Counterpart items

Counterpart items

So far nothing has been mentioned about the accounts labeled counterpart items and net errors and omissions.Counterpart items are analogous to unrequited transfers in the current account.They arise because of the double entry system in balance of payments accounting and refer to adjustments in reserves owing to monetization or demonetization of gold, allocation or cancellation of SDRs and revaluation of the various components of total reserves.

When monetary authorities add to their holdings of monetary gold by acquiring newly mined gold or existing gold offered on the private market, their reserves increase which creates a debit or use on the capital account.The offsetting source for the same amount as the increase in reserves is applied to the counterpart account.When monetary authorities sell gold to the private sector (demonetization), the resulting source is offset by a use entry for the same amount in the counterpart account.

The same procedure holds for the allocation of SDRs.SDRs, as a pure creation by the IMF, give rise to a debit in the reserve account when they are allocated.The offsetting source is credited to the counterpart account.When SDRs are cancelled, the resulting source in the reserve account is offset by a debit in the counterpart account.

The floating exchange rate system, which was in place since the early 1970s, and the fact that an official gold price no longer exists, mean that in the absence of a fixed price unit of account the various reserve components can show valuation changes relative to each other.When the monetary authorities adjust the value of their reserves upwards or downwards in response to these changes, the offsetting credit or debit is applied to the counterpart account.