Balance of payments

Interbank positions and other transactions between resident and non-resident deposit-taking corporations are classified as deposits.

Trade credit is a claim generated when a provider of goods or services grants a customer an extension of time to pay or receive advance payment for goods or services. The trade-credit and advances derive from the fact that payment for the goods or services is not remitted at the time the goods are delivered or the service provided.

The balance of payments shows transactions between residents and non-residents over a specified period of time. It is divided into the current account balance, the capital account balance, and the financial account balance. As a general rule, the current account balance and the financial account balance plus the capital account balance should be equal, as a current account surplus increases external assets or reduces liabilities, while a current account deficit erodes external assets or is met with increased foreign borrowing. For each transaction, two entries are made. The amounts of the two entries should be equal, and their sum should be
zero. For example, goods imports are entered in the current account, and the payment for the goods is entered in the financial account. If the sum of the two entries is not zero, the remainder is entered under errors and omissions. Because each item is measured separately, using data from different providers, it is not guaranteed that the figures will agree.

The current account shows transactions between residents and non-residents with goods and services, primary income, and secondary income. The current account balance is the difference between revenues from exports, primary income, and secondary income, on the one hand, and expenses due to imports, primary income, and secondary income, on the other. All current account entries have a positive sign, apart from reinvested earnings and goods under merchanting, which could be either positive or negative. Reinvested earnings and goods under merchanting are explained in greater detail below.

Goods trade is divided into three categories: general merchandise on a balance of payments basis, net exports of goods under merchanting, and non-monetary gold. General merchandise on a balance of payments basis includes goods transactions involving a change of economic ownership between residents and non-residents. In this context, it is the change of ownership
that determines whether the transactions are entered into the current account balance or not. Transport of goods from one country to another does not, in and of itself, entail goods trade if there is no change of ownership.

Statistics Iceland compiles statistics on goods imports and exports, as well as external trade, and measures the importation and exportation of goods that are physically transferred to and from Iceland, irrespective of whether a change in ownership has taken place. The Statistics Iceland figures used for the balance of payments are adjusted for the balance of payments basis (change in ownership). Statistics Iceland publishes on its website a bridge table showing the changes made to external trade figures to adjust them for the balance of payments basis.

Merchanting includes domestic entities’ transactions with goods that do not physically enter Iceland: for example, if a domestic firm buys goods from Germany and sells them on to a buyer in Denmark without physically bringing them to Iceland. Even though the product never enters Iceland, the transaction is still considered a trade between a resident and a non-resident. The purchase of the goods is entered under goods trade as exports of goods under merchanting, with a negative sign. When the same goods are sold, the exportation of the goods is entered in a conventional manner, with a positive sign. The difference between purchase and sale price is shown under the item Net exports of goods under merchanting. The difference could reflect the intermediary’s profit, gains, or losses due to price changes, or changes in inventory. In case of a loss or an increase in inventories, net exports of goods under merchanting could be negative in some instances.

Non-monetary gold includes the importation and exportation of gold other than that
belonging to the Central Bank’s foreign exchange reserves.

Services transactions are entered into the current account balance for the period during which the service is provided. Services trade is divided into twelve categories; manufacturing services on physical inputs owned by others, maintenance and repair services not included elsewhere (n.i.e.); transport; travel; construction; insurance and pension services; financial services; charges for the use of intellectual property n.i.e.; telecommunications, computer, and information services; other business services; personal, cultural, and recreational services; and government goods and services n.i.e.
Statistics Iceland oversees the preparation of statistics on services trade and has done so since 2009. Previous figures were prepared by the Central Bank of Iceland.

Primary income includes revenues and expenses that derive from institutional units’ contribution to the production process or from providing financial assets or leasing natural resources to other institutional units. It includes compensation of employees, investment income, and other primary income.

Compensation of employees includes all of an employee’s wages and related expenses when the employee and employer reside in different countries. Compensation is recorded on a gross basis, including the employer’s contribution to the social security system, pension funds, and other items paid by the employer as a part of the employee’s terms of employment. Only those payments between parties in an employer-employee relationship are included with the compensation of employees. Otherwise, the payments are included in the services trade.

Investment income is net income from equity holdings (dividends and invested earnings) and liabilities (interest). Net income excludes capital gains, exchange rate gains, and financial intermediation services indirectly measured (FISIM). Investment income is classified according to the activities underlying the investment: direct investment, portfolio investment, other investment, or foreign exchange reserves. These are further classified in terms of the type of investment. Gains and losses due to price and exchange rate movements are separated from gains and losses on equity holdings and are not included in investment income.

Income on equity and investment fund shares is classified as dividends or reinvested earnings. Dividends are revenues distributed among shareholders in return for their having provided companies with funds for their disposal. Dividends are recognised in the period in which they are paid out.

Reinvested earnings are an imputed value that includes the portion of net profit (excluding price and exchange rate movements) that is not paid out to shareholders as dividends. In investment income, reinvested earnings represents the profit or loss that an investor receives on his holdings during the period, excluding dividends (dividends are also the profit or loss received by the investor on his holdings during a given period). Reinvested earnings, together with the exchange rate and price movements, therefore reflect changes in the value of equity between two periods and is entered into the financial account to reflect an increase or decrease in equity holdings.

Interest in primary income is measured as pure interest by excluding the FISIM component, financial intermediation services indirectly measured, from “actual” interest. Interest that borrowers pay can be split into two parts: pure interest (primary income) and FISIM (service). The same applies to interest received by depositors on their deposit balances. In this way, the
service portion is segregated out and recorded as a financial service in the services account. Interest including FISIM is shown as a separate memorandum item. FISIM is the margin between the deposit interest rates offered by financial institutions and the lending rates they charge, and it is used to cover operating expenses and dividend payments. In this way, borrowers pay indirectly for the services they receive by paying higher interest rather than paying service charges to lenders. By the same token, the interest income that depositors receive on their balances is considered to be net of service charges.

FISIM applies only to loans (or deposits) provided by financial institutions, and not to marketable bonds or trade credit between two non-financial enterprises. Investment income attributable to investment fund shareholders, including income from equity funds and custodial funds, consists of dividends and reinvested earnings. The funds earn income by investing the capital invested with them by shareholders. Shareholders’ income from investment funds is defined as investment income from the fund’s investment portfolio, net of operating expenses. The net income earned by investment funds after deducting operating expenses belongs to shareholders.

Like equity funds, insurance, pension, and standardised guarantee schemes earn income by investing the capital they receive from policyholders (fund members). The funds’ net income after deducting operating expenses belongs to rights holders.

Included in other primary income is income from renting natural resources. An example of this is payment for the use of land for the extraction of minerals or the use of fishing waters, forests, or grazing land. Taxes and subsidies on products and production are also included under other primary income.

Secondary income is divided into two categories: personal transfers and other current transfers. Personal transfers include all monetary transfers between individuals living in two different countries. The most common form is workers’ remittances, which are monetary transfers that individuals working abroad send to family members in their home country. Other current transfers consist of contributions to current international operations (development contributions) made by Government entities and non-governmental organisations, employees’ pension contributions, and pension benefits paid to retirees. The same applies to wage-earners’ social security contributions and social security payments to individuals, such as retirement and disability pensions, accident/illness per diem payments, and so forth. Tax refunds paid by the Government to non-residents, such as value-added tax
reimbursements paid to tourists and reimbursements for film production in Iceland, are included in secondary income. Premiums and claims for liability insurance are also included with other current transfers.

The capital account measures capital transfers “free of charge” between residents and nonresidents. Capital transfers can include investment grants, debt forgiveness, or unusually large insurance compensation payments.

The financial account includes net transactions with financial assets and liabilities which take place between residents and non-residents. The purpose of the financial account is not to measure the cross-border movement of capital (even though it is likely that most transactions involve the transfer of funds across borders), but rather to measure transactions between residents and non-residents. Transactions with foreign assets that take place between two residents are not included in the financial account, even though the transaction may entail cross-border movement of capital. The same applies to transactions with domestic assets that take place between two non-residents.

The financial account and the international investment position are related in that transactions entered in the financial account partially explain changes in external assets and liabilities between periods.

The international investment position shows the value of residents’ financial assets and liabilities to non-residents as of the end of each quarter. The difference between assets and liabilities is the IIP, which indicates whether there is a net claim or a net liability vis-à-vis nonresidents.

Valuation is based on market price; however, nominal valuation is used for positions in non-negotiable instruments, such as loans, deposits, and other accounts receivable/accounts payable. Equity holdings in direct investment are entered as own funds at book value in the books of the direct investment enterprise.

The financial account and the international investment position are related in that transactions entered in the financial account partially explain changes in external assets and liabilities between periods. Apart from transactions in the financial account, the value of external assets and liabilities can change because of changes in prices and exchange rates.

When an investor in one country owns 10% or more of the share capital of a company in another country, it is called Foreign Direct Investment. It is assumed that when the holding is this large or larger, it is the investor's intention to influence the management and policy of the company and to establish a long-term business relationship. The investor's loans (his contribution other than equity) or companies owned by him are considered as his additional investment in the company in question.

In the banks publication of direct investment the directional principle is followed. According to the principle, reverse investment between related parties in excluded and loans, between an investor and a company owned by him, are netted out and entered to either the assets or liabilities side, depending on whether the investor is a resident or a non-resident. Special purpose entities are excluded in the directional principle.

Direct investment in the balance of payments statistics as well as in the external position of the economy is presented according to the so-called asset and liability principle, which implies that asset and liability items are on a gross basis (claims between parent and subsidiary are not netted against each other). For example, this presentation implies that a domestic investor's loan to a foreign company owned by him is presented on the liability side of the external position of the economy but is not netted against the investor's loan claims on the foreign company on the asset side.

Loans between an investor and enterprises that are linked to it in a direct investment relationship are not considered direct investment if both parties are depository institutions, mutual funds or other financial institutions other than insurance companies and pension funds. In such cases, the loan is classified as other investment.

Real estate transactions are classified as direct investment. Investment in real estate is not considered a financial instrument and is special in that respect. Real estate transactions can be with individual real estate but also as real estate companies or holding companies.

Bonds are transferable financial instruments that are valid proof of a debt and are offered for sale in an offering in which all the main features of the bonds in each class are the same, including the name of the issuer (debtor), first interest date and provisions on repayment, interest rate and calling as appropriate. Marketable bonds are made to be bought and sold in the market, either on a stock exchange or directly over the counter between parties.

Types of bonds in Central Bank statistics:

Indexed market bonds
The principal changes in accordance with a certain index and is usually issued in Icelandic krónur. This includes, for example, housing bonds, housing fund bonds, HFF bonds, indexed Treasury bonds (RIKS) and indexed bonds issued by commercial enterprises, financial undertakings and municipalities.

Other marketable bonds and bills
The principal is not linked to any index - is non-indexed. These bonds can be issued in Icelandic krónur or foreign currencies. These include, for example, non-indexed Treasury bonds (RIKB), Treasury bills (RIKV) and bonds issued by commercial enterprises, financial undertakings, municipalities and foreign entities.

Equity
A shareholder’s claim on a given shareholding in a company. A public limited company issues special documents (shares) to prove that the owner of the equities (shareholder) holds a share in the company’s assets and annual profits. Shares are usually commercial papers, i.e. they can be bought and sold as specified in the company’s articles of association, either on a stock exchange or directly over the counter between parties. Upon dissolution of a company, shares become payable after all other debts of the company in question have been paid.

When an investor owns less than 10% of a company, it is considered a securities holding. If the share is larger, it is considered a direct investment and is classified as a share in an associated undertaking or affiliated undertaking.

Associated undertaking
An undertaking where direct and indirect ownership amounts to between 10-50% of the equity or voting rights.

Affiliated undertaking
A subsidiary of an undertaking, its parent company, or a sister company (i.e. a company under the same parent company). The condition is that the ownership stake amounts to > 50%.

Investment fund shares
Financial instruments confirming the claim of all owners of units in an undertaking for collective investment in transferable securities (UCITS) or in its separate divisions, to that fund’s securities holding. All holders of units have an equal claim on the income and assets of the undertaking or of its respective divisions, in proportion to their holdings in the total number of issued unit shares.

Equity liabilites
Equity is the entire shareholdings of the owners of an undertaking. Equity corresponds to the difference between assets and liabilities.

Financial derivatives are financial instruments whose value is dependent on the price of another, the underlying asset. Financial derivatives are distinguishable from other asset classes because they generally involve the transfer of risk (such as interest rate risk, exchange rate risk, equity, and commodity price risks, etc.) rather than the provision of capital or other financial assets. The value of financial derivatives is separate from the value of the underlying assets. Financial derivatives fall into the following subcategories: options, forward contracts, and employee stock options.

Options
Options give the purchaser the right to buy or sell the underlying asset at a specified price (the strike price) by a specified date.

Forward contracts
Forward contracts are unconditional contracts wherein two counterparties agree to exchange a specified quantity of an underlying asset at an agreed strike price on a specified date.

Employee Stock Options
Also included in financial derivatives are employee stock options, which give employees of a company the right to buy its stock as part of their remuneration package. If an employee stock option can be traded on financial markets without restriction, it is classified as a financial derivative.

Other equity is equity not in the form of securities. It can include holdings in branches, trusts, and limited partnerships. Holdings in many international organisations are not in the form of securities and are therefore classified as other equity.

Currency and deposits consist of banknotes and coins in circulation, plus deposits. Deposits
Currency and deposits consist of banknotes and coins in circulation, plus deposits. Deposits are standardised, non-negotiable agreements offered by deposit-taking corporations. The term of deposits can vary, depending on the agreement. Deposits generally imply that the debtor is obliged to return the principal to the investor. They can be held in central banks or in deposit-taking corporations.

Deposits are non-transferable agreements between a deposit-taking corporation and another party where funds are deposited in an account in a deposit-taking corporation for a long or short term return. Deposits can be retail deposits or wholesale deposits. Wholesale deposits are deposits for which the terms and duration of the relevant deposits have been specifically agreed upon either directly with the relevant deposit-taking corporation or through a money market broker. Such deposits are generally not available to regular savers and their terms are not standardised. Retail deposits are deposits in standard accounts with advertised terms and duration.

Loans are non-transferable financial instruments where a lender lends money directly to a borrower and have fixed, predictable payments. Loans are generally non-transferable, but if loans become transferable from one owner to another, their classification is changed to marketable bonds. For loans to be reclassified, market transactions must take place.

Redeemed liabilities
Loans which a financial undertaking has reclaimed but has not yet demanded payment for from guarantors.

Overdraft facilities
Overdraft on a current account. This also includes debts due to payment cards.

Bills of exchange  
Written orders in a specific format from an issuer to a drawee to pay a certain amount to a third party. Bills of exchange can be bills of exchange against another person or an own promissory note. A bill can also be an own promissory note whereby the issuer undertakes to pay the stated amount on the date of maturity. Most bills are non-indexed and generally used for short-term financing (4 months or less). Bills are generally not issued for a longer term than one year.

Indexed loans
A bond whose principal changes in accordance with a certain index that ensures that the bond maintains its value. Bonds are written undertakings by an issuer (borrower) to pay another party (the lender) a specified amount including interest for a certain period of time and to repay the loan on its date of maturity. Indexed bonds according to the Central Bank of Iceland's rules No. 218/2023 on Price Indexation of Savings and Loans are based on the Consumer Price Index.

Other loans and receivables
Non-indexed bonds and receivables other than accounts receivable. A receivable is a legally protected authorisation by one party to demand payment from another party, i.e. the debtor. This also includes non-indexed interbank loans and claims against subsidiaries.

Purchase lease agreements
Synonym for financing lease and hire-purchase agreements. They differ from direct loans in that they involve the lender buying the liquidity or asset requested by the customer and subsequently renting it to the customer for a pre-negotiated term. Ownership is therefore the main collateral for the lender.

Collateral loan
The Central Bank can grant loans for both short and long terms, but all loans granted by the Central Bank are secured loans, as the bank may only lend against collateral that the bank deems eligible. The rates on 7-day collateralised loans form the centre of the interest rate range.

Securities lending
Securities lending with cash collateral

Provisions
Provisions are precautionary entries made by lenders in connection with recoveries on loans. Provisions are made based on the assessment of expected loan losses due to specific customers.

Unused credit lines are not classified as loans as they are not debts but obligations.

Overnight loans
Loans that counterparties in transactions with the Central Bank can apply for on their own initiative, if they can put up collateral that the Central Bank deems eligible. Overnight loans are loans until the next business day.

Collateral loans
Loans against collateral in securities. The Central Bank lends against collateral in securities and the agreement is reversed after 14 days. Counterparties submit eligible securities, according to the bank's list of securities eligible as collateral.

The insurance, pension, and standardised guarantee schemes that most strongly affect the statistics of the Central Bank of Iceland Iceland’s are non-life insurance technical reserves and pension entitlements. Other categories are life insurance and annuity entitlements, entitlements to non-pension benefits, claims of pension funds on pension managers, and provisions for calls under standardised guarantees.

Pension funds
Fund members’ pension fund assets are not necessarily equivalent to the pension funds’ assets because there are different types of funds. They could be either defined-benefit funds or defined-contribution funds. Defined-benefit funds are of two types: funded and unfunded. Assets in defined-benefit funds are calculated in terms of the fund’s actuarial position. If a defined-benefit fund is funded, it can be assumed that fund members’ assets (their actuarial
position) at any given time are equal to the market value of the fund’s assets. In the case of unfunded defined-benefit funds, however, the funds’ assets could be less than their actuarial position, and the employer is responsible for bridging the gap that develops. Defined contribution funds are always funded; therefore, fund members’ assets at any given time are equal to the market value of the assets in the funds.

Non-life insurance technical reserves
Non-life insurance technical reserves fall into two categories. On the one hand, is a fund for prepaid premiums, and on the other is a fund for outstanding claims that the insurance companies expect to pay for events that have already occurred. These funds constitute the insurance companies’ liabilities and the insured parties’ assets. Their impact on statistics is comparable to that of the pension funds, which is described above.

Other accounts receivable/payable include accounts receivable or payable other than those specified above. They can include tax liabilities, securities transactions, wages, or dividends.

Reserve assets are foreign assets that are always available to monetary authorities and under their control. Reserve assets must be foreign-denominated assets, claims against nonresidents, and assets that actually exist. Potential assets are excluded.

A resident is any individual and legal entity permanently residing in Iceland, irrespective of nationality. Students and embassy employees are exempt from the residency requirement. Therefore, Icelandic students and their families who reside abroad are considered residents, and foreign embassy employees are considered non-residents. Non-residents shall mean all parties except residents.