Nature of the balancing item
2.12. The current account of the balance of payments measures exports and imports of goods and services, income receivable and payable and unrequited transfers. Traditionally, Australia has recorded a deficit on current account. That is, the sum of imports of goods and services, income payable abroad and unrequited transfer debits exceeds the sum of exports of goods and services, income receivable and unrequited transfers credits. The capital account measures both the way in which the deficit on the current account is financed and the accumulation of international investment claims and liabilities that are not associated with current account transactions. In the latter case, because both the credit and debit sides of the investment transactions should be recorded within the capital account, these transactions should have no effect on the balance on capital account. Therefore, the net balance on the capital account should, in principle, exactly offset the deficit on the current account. However, in practice, as different data sources and methods are normally used to compile the credit and debit sides of transactions, there is inevitably a residual imbalance, known as the balancing item. It reflects the net effects of differences in coverage, timing, and valuation as well as errors and omissions which occur in compiling both the current and capital accounts of the balance of payments statistics.
2.13. An examination of the balancing item can be useful in assessing the accuracy of the balance of payments. Different patterns in this item may provide insights into possible causes of errors in the statistics. Persistently large balancing items may be taken as an indication of serious errors and omissions in the accounts. However, a small balancing item does not necessarily mean that only small errors and omissions have occurred, since the errors and omissions may be offsetting. Offsetting errors may:
- reflect a direct link in the measurement of two items. For example, an incorrect decision on the dissection of landed values for goods imports into their merchandise and freight components will result in both items being incorrect by exactly offsetting amounts; or
- result from a measurement problem affecting both sides of a transaction. For example, the one estimate for retained profits on direct investment is entered both in the current account as reinvested earnings, and with opposite sign in the capital account as reinvestment of earnings, exactly offsetting any error in measuring retained profits.
2.14. If the balancing item is predominantly in one direction (i.e. generally positive or negative), this suggests that errors and omissions are occurring systematically rather than randomly. A balancing item with a positive sign may indicate the under-recording of credits (capital inflows, exports of goods and services or other current account receivables) or the overstating of debits (capital outflows, imports of goods and services or other current account payables), or both. Similarly, a balancing item with a negative sign may indicate under-recording of debits (capital outflows or current account debits) and/or overstating of credits (capital inflows or current account receivables).
2.15. In Australia's balance of payments statistics, initial estimates of the quarterly and annual balancing items since the mid-1980s have sometimes been quite large. These large balancing items have been of concern to both users of the statistics and the ABS. While the general causes of, and contributions to, the balancing item are discussed in more detail below, it is worth noting here that the emergence of large initial balancing items since deregulation of Australia's capital markets has focused statisticians' attention on the need for improved initial estimates.
2.16. Focus on these quality issues has lead the ABS to conclude that the large initial balancing items are primarily an indication that the quarterly estimates of capital transactions obtained from partial coverage quarterly international investment collections are deficient in measuring Australia's balance of payments capital account. The deficiencies arise partly because data providers omit transactions when required to report on a very timely quarterly basis. Estimation methods used to derive capital transactions from available quarterly levels data also have deficiencies which become more marked when financial market prices or traded volumes are moving very quickly. Finally, methods to adjust the partial coverage quarterly results to account for the population of transactors engaged in cross-border capital flows are limited in what they can achieve and can be ineffective when capital markets are moving quickly.
2.17. In recognition of these problems, the ABS keeps its capital flows estimation methodologies under review and makes adjustments to them when better measurement techniques are identified. It has also progressively expanded the scope and coverage of the quarterly international investment collections and further improvements in coverage are planned.
Revisions to the balancing item
2.18. By the time annual survey results are available, usually two quarters after the end of a financial year (and therefore up to five quarters after estimates for a September quarter are first published), many of the coverage issues are resolved. For this reason, a feature of the Australian balance of payments has been the tendency for the estimated balancing item for any period to improve over time, i.e., the balancing item becomes absolutely smaller as intermediate and final estimates replace initial estimates. This pattern has continued in recent years. This is illustrated in Table 2 which shows, for the latest 14 years, the first published estimate of the balancing item for each year; the latest estimate; the revision this represents; and the contribution to this revision from revisions to each of the current and capital accounts. In 12 of the 14 years shown, revisions to the initial estimate of the balancing item took it closer to zero.
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2: BALANCE OF PAYMENTS BALANCING ITEM
| |
| | | | | Extent of revision attributable to:
| |
| | | | | Net current | Net capital | |
| First published
estimate (a) | Current
estimate | Revision since
first estimate | account revisions (b) | account revisions (b) | |
| Year | $m | $m | $m | $m | $m | |
|
| |
| 1980-81 | 1 757 | 937 | - 820 | - 147 | - 673 | |
| 1981-82 | 921 | 461 | - 460 | - 432 | - 28 | |
| 1982-83 | 861 | 179 | - 682 | - 452 | - 230 | |
| 1983-84 | 1 961 | 1 577 | - 384 | 497 | - 881 | |
| 1984-85 | - 2 005 | - 1 254 | 751 | 298 | 453 | |
| 1985-86 | 2 674 | - 508 | - 3 182 | 850 | - 4 032 | |
| 1986-87 | 849 | 1 745 | 896 | - 610 | 1 506 | |
| 1987-88 | 3 217 | - 1 625 | - 4 842 | 514 | - 5 356 | |
| 1988-89 | 5 266 | - 2 801 | - 8 067 | 437 | - 8 504 | |
| 1989-90 | 5 517 | 2 472 | - 3 045 | 1 134 | - 4 179 | |
| 1990-91 | 2 382 | - 2 112 | - 4 494 | 340 | - 4 834 | |
| 1991-92 | - 625 | - 4 268 | - 3 643 | - 347 | - 3 296 | |
| 1992-93 | 1 381 | - 1 251 | - 2 632 | - 660 | - 1 972 | |
| 1993-94 | 8 471 | 440 | - 8 031 | 326 | - 8 357 | |
|
(a) Prior to 1986-87, the first estimate of the balancing item for a particular year was published in the following year's September quarter issue of 5302.0. From 1986-87, the first estimate of the balancing item has been published in the reference year's June quarter issue of 5302.0.
(b) The signs on these amounts relate to the impact of revisions on the balancing item rather than to the actual revisions themselves.
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2.19. Table 2 also illustrates the relative contributions to the revisions to the balancing item that are attributable to the current account and to the capital account. It can be seen that in 12 of the 14 years shown changes to the capital account have predominated, and this has been continually the case since the substantial deregulation of Australian capital markets in the mid-1980s.
2.20. The relative contributions of current and capital account revisions to the revised balancing item measures can also shed light on the likely future revisions to those aggregates arising from initial balancing items that may be larger than usual. The net current account revisions shown in Table 2, as a proportion of initial annual estimates of the current account balance, peaked at about 7% in the early 1980s, and have averaged less than 4% over the period 1980-81 to 1993-94. (Subjective estimates of the quality of these initial estimates shown in Table 5 are rated B, i.e., the initial estimates are expected to be within 10% of the final estimate.) However, based on past experience, regardless of the size of an initial balancing item, it is unlikely that the subsequent revisions to the annual estimate of the current account balance will be beyond that 7% range.
2.21. As discussed later in this paper, initial estimates of the balancing item through subsequent annual revisions cycles tend to be significantly negatively biased until about the third annual revision cycle is reached. Revisions therefore could be expected to flow through the usual data sources that will significantly reduce the three negative balancing item entries from 1990-91 to 1992-93, both reducing the average size of the balancing item and increasing the likelihood that residual balances in the final accounts will reflect a significant element of timing difference in recording transactions rather than coverage or other measurement deficiencies.
2.22. In these circumstances, where initial balancing items might be considered high, but where users can with some confidence expect them to both fall over time, and fall because additional capital flows are identified, it is less likely that users with a focus on the current account and the general level of external debt will be mislead by the size of initial balancing item estimates.
Size of the balancing item
2.23. In this context, it is worth considering the relative size of Australia's balancing item estimates.
2.24. The IMF's BPM4 suggested, as an empirical rule of thumb, that a balancing item in excess of 5% of the gross sum of merchandise exports and imports was cause for concern.
2.25. While that rule of thumb may have been appropriate for the early to mid-1970s, when capital flows were generally more constrained and services and income flows were of less significance, it is no longer appropriate and has not been repeated in the recently released fifth edition of the IMF's Balance of Payments Manual.
2.26. Table 3 shows annual estimates of Australia's balancing item from 1980-81 to 1993-94 and expresses them as a percentage of the sum of credits plus debits for current account, capital account and total balance of payments transactions. For comparison, the long-term average proportions for the period 1959-60 to 1979-80, and the balancing item to total current transactions from 1945-46 to 1958-59, are also shown. For the 14-year period up to 1993-94, the average proportion of total current account transactions represented by the balancing item is 1.3%. Estimates exceed 2% in only two of the 14 years shown, with the maximum proportion at 2.5%. On average, this experience was little different from the 20 year period to 1979-80, but is about half the proportion shown for the earlier period ending 1958-59. On the evidence of this indicator, accuracy would appear to have improved from 1959-60 when the ABS commenced compiling quarterly balance of payments statistics.
2.27. The proportion of capital account (and total transactions) represented by the balancing item needs to be viewed slightly differently. Capital account transactions are recorded on a net basis, which may mean that sizeable capital flows in successive quarters could net to annual transactions values which are at, or close to, zero, rendering proportional analysis meaningless. The lack of quarterly balance of payments statistics prior to 1959-60 means that total credits and debits transactions for the capital account, and for the balance of payments in total, cannot be provided for the proportional analysis shown in Table 3.
2.28. Looking at the period from 1959-60, the proportions of capital account transactions represented by the balancing item display an interesting pattern. In the 20 years to 1979-80 the proportion averaged 4.4%. In the four years to 1983-84 the average was lower (at 1.9%) and varied from 0.3 to 4.2%. However, following deregulation of Australian capital markets in 1993-94, the ratio falls substantially, averaging only 0.4% over the following 10 years, falling to 0.1% or less in the most recent two years as the measured capital flows increased substantially. However, even these low proportions overstate the scale of the balancing item in terms of gross capital flows. Much of Australia's international financial transactions are collected on a gross basis enabling the credits plus debits total to be derived. But some transactions values in the capital account (such as for Australian investment abroad in shares) are reported as net transactions only, while others (such as deposits transactions) are measured by differencing reported levels data to derive net transactions flows. The total gross flows in 1992-93 and 1993-94 are likely to be in excess of $2,000 billion per annum, reducing the balancing item proportion for these two years to 0.04% or less.
2.29. The direction of the balancing item may throw some light on possible causes of errors or omissions in the statistics. If positive and negative balancing items do not tend to offset each other in successive years it would suggest that the error is not predominantly one of timing differences in data reported by the different sources used to estimate the credit and debit sides of a transaction. In the 14 years to 1993-94 the number of positive and negative balancing items are equal. Also, it is worth noting that the large negative balancing item recorded in 1988-89, and the large positive values recorded in 1983-84 and 1986-87, were all followed by balancing items of similar magnitude but opposite sign. The large negative balancing items for 1990-91 to 1992-93 are followed by a much smaller positive balancing item in 1993-94 suggesting some under-recording of debit transactions for the three years to 1992-93, or possibly an over-recording of some credit transactions, or some combination of both effects.
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3: BALANCING ITEM AS A PROPORTION OF GROSS BALANCE OF PAYMENTS TRANSACTIONS
| |
| | | Credits plus debits
| | Balancing item as a proportion of
| |
| Year | Balancing item | Current account | Capital account | Total transactions | | Current transactions | Capital transactions | Total transactions | |
| | $m | $m | $m | $m | | % | % | % | |
|
| |
| Annual average | | | | | | | | | |
| 1945-46 to 1958-59
| . . | 3 268 | n.a. | n.a. | | 2.7 | n.a. | n.a. | |
| Annual average | | | | | | | | | |
| 1959-60 to 1979-80 | . . | 16 234 | 4 048 | 20 282 | | 1.1 | 4.4 | 0.9 | |
| 1980-81 | 937 | 54 249 | 22 512 | 76 761 | | 1.7 | 4.2 | 1.2 | |
| 1981-82 | 461 | 60 064 | 38 835 | 98 899 | | 0.8 | 1.2 | 0.5 | |
| 1982-83 | 179 | 62 985 | 56 634 | 119 619 | | 0.3 | 0.3 | 0.1 | |
| 1983-84 | 1 577 | 71 995 | 91 466 | 163 461 | | 2.2 | 1.7 | 1.0 | |
| 1984-85 | - 1 254 | 89 454 | 152 671 | 242 125 | | - 1.4 | - 0.8 | - 0.5 | |
| 1985-86 | - 508 | 102 116 | 254 870 | 356 986 | | - 0.5 | - 0.2 | - 0.1 | |
| 1986-87 | 1 745 | 112 055 | 356 747 | 468 802 | | 1.6 | 0.5 | 0.4 | |
| 1987-88 | - 1 625 | 128 793 | 369 696 | 498 489 | | - 1.3 | - 0.4 | - 0.3 | |
| 1988-89 | - 2 801 | 145 264 | 515 117 | 660 381 | | - 1.9 | - 0.5 | - 0.4 | |
| 1989-90 | 2 472 | 161 946 | 534 711 | 696 657 | | 1.5 | 0.5 | 0.4 | |
| 1990-91 | - 2 112 | 165 395 | 607 399 | 772 794 | | - 1.3 | - 0.3 | - 0.3 | |
| 1991-92 | - 4 268 | 169 452 | 720 049 | 889 501 | | - 2.5 | - 0.6 | - 0.5 | |
| 1992-93 | - 1 251 | 185 623 | 1 137 679 | 1 323 302 | | - 0.7 | - 0.1 | - 0.1 | |
| 1993-94 | 440 | 198 413 | 1 158 229 | 1 356 642 | | 0.2 | 0.0 | 0.0 | |
| Average of annual absolute values | | | | | | | | | |
| 1980-81 to 1993-94 | . . | . . | . . | . . | | 1.3 | 0.8 | 0.4 | |
| Average of annual absolute values | | | | | | | | | |
| 1984-85 to 1993-94 | . . | . . | . . | . . | | 1.3 | 0.4 | 0.3 | |
|
Source: Balance of Payments, Australia, December Quarter 1994 (5302.0).
| |
International comparisons of the balancing item
2.30. It is also useful to compare Australia's experience with that of other industrialised countries. Table 4 shows inter-country comparisons of the balancing item as a percentage of total current account transactions. It shows that Australia's overall performance of 1.8% on average over the 14 years under analysis is better than that for either the United States (2.4%) or New Zealand (3.2%), significantly worse than that for France and Germany, and a little worse than that for the other countries shown.
2.31. Interestingly, Australia's balancing item was positive on eight occasions and negative on six, providing no evidence of the systematic omission or error in measuring credit or debit transactions. The sign on Japan's balancing item was similarly balanced, whereas most other countries in Table 4 showed a preponderance of positive or negative values suggesting some bias in their accounts. The United Kingdom and Canada had eleven positive or negative entries respectively, the United States, Germany, France and New Zealand each had nine or ten positive entries and Italy had nine negative entries.
|
4: INTERNATIONAL COMPARISONS OF THE BALANCING ITEM AS A PERCENTAGE OF TOTAL CURRENT ACCOUNT TRANSACTIONS (a)
| |
| | | | | | | | | | | |
| | | United | United | | | | | | New | |
| Year (b) | Australia (b) | States | Kingdom | Germany (c) | France | Italy | Japan | Canada | Zealand | |
|
| |
| 1981 | 1.1 | 3.3 | 0.4 | - | -0.6 | 0.5 | 0.1 | -3.9 | -1.8 | |
| 1982 | 0.5 | 5.6 | -0.9 | -0.6 | -0.3 | -0.3 | 1.3 | -0.8 | -5.4 | |
| 1983 | 2.1 | 2.6 | 0.4 | 0.1 | 0.1 | 0.5 | 0.6 | -2.3 | -1.3 | |
| 1984 | 1.7 | 2.9 | 2.5 | 0.5 | 0.2 | 1.1 | 1.0 | -2.3 | 4.5 | |
| 1985 | -0.7 | 2.8 | 0.3 | 0.7 | 0.1 | -1.8 | 1.0 | -3.1 | 2.5 | |
| 1986 | 0.7 | 1.6 | 1.4 | 0.2 | 0.2 | -0.8 | 0.6 | -0.9 | -0.8 | |
| 1987 | -0.9 | -0.4 | -0.6 | -0.1 | 0.2 | 0.4 | -0.7 | -1.0 | 1.4 | |
| 1988 | -3.8 | -1.0 | 1.6 | 0.3 | 0.2 | -0.5 | 0.5 | -0.2 | 1.0 | |
| 1989 | 1.2 | 3.8 | 0.5 | 0.6 | -1.0 | -0.4 | -2.8 | 0.2 | 3.7 | |
| 1990 | 2.3 | 2.7 | 0.1 | 1.5 | 0.2 | -2.7 | -2.4 | -0.4 | 4.7 | |
| 1991 | -2.1 | -2.6 | -0.2 | 0.7 | 0.6 | -1.3 | -0.8 | -0.7 | 1.4 | |
| 1992 | -3.0 | -1.1 | 1.6 | 0.1 | 0.3 | -1.4 | -1.1 | 0.4 | 6.3 | |
| 1993 | -1.0 | 1.3 | 0.6 | -1.5 | 0.3 | -3.5 | - | -1.5 | 6.5 | |
| 1994 | 3.5 | -1.8 | 1.1 | - | -0.5 | - | -1.7 | 0.7 | n.a. | |
| Average | 1.8 | 2.4 | 0.9 | 0.5 | 0.3 | 1.1 | 1.1 | 1.3 | 3.2 | |
|
(a) The sum of current account creits and debits, without regard to sign.
(b) Data for all countries including Australia are on a calendar year basis.
(c) Prior to July 1990 the statistics refer to West Germany (Federal republic of Germany) and from July 1990 includes both the former German Democratic Republic and Federal Republic of Germany.
Sources:
Australia: Statistics consistent with the December quarter 1994 issue of Balance of Payments, Australia (5302.0);
Other countries: IMF's Balance of Payments Statistics and International Financial Statistics yearbooks.
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