What are 'Current Transfers'
Current transfers are current account transactions in which a resident entity in one nation provides a nonresident entity with an economic value, such as a real resource or financial item, without receiving something of economic value in exchange. Current transfers are transactions where the originator does not receive a “quid pro quo” in return; this absence of economic value on one side is represented in the balance of payments by one-sided transactions called transfers. Current transfers affect the current account and are separate and distinct from capital transfers, which are included in the capital and financial account. Current transfers include workers’ remittances, donations, tax payments, foreign aid and grants.
BREAKING DOWN 'Current Transfers'
Current transfers include all transfers that do not have the following characteristics of capital transfers:
- Transfers of ownership of fixed assets;
- Transfers of funds linked to acquisition or disposal of fixed assets; and
- Forgiveness by creditors of liabilities without any counterparts being received in return.
Current transfers are classified into two main categories – general government and other sectors.
General government transfers include the following:
- Transfers in cash or kind backed by international cooperation between governments of different economies, or between a government and an international organization;
- Cash transfers between governments for financing current expenditures by the recipient government;
- Gifts of food, clothing, medical aid, etc. as relief efforts after a natural disaster;
- Gifts of certain military equipment; and
- Current taxes on income and wealth, and other transfers such as Social Security contributions.
“Other sectors” transfers include the following:
- Workers’ remittances by migrants (someone who stays in another nation for more than a year) who are considered residents of other countries;
- Transfers in cash and kind for disaster relief;
- Regular contributions to charitable, religious, scientific and cultural organizations; and
- Premiums and claims for non-life insurance.
While current transfers are grouped separately from goods, services and income in the balance of payments because of their one-sided nature, the distinction between a transfer and a regular transaction is not always clear. For example, remittances from overseas workers are classified by the recipient nation either as current transfers or as “compensation of employees,” depending on the length of stay by these workers in the foreign countries where they are working. As another example, a remittance from a resident of one nation to finance another resident who is staying abroad temporarily is not recorded as a transfer, since it is considered a transaction between residents of the same country.