Interest and Index-linked Debt Instruments (BOPCOM-05/32) - Eighteenth Meeting of the IMF Committee on Balance of Payments Statistics Washington, D.C., June 27–July 1, 2005

(2) Issues – see BOPTEG Issues Paper # 26 and Background paper prepared by Chris Wright (i) The BOPTEG meeting in December 2004 discussed the treatment of index-linked instruments and recognized the complexity of the issue. The discussion was based on an approach consistent with the debtor approach to recording interest. (ii) The group considered two methods for determining interest (using the movement in reference index during a period or using the most recent observation of relevant index) without changing the definition of interest in the 1993 SNA (Alternative 1 from the IMF Statistics Department's paper). Most members considered the use of recent observations to estimate interest accruals as the most acceptable option, but considered after-the-fact revisions as impractical. BOPTEG members expressed reservations on limiting the discussion. Some members felt that other alternatives (such as interest expectation at inception [Alternative 2] or embedded derivative approach [Alternative 4]) should be explored. It was also noted that instruments linked to inflation indicators have special nature than those linked to speculative indicators. Some members felt that ESA95 intended to make such a distinction. (iii) The issue paper was also presented at the December 2004 AEG meeting as an information item. The AEG expressed the view that the debtor approach did not limit discussion to Alternative 1 from the attachment (IMF Statistics Department's paper), but also encompassed Alternatives 2 and 4, which received some support. (iv) As a result, the BOPTEG issues paper # 26 was revised and a background paper including numerical examples was prepared (by Chris Wright) for an electronic discussion among the BOPTEG members of all three alternatives. (3) Recommendations: (i) Ten BOPTEG members responded to the revised paper. The following summarizes their views: • Four members preferred to determine interest as the difference between redemption and issue prices accrued over the life of the instrument, in line with the 1993 SNA approach. For calculating interest for each accounting period, two responses favored using the movement in the relevant index, of which one suggested no revisions so that it would be closer to the existing SNA guidelines. Two other responses considered the-2-use of the most recent observation of the relevant index to be more practical, but one response felt that continuous revision is undesirable. • One member thought that while a split between interest and holding gains/losses as a result of indexation seems appropriate; on practical grounds and for achieving symmetry …