - Counterpart sector data increasingly important; CPIS sponsors portfolio investment counterpart sector data.
  - Counterpart sector information generally available for portfolio investment; in some jurisdictions available for direct investment (SPEs vs non‑SPEs) and other investment.
  - Cross‑classification by instrument, counterpart country and sector is a powerful tool to assess portfolio or credit risk.
- Additional considerations:
  - Credit derivatives (e.g., credit default swaps) and guarantees alter portfolio risk; notional amounts of derivatives are necessary, preferably broken down by counterpart area and sector.
  - For guarantees, the relevant measure for credit risk is the underlying (notional) value of the debt being guaranteed rather than the market value of the guarantee.
  - Rating information and breakdown of portfolio investment by rating grade would greatly enhance creditworthiness analysis—this information is generally missing in IIP statistics.
- Role of price revaluations and other changes:
  - Price revaluations provide information on the impact of credit dimensions on tradable portfolio value; relatively high(/low) revaluations correspond to high(/low) risk portfolios.
  - Comparative analysis: revaluation return of the portfolio vs. benchmark equity (e.g., Dow Jones) and/or debt securities portfolios.
  - For non‑tradable instruments (loans), historical analysis of write‑offs and write‑downs (other changes in volume account) indicates credit risk.

### Valuation paradox
- Caution in interpreting revaluation effects:
  - Revaluations adjust IIP stocks to market values and do not necessarily reflect realized gains or losses.
  - IIP captures only external part of a sector’s financial balance sheet—losses recorded externally may be offset by domestic gains.
  - Hedging operations transferring open positions across sectors may not be fully captured.
- Valuation paradox description:
  - Marking bonds to market can produce paradoxical outcomes: a country’s net IIP might improve even if it is near insolvency because falling bond prices lower liabilities in the IIP while payment obligations remain unchanged.
  - The reverse can occur when rising bond prices (e.g., due to better rating) increase recorded liabilities and lower net IIP despite unchanged payment obligations.
  - The paradox may be more pronounced in currency unions where exchange rates cannot adjust, though bail‑out expectations may damp bond price responses.
- Suggested mitigation:
  - FITT GN F.8 proposes a reconciliation table presenting nominal and market valuation of debt securities liabilities (similar to 2013 External Debt Statistics guide) to help understand the paradox.

### Consistency between balance of payments/IIP and national accounts
- Common economic reality:
  - Rest of the world sector in national accounts and the balance of payments/IIP portray the same economic reality (cross‑border flows and balance‑sheets).
- Benefits of consistency:
  - Joint development of BPM6 and 2008 SNA leads to analytical benefits: integration of cross‑border flows/positions with domestic counterparts aids analysis of sector/geographical imbalances, shock propagation, and cross‑border exposures.
  - Consistency has improved clarity, communication to policymakers, and data quality through shared sources, methods, and institutional arrangements.
- Accumulation accounts:
  - National accounts accumulation accounts decompose flows (changes in stocks) into transactions, revaluations, and other changes in volume, enabling detailed analysis of asset value accumulation and net worth determinants.
- Enhancing BOP accumulation framework:
  - A similar position‑accumulation framework in BOP/IIP would deepen synergies, aid monitoring of financial risk exposures, integrate cross‑border assets/liabilities with domestic determinants, and illuminate links such as the valuation paradox.
  - Enhancements should aim for broad consistency with the SNA framework to facilitate numerical consistency and exploit analytical synergies.

### Rates of return — calculation and analytical use
- Importance:
  - Rates of return help understand capital allocation between economies, sustainability of current account deficits, and behavior of the current account, financial account, and IIP.
  - Current‑account investment income, financial‑account transactions, and other changes in volume interact with rates of return and can influence economic outcomes.
- Definitions and presentation:
  - Income rate of return = investment income divided by corresponding average asset or liability position in the IIP (Table 5.2 in BPM6 links instruments to corresponding income).
  - Revaluation rate of return = revaluations divided by corresponding average asset or liability position.
  - Total rate of return = income rate of return + revaluation rate of return.
  - Rates of return can be computed for assets excluding financial derivatives and for liabilities excluding financial derivatives.
- FISIM considerations:
  - Estimation of pure interest on loans and deposits when FISIM is excluded from investment income causes rates of return on loans and deposits to differ from rates estimated from actual interest.
  - Estimating rates using both pure interest and actual interest (interest before FISIM) provides a more complete analytic picture.
- Analytical benefits:
  - Systematic estimation of rates of return across the IIP highlights different investment characteristics across functional categories; equities and debt in portfolio and direct investment may exhibit different rates of return.
  - Revaluation rates are especially important in analyses relying on marked‑to‑market positions and the valuation paradox; direct investment marked to market can generate larger revaluations than book value measures.
- Rate differentials and stability:
  - Rate of return differential = rate of return on assets minus rate of return on liabilities.
  - Income rate of return differential affects the potential destabilizing feedback loop between the current account and the financial account: a current account deficit financed by a decrease in net foreign assets can affect net investment income depending on the differential:
    - Positive differential reduces the impact on net investment income.
    - Neutral differential means proportional impact.
    - Negative differential increases the impact, potentially exacerbating instability.
  - Income and revaluation rates, tax rates, and expected future price changes determine expected real after‑tax total rates of return on foreign assets and liabilities.
- Financial derivatives:
  - Financial derivatives are omitted from the suggested rates of return framework because they do not pay interest and capital gains are difficult to relate to an original principal investment; revaluation rates on financial derivatives could be a topic for additional research.

---


_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/bptt/b-4-reconciliation-between-flows-stocks.pdf_