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AngolaWorkshop on Oil Revenue
Management
The World Bank - Angola
Appropriate Fiscal Responses to the Rapid
Accumulation of Oil Revenues
By Francisco G. CarneiroMay - 2006
Structure of the Presentation
• Background and main challenges
• Government actions to relaunch the economy
• Administration of oil revenues• Appropriate fiscal responses• Summary of recommendations
Background:
The Most Challenging Issues Facing Angola in the
Near Future
A Country Rich in Natural Resources
US
$ m
illio
n
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20000
30000
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1990 1995 2000 2005 2010 2015 2020 2025 2030
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High
Low
Regime (All)
Sum of Gross Rev $M
Year
Price
Low price
Base price
High price
Figure 1: Angola's Official Diamond Exports
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$ m
illi
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Carats US$ million
Receitas do Petróleo sob Diferentes Cenários de PreçosNa Ausência de Novas Descobertas
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500
1,000
1,500
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2,500
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Current production Pending production
1000
b/d
The Evolution of World Prices
World Price of Crude Oil since 1861
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120.00
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$/b
arr
el
$ 2004 Median Mean
1974 1980 1998
Median = $18.18 Mean = $24.28Source: BP Statistical Review of World Energy
Association Between Resource Concentration
and Conflict
Bannon, Ian and P. Collier (2003), “Natural Resource and conflict: What We Can Do” in Natural
Resources and Violent Conflict, Bannon, Ian. and Paul Collier (eds.), Washington DC: World Bank
Low-Base Social Indicators
Indicadores Sociais e de Pobreza Indicador A Posição de
Angola População (em milhões) 14.7 População 20 anos 60% População abaixo da linha de pobreza 68% Expectativa de vida ao nascer 42.4 Taxa de mortalidade dos 0 aos 5 anos ( por 1000 nascimentos) 250 Taxa de prevalência do VIH/SIDA 3.9% População que sabe onde fazer um teste do VIH 23% População que sabe pelo menos 3 maneiras de se evitar a infec ção pelo VIH 17% Taxa de analfabetismo adulta 33% Taxa de mortalidade maternal 1800 Taxa líquida de escolarização ( 1ª -4ª classe) 56% Classificação no IDH (entre 177 países) 166 Classificação PIB/capita (entre 177 países) 128 Coeficiente de Gini (1995) 0.54 Coeficiente de Gini (2001) 0.62 Fonte: ECP.
Dealing with an Appreciating Exchange
RateAngola has experienced a more sustained real appreciation of the effective exchange rate
since 2003 than its oil-producing neighbors.
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Jan-
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Angola Cameroon
Chad Congo, Rep. of
Equatorial Guinea Gabon
Nigeria
Real Effective Exchange Rate(Index 100=Jan00)
What the Government is Doing
Relaunching the Economy
Job CreationRepairingInfrastructure
ImprovingService Delivery
SocialStability
Causal Factors
• Technical Factors:– “Paradox of Plenty”
– Volatility of revenues
• Political Factors:– Diminished governance
– Under-investment in capacity
160 CountriesStrong governanceWeak Governance
Source for data: http://www.worldbank.org/wbi/governance/govdata2001.htm. This chart shows estimates of control of corruption for 160 countries during 2000/01, with selected countries indicated for illustrative purposes. The vertical bars show the likely range of Governance indicators, and the midpoints of these bars show the most likely value for each country. The length of these ranges varies with the amount of information available for each country. Colors are assigned according to the following criteria: Red, less than 30% of overall countries rank worse; Yellow, between 30% and 70%; Green, over 70% . Countries’ relative positions in no way reflect the official views of the World Bank or the International Monetary Fund.
Go
vern
an
ce I
nd
icat
or
Angola
Nigeria
Ecuador
Cameroon
Azerbaijan
Russia
Iran
Algeria
Venezuela
Gabon
Colombia
Mexico
Malaysia
Kuwait
United Kingdom
Norway
Governance and Transparency
Weak Institutional Capacity
• National Tax Department (DNI)
– USD $10 billion in revenues (2004)– > 30 companies– > 60 contracts– 6 professional staff
Sector Management Assessment
• World class reserves with robust pre-tax economics
• Up-to-date legal and contractual regime
• Acceptable post-tax returns• Very significant production build-
up, but with significant mid-term peaking….
The Way Forward
The way forward requires:
1.Better capacity to forecast revenues
2.Appropriate fiscal policies3.Some form of a stabilization fund
(conta de reserva do Tesouro)
Different Price and Revenue Scenarios
32.00
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Low 54.00 40.00 39.44 38.89 38.33 37.78 37.22 36.67 36.11 35.56 35.00
Base 54.00 56.00 52.00 47.00 43.00 40.00 39.00 38.00 37.00 36.00 35.00
High 54.00 76.00 72.00 67.00 63.00 60.00 59.00 58.00 57.00 56.00 55.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
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1990 1995 2000 2005 2010 2015 2020 2025 2030
US
$ m
illio
nLow price
Base price
High price
Different Price Scenarios Corresponding Revenues
Different Price and Revenue Scenarios
Total Government Revenues (US$ million)
Past revenues at historical prices
1990 - 1994 10,247
1995 - 1999 12,119
2000 - 2004 24,251
Future revenues under three price scenarios
Base Price High Price Low Price
2005 – 2009 99,930 152,358 74,301
2010 - 2014 95,016 175,672 86,805
2015 - 2019 50,239 94,850 48,232
2020 - 2024 21,556 41,922 21,256
2025 - 2029 5,772 11,748 5,714
Fiscal Policy Response
The essential idea is to convert uncertain per capita future oil revenues into a conservative estimate of what might be spent per capita in perpetuity, based on those future revenues and on accrued savings and interest from their early investment. The result of such a policy is a dramatic smoothing of expenditure, which addresses both Dutch Disease and expenditure volatility concerns, and
a transfer of wealth to future years to cover resource exhaustion concerns.
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Adjusted government revenue per capita Interest on accumulated savings per capitaProjected government revenue per capita Permanent Expenditure per capita
Assumptions:
Base price scenario
Population grows at 2.9% annually.
Financial assets yield 5% annually.
Adjusted government revenue is
discounted at 10%.
US
$
$169
Permanent Expenditure Levels under Different
Assumptions
Discount Rate
Price Scenarios 5% 10% 15%
Low 182 136 107
Base 220 169 136
High 385 292 232
US$ per capita, assuming that population grows by 2.9% annually and that financial assets yield 5%
Practical and Political Considerations
• Need for agreement on assumptions
• Institutional capacity requirements
• Popular opposition current savings/deferred expenditures
Economic Policy Objectives
• Manage the impact of an appreciating real exchange rate
• Agree on a strategy to absorb oil windfall with a view to move to an MTEF
• Build international reserves/the oil reserve account as buffers against the foreign exchange/fiscal impact of revenue volatility
• Promote rapid and bold improvements in procurement practices
Options to Deal with the Effects of Appreciation of
the Currency
Reduce Costs• Detailed analysis of the structure of
production costs is essential• Use of oil revenues for productive
investment (e.g., infrastructure) can lower domestic costs for the entire economy
• Do not try to fight against the appreciating trend
Institutional Options to Manage the Windfall
Box E.1: Elements of a Revenue Management Framework for Angola Revenue consolidation and collection
- The collection of all petroleum related revenues are consolidated through the oil reserve account - Revenues are accounted for according to agreed and transparent accounting guidelines - Revenues are published in an accessible and timely manner
Define savings and consumption
- Transfers from the oil reserve account to the budget are based on the agreed savings/expenditure rules. - The rules are clear, predictable, and public, do not depend on administrative or political discretion for their application - In the development of guidelines for savings and consumption, macroeconomic and sustainability concerns are paramount
Institutionalize the transfer mechanism
- Transfers from the revenue collecting authority to the budget and the oil reserve account follow predefined rules and occur automatically, independent of administrative or political discretion
Account management
- Management of the funds is based on clear, transparent, agreed, and predictable rules, which allocate clear responsibilities and reporting requirements.
- The BNA is designated as the operational (day-to-day) manager for the account. - The rules for investing the account’s assets must be clear, agreed and published. - Fund assets should to a large extent be invested abroad and in safe instruments - The BNA reports on performance of the oil reserve account and asset allocation according to a preset schedule, and the reports are
made public in an accessible way - A high level oversight committee (key ministries plus qualified external advisers) must be established. - The oil reserve account, its management, and guidelines must be subject to rigorous transparency requirements - There should be a cap limiting the resources accumulated ex-ante to avoid political economy problems.
Summary of the Recommendations
Improve Governance
• Adopt best practice policies to manage natural resources
• Invest in institutional capacity
• Improve transparency• Consolidate
macroeconomic stability
Strong political commitment to guarantee the success of the reforms
