International Technical Meeting on Remittances Statistics Key Issues in Recording Remittances in the Balance of Payments Statistics and Recent Improvements in Concepts and Definitions The World Bank Washington, D.C. June 11 12, 2009 Prepared by Emmanuel Kumah and Tamara Razin Statistics Department International Monetary Fund 1.2-Kumah-PAPER.DOC June 24, 2009 (12:26 PM)
- 2 - Key Issues in Recording Remittances in the Balance of Payments Statistics, and Recent Improvements to the Concepts and Definitions 1 Introduction 1. This paper provides a brief overview of the new concepts and definitions concerning remittances in the balance of payments framework and the recent work undertaken by the IMF in the area of remittances data. In particular, it discusses improvements to the conceptual framework of remittances in the Balance of Payments and International Investment Position Manual (BPM6) that have been replicated in the International Transactions on Remittances: Guide for Compilers and Users (RCG), the assistance provided by the IMF to its member countries to improve the concepts of remittances, and its activity to promote the concepts set out in the RCG. The paper also reviews the data issues and problems that data compilers and users may experience with the new balance of payments concepts for remittances. 2. The paper is divided into three sections. The first section provides a background on the decision to improve remittances statistics and also discusses the existing discrepancies in the data on remittances. The next two sections present new concepts and definitions of remittances, as well as the progress in developing the guidance on compilation of remittances data and technical assistance available from the IMF. The paper concludes by considering data users and their concerns with the compiling data consistent with the new concepts. Background 3. Remittance flows have increased rapidly in recent years. From 2001 to 2007, remittance receipts reported in the IMF s Balance of Payments Statistics Yearbook (approximated by adding global receipts of workers remittances and compensation of employees ) more than doubled to US$336 billion (see table below). This sharp increase is linked to rising migration and labor mobility, more liberal and competitive financial 1 The views expressed herein are those of the author and should not be attributed to the IMF, it s Execuive Board, or its management.
- 3 - intermediaries, and improved data recording. For some countries, receipts from remittances exceed receipts from the export of goods and services and from financial inflows on foreign direct investment. 4. Despite the high level of interest in remittances, there is some evidence to suggest that data on remittances are less reliable than are data on many other items in the balance of payments accounts. At a global level, remittance receipts has consistently exceeded remittance payments, and the gap has been growing in recent years, indicating growing inconsistencies in the coverage and compilation of remittances data. This statistical discrepancy may reflect the incomplete coverage of transactions, the inaccurate and inconsistent recording of transactions resulting from differences in classification and practices, and differences in the time of recording transactions. Compensation of Employees and Workers Remittances, 2001 to 2007 (In millions of U.S. dollars) 2001 2002 2003 2004 2005 2006 2007 Compensation of employees Credit 43,517 49,475 60,096 70,714 76,460 82,602 98,934 Debit 51,030 57,312 67,926 76,463 84,883 95,144 113,975 Global discrepancy 7,513 7,837 7,830 5,749 8,423 12,542 15,041 Workers remittances Credit 81,168 93,410 112,693 126,007 153,009 180,715 237,396 Debit 67,612 77,829 81,465 91,780 99,853 117,259 135,748 Global discrepancy 13,557 15,582 31,228 34,228 53,156 63,457 101,648 Sum of compensation of employees and workers remittances Credit 124,686 142,885 172,789 196,721 229,469 263,318 336,330 Debit 118,642 135,141 149,391 168,242 184,736 212,403 249,722 Global discrepancy 6,043 7,745 23,398 28,479 44,733 50,915 86,608 Source: IMF, Balance of Payments Statistics Yearbook 2008, Part 2. The table uses definitions from the fifth edition of the Balance of Payments Manual.. 5. The Table shows that, for all the years from 2001 to 2007, the global discrepancy for the sum of compensation of employees and workers remittances increased in each year. Many
- 4 - observers assume that underreporting is common, although overreporting (through misclassification and inadequate estimation) has also been found. Furthermore, remittancerelated items in the balance of payments framework up through the BPM5 were defined in ways that could make identification and analysis of remittances difficult, further strengthening the arguments for clarification and simplification of the definitions of standard components related to remittances, and for adoption of supplemental measures. 6. The importance of good quality remittances data was emphasized by the G-8 Heads of State meeting at Sea Island in 2004. The G-8 noted the challenges associated with compiling such data but they also urged improvements in the availability of statistical data on remittances, including improvements in both definitions of key aggregates and improvements in estimation techniques. They called for the establishment of a statistical working group, to be led by the World Bank, for improving remittance data. 7. In response to the G-8 request, the World Bank hosted an international meeting of data users and compilers on the topic of statistics on remittances, to agree on a work program to improve data on remittances. Emerging from the meeting was a consensus that a process for improving data on remittances required two steps: first, simplifying, clarifying, and expanding the definitions of remittance-related items to meet the needs of data users; second, developing practical compilation guidance to support compilers. At the meeting, it was agreed that the balance of payments statistics are the appropriate framework for collecting, reporting and improving official statistics on remittances; that balance of payments concepts and definitions relating to remittances should be reviewed; and that improved guidance for collecting and compiling remittance statistics is needed. 8. While recognizing that the improvement in remittances concepts could be better achieved using the balance of payments framework, the meeting proposed the creation of a "city group" of experienced compilers to prepare a set of best practices for remittance statistics in the form of a compilation guide. 9. Participants at the international meeting agreed that the discussion of improvements to relevant statistical concepts and definitions should take place in the Technical Sub-Group
- 5 - on the Movement of Persons (TSG) established by the UN Statistical Commission to develop a conceptual framework for statistical issues in connection with the movement of persons. The TSG developed the new definitions for remittances-related items in the balance of payments framework. Most importantly, these new definitions simplify the standard components related to migration and remittances. They include several new supplementary items in the balance of payments framework, thereby addressing specific concerns raised by data users. The TSG reported its proposals on remittance statistics to the IMF Committee on Balance of Payments Statistics, as an input to revision of the Balance of Payments Manual, fifth edition (BPM5), and to the Advisory Expert Group on National Accounts (AEG), as an input to the update of the 1993 System of National Accounts. New concepts and definitions of remittances 10. The BPM6 introduces an economic concept of remittances, and also identifies standard components and supplementary items to allow the compilation of remittance measures. No single data item in the balance of payments framework comprehensively captures transactions in remittances. 11. In the balance of payments framework, remittances represent household income from foreign economies arising mainly from the temporary or permanent movement of people to those economies. The balance of payments accounts definitions of remittances are somewhat broader than those resulting from the movement of persons, because they are not based on the concepts of migration, or family relationships. Remittances include cash and noncash items that flow through formal channels, such as via electronic wire, or through informal channels, such as money or goods carried across borders. They largely consist of funds and noncash items sent or given by individuals who have migrated to a new economy and become residents there, and the net compensation of border, seasonal, or other short-term workers who are employed in an economy in which they are not resident. 12. The definition of remittances is linked to the concept of residency. According to BPM6, the residence of households is determined according to the centre of predominant economic interest of its members. In applying this principle being present for one year or
- 6 - more in a territory or intending to do so qualifies as being a resident of that economy. Individuals leaving their economy with the intention of living in a new economy for a year or longer will be considered residents of the new economy (with a few exceptions, notably students, medical patients, diplomats and military personnel). 13. Two items substantially relate to remittances in the balance of payments framework: Income earned by workers in economies where they are not resident (or from nonresident employers)--compensation of employees--and transfers from persons who are residents of one economy to persons who are residents of another--personal transfers. Both of these standard components are recorded in the current account. 14. Compensation of employees refers to the income of border, seasonal, and other shortterm workers who are employed in an economy where they are not resident, and of residents employed by nonresident entities. Compensation of employees represents remuneration in return for the labor input to the production process contributed by an individual in an employer-employee relationship with the enterprise. 15. Personal transfers consist of all current transfers in cash or in kind made or received by resident households to or from nonresident households. Personal transfers thus include all current transfers between resident and nonresident individuals. Personal transfers is a standard component in BPM6 and workers remittances is dropped from the standard components. However, workers remittances are included as a supplementary item in BPM6. Unlike workers remittances, which are defined as current transfers made by migrants who are employed in new economies and considered residents there, personal transfers are defined without regard to whether the sender is a migrant. This simplifies the definition and brings it into line with compilation practices applied in many economies. Personal transfers cover all current transfers that are sent by individuals to individuals, nonetheless it is recognized that they often originate from migrants sending resources to support their relatives in their country of origin. 16. New standards identify three major supplementary items related to remittances: personal remittances, total remittances, and total remittances and transfers to nonprofit
- 7 - institutions serving households (NPISHs). They are cumulative measures, as illustrated in the table below. Tabular Presentation of Remittances Concepts in BPM6 Total remittances and transfers to NPISHs: a+b+c+d+e+f Total remittances: a+b+c+d Personal remittances: a+b+c a b c Compensation of Capital employees less taxes, transfers Personal transfers social contributions, between (part of current transfers) transport, and travel households Social benefits d Current transfers to NPISHs e Capital transfers to NPISHs f Source: IMF, 2008 (BPM6). 17. Personal remittances are defined as current and capital transfers in cash or in kind between resident households and nonresident households, plus net compensation of employees. In short, personal remittances include all household-to-household transfers and the net compensation of nonresident workers. Net compensation is calculated by deducting taxes, social contributions paid by nonresident workers in the country of employment, and transport and travel expenditures related to their work abroad from (gross) compensation. 18. Total remittances is the sum of personal remittances and social benefits. Social benefits include benefits payable under social security funds and pension funds. They may be in cash or in kind. This item includes all household income obtained from working abroad. Total remittances includes income from individuals working abroad for short periods, income from individuals residing abroad, and social benefits from abroad. 19. Total remittances and transfers to NPISHs include total remittances and both current and capital transfers to NPISHs from any sector of the sending economy. It therefore includes all transfers benefiting households directly or indirectly through NPISHs, as well as the net earnings of short-term workers abroad. It includes donations, in cash or in kind, from governments and enterprises to charitable organizations in another economy. It therefore is a very wide definition that is not closely linked to migration. In fact, much private and official aid as well as cross-border sponsorship of educational and cultural activities (including scholarships) may be included in this item.
- 8-20. Of the new supplementary remittance aggregates in the international accounts, some data users consider total remittances and transfers to NPISHs to most closely match the economic meaning of remittances. This measure is broader than the other remittance aggregates, because it includes current and capital transfers to NPISHs from any sector of the sending economy (households, corporations, governments, and nonprofit institutions). Thus, unlike the other supplementary remittance aggregates, it includes funds and noncash items that flow indirectly to households through nonprofit institutions. Guidance on compilation of remittances data 21. In response to G-8 requests, the IMF and the World Bank invited experts in remittances statistics from selected economies and international organizations to identify a set of best practices, and to prepare draft chapters of a compilation guide for remittances statistics. The first meeting of the group was held in Luxembourg (and thus named the Luxembourg Group ) in June 2006. It identified data sources and compilation methods, and it drafted and reviewed the International Transactions in Remittances: Guide for Compilers and Users (also called Remittances Compilation Guide, or RCG), during 2006 2008. The IMF coordinated the preparation and edited the text of the RCG; the work on the RCG is essentially completed. 22. The purpose of the RCG is to promote lasting improvements in remittances data. It seeks to accomplish this purpose by summarizing the definitions and concepts related to remittances in the balance of payments framework and by providing practical compilation guidance. Besides the clarification of definitions related to remittances, it provides also practical guidance on data sources with the view to developing high quality estimates that are consistent with the improved concepts. 23. In terms of content, the RCG identifies the main remittances compilation methods currently being used by compilers, including methods that are based on transactions data (ITRS), direct reporting by money transfer operators, household surveys, and various approaches using models. Also, administrative records data are often used. These methods have different strengths and weaknesses which are discussed in detail in the RCG. The
- 9 - selection of a method partly depends on the availability of source data and on the main delivery channels that are used in a particular economy; thus, the relative merits of alternate compilation methods vary from country to country. No single method, by itself, is thought likely to yield sufficient information for compiling high quality remittance data. The RCG provides assistance to compilers in choosing an appropriate compilation strategy, including practical guidance in the selection of data sources and of techniques for combining data from different sources. 24. In support of the application of the principles and standards set out in the BPM6, the IMF will provide future compilation guidance, including the compilation of remittances, in the BPM6 Compilation Guide and the BPM6 Textbook. The BPM6 Compilation Guide will provide practical guidance on topics such as data sources, how to compile the various accounts in the balance of payments, how to develop estimates, database management, and publications. The BPM6 Textbook will be a good reference for self-study by compilers. It will provide practical examples and useful explanations of definitions and conventions contained in the BPM6. The IMF intends to begin the update of the Compilation Guide in 2009. The update of the Textbook, comprising a further elaboration of concepts and examples of particular types of transactions, is a longer-term project. Work could possibly start on the Textbook once a near-final version of the Compilation Guide is posted on the website. IMF training and technical assistance 25. Technical assistance is available from the IMF for member countries to support the continued improvement of balance of payments statistics. Technical assistance missions frequently assess statistical systems, provide recommendations for improvement, help with implementing methodological changes, and engage in general capacity building and on-thejob training. Regular training courses in balance of payments statistics are held at the IMF headquarters and regional training centers for the benefit of all member countries. 26. Compilation guidance through technical assistance and training courses address all parts of the balance of payments framework, including the various components discussed in this paper. However, member countries increasingly express interest in remittances issues
- 10 - and the IMF often receives requests for training to be conducted at a regional level. During 2008-09, three seminars on remittances were conducted by the IMF staff in Chiangmai, Thailand (October 2008), Tunis, Tunisia (November 2008), and Beirut, Lebanon (March 2009). Countries who attended these seminars improved their understanding of the updated international standards, compilation techniques, and discussed their recent experiences in collecting data, with an emphasis on problems encountered and how to overcome them. Two other seminars on remittances involving the RCG are scheduled to be conducted in Ljubljana, Slovenia and Singapore in 2009. The promotion of the RCG through training and technical assistance will help achieve more uniform application of remittances concepts and compilation techniques across countries. Dissemination 27. Data on remittances, like data on all other components of the balance of payments statement, are compiled by relevant statistical authorities in member countries (typically the central bank or national statistical office). Member countries report their data to the Statistics Department of the IMF, where global tables are compiled and published in the Balance of Payments Statistics Yearbook. Part 2 of the Yearbook, which shows world and regional tables by individual item, is a particularly good place to identify and compare specific items, such as those relating to remittances. With the implementation of the BPM6, countries will be asked to report the supplementary measures of remittances. 28. Metadata is a tool for understanding differences in methodology, data sources, and compilation practices applied by national compiling agencies. The compiling agencies of IMF member countries compile information on their data sources, definitions, classifications, and compiling methods. Reported in a standard template, it is published by the IMF in the Balance of Payments Statistics Yearbook (Part 3). Also available online are metadata of countries that are SDDS subscribers or GDDS participants. Although these metadata help in understanding different approaches taken by balance of payments compilers, the level of detail they provide is insufficient for a detailed analysis of data compilation systems. The majority of countries do not describe in detail in their metadata the methods they employ for their remittances data compilation system. Another approach to improve the transparency of
- 11 - methods could be the creation of a specialized website on remittances data, where countries could voluntarily post a detailed description of their practices, methodology, and data sources for compilation of remittances measures. The website could be managed by an international organization with an interest in remittances data. Challenges in compiling new measures of remittances 29. The problems that compilers encounter, and the solutions that they apply, vary between countries. The level of resources available to compilers also varies between countries. As a result, data are sometimes not equally comprehensive and reliable across countries. The BPM6 framework brings more clarity in concepts and definitions and also it better meets the users needs. However, compilation problems will still be encountered. Conceptual issues 30. Before BPM6 and RCG, no statistical definition of remittances was presented in methodological publications other than the definition of worker s remittances (a subject of transfers). Users and compilers often went beyond this component and added other components to workers remittances, such as transfers for financing goods and services or financial transactions. This led to discrepancies and inconsistencies in data disseminated by countries. 31. The BPM6 definitions of remittances are oriented to users needs. The implementation of BPM6 concepts will eliminate many inconsistencies in coverage of compiled data. The new definitions will facilitate data compilation and analysis. Certainly, countries, for different analytical purposes, may decide to extend remittances measures beyond those presented in BPM6; however, no major inconsistencies or difficulties should arise if differences from BPM6 definitions are clearly highlighted. Data source issues 32. In most cases, data weaknesses and omissions result from difficulties in obtaining all necessary source data. The guidance provided in the RCG on existing or new remittance
- 12 - channels, on relations between settlements and information flows, and also on possible data sources for the compilation of remittances data, bring more clarity and enhance understanding. Clearly the RCG can help compilers in designing or improving the remittances compilation system through exploring available data sources. 33. However, because remittance transactions are heterogeneous, no single data source can ensure that all transactions are reported adequately. For compiling all remittance-related flows, a variety of data sources should be used, some of which are difficult to capture. Even if compilers have a profound understanding of remittances channels employed in their countries, the identification of possible data sources and the collection of reliable data from those sources will remain challenging. Classification issues 34. The BPM5 states that it is often difficult to make the distinction between certain individuals (persons who are not residents of the economies in which they work) whose earnings are classified as compensation of employees, and migrants (persons who have become residents of economies by virtue of being expected to live there for a year or more). (BPM5, paragraph 272). The BPM5 also requires a distinction to be made between migrant and non-migrant residents in order to compile workers remittances. The BPM6 framework considers as remittances not only transfers from migrants but all transfers received by resident households from nonresident households. This eliminates some of the challenges posed in BPM5 caused by possible misclassification of workers remittances and other transfers; consequently, it is expected that global data accuracy and comparability will improve when the new definitions are implemented. 35. Users are often interested in the net income a country earns from seasonal and boarder workers. The inclusion of personal remittances as a new measure of remittances will allow meeting users need, as this measure incorporates the net compensation of employees. 36. Variations in data compilation procedures may occur due to different practices. For example, some economies consider their nationals working abroad for a year and longer to still be residents and their earnings therefore as compensation of employees because they
- 13 - maintain strong linkages with their home economy. However, most economies follow the one-year rule. Similar to BPM5, BPM6 states that the intention to stay in a territory for one year or more is sufficient to qualify the migrants as being residents of the host economy. 37. In the balance of payments framework, not all funds remitted by persons are recorded as remittances. The BPM6 states that funds sent abroad by individuals who are resident in the economy for the purpose of making a deposit in his or her own account with a bank located abroad represent a financial investment [...] rather than a personal transfer (para. 12.50). It involves a quid pro quo because the sending party acquires a claim against the deposit-taking bank abroad. In regard to joint bank accounts, BPM6 states But, any withdrawals to provide resources to a relative or another person (without a quid pro quo) should be recorded as a personal transfer. This situation of joint accounts can arise with workers resident abroad who have joint bank accounts with relatives in their home countries. If the joint account of the emigrant workers held in their home country is freely usable by its holders in the home country, the account may be considered to be held by residents in the home economy [and] the deposits made to the account by the nonresident should be shown as funded by a transfer from abroad... The clarification in BPM6 will lead to less confusion about preferred concepts and treatments, but data collection and compilation issues could still remain. 38. Another example is when migrants accounts are accessible by family members in the country of origin (e.g., through ATM cards). Withdrawals from such an account constitute a remittance when the withdrawal is made, yet it would seem challenging to accurately capture such transactions. Similar classification problems apply to money transfers to nonresidents in the receiving country (students, medical patients, tourists, etc); these are not remittances, because the parties are residents of the same economy. Such flows may interest data users, yet they are not identifiable as migration-related flows in balance of payments statistics unless recorded mistakenly, e.g., by recording all transfers through money transfer operators as remittances. 39. Misclassifications may occur when money is remitted to purchase real estate or acquire control of a business; such transfers should be treated as an investment but may be
- 14 - misclassified as remittances. Furthermore, when family members in the country of origin live in the real estate free of charge or work in the business set up by the migrant, and are paid above-market income, personal transfers should be imputed capturing these transactions would be challenging, but in most economies such transactions may represent a small share of total remittances, and so these are usually not significant challenges. 40. In this paper, we have highlighted recent key achievements in statistics on remittances, most notably, the adoption of the BPM6 and the RCG. We note that some data compilation challenges will continue, but these are less daunting than under BPM5. Remittances data quality will no doubt substantially improve, as compilers adopt the definitions and techniques in these new manuals.
- 15 - References International Monetary Fund, 1993, Balance of Payments Manual, fifth edition., 1995, Balance of Payments Compilation Guide., 1996, Balance of Payments Textbook., 2008, Balance of Payments Statistics Yearbook., 2009, Balance of Payments and International Investment Position Manual, sixth edition.,2009, International Transactions in Remittances: Guide for Compilers and Users.