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Fiscal Policy Frameworks for Resource-Rich Economies: Considerations for Liberia
Todd Mattina Fiscal Affairs Department
International Monetary Fund March 18, 2013
Presentation plan:
2
I. Motivation: Challenges for resource-rich developing countries (RRDCs)
II. Fiscal policy frameworks for RRDCs: key considerations
III. Summary
Motivation: Macroeconomic and Fiscal Policy
Challenges for RRDCs
3
Resource revenues are increasingly important for many developing countries
4
0
10
20
30
40
50
60
70
80
90
100
Equatorial Guinea
Libya Kuw
ait Tim
or-Leste Iraq Angola C
ongo Republic
Nigeria
Algeria Iran Yem
en Sudan Kazakhstan C
had Venezuela Botsw
ana M
alaysia M
exico Bolivia Ecuador R
ussia Ivory C
oast D
RC
M
auritania Papua N
ew G
uinea G
uinea Zam
bia
1 27 LICs and MICs have mineral & oil revenue above 25 percent, in 2011.
Receipts from Natural Resources in 2011
(Selected countries, percent of government revenues)1
Petroleum Revenue
Mining and Petroleum Revenue Mining Revenue
0
2
4
6
8
10
12
14
16
2000 2011
LICs MICs
1/ Latest data for five countries are as of 2010 and earliest data for five other countries are as of 2001-2004.
Number of LICs and MICs with mineral and oil revenue above 25 percent of government revenue 1/
Macroeconomic and Policy Challenges in RRDCs
5
0.0
0.4
0.8
1.2
1.6
Oil Producers Mineral Producers Non-Resource Rich*
Sources: World Economic Outlook; and IMF staff estimates. *Real total revenue.
Volatility of Real Resource Revenue and Expenditure
(Coefficient of variation, average: 1992–2011)
Resource Revenue Expenditure
AGO
BGD
BOL
BWA
CMR
COG
CIV GAB
GHA
GIN GUY
IDN
KAZ LBR
MLI
MNG
MOZ
NAM
NER PER
ZAF
SDN SYR
TZA
TGO
TTO
VNM
ZMB
-35
-25
-15
-5
5
15
25
35
0 20 40 60 80
Resource Rent
Adj
uste
d N
et S
avin
gs
Adjusted Net Savings and Exhaustible Resource Rent1,2
(Average:2000–09, in percent of GDP)
Sources: World Development Indicators, World Bank; and IMF staff estimates. 1Adjusted net savings are net national savings plus education expenditure minus energy, mineral and net forest depletion, and emissions damage. 2Resource rents are unit price minus unit cost of oil, mineral and forest sectors.
Boom-Bust Cycles Low Saving Rates
Building assets with resource revenues
6
Low Public Investment in RRDCs
0
2
4
6
8
10
12
Public Investment in RRDCs and Non-RRDCs (Average: 1980–2011, median and interquartile range,
in percent of GDP)
1980–89 1990–99 2000–11
RRDCs Non-RRDCs
Sources: World Economic Outlook; and IMF staff estimates.
Public investment in RRDCs has been relatively low compared to non-RRDCs.
For a lasting impact on development, part of the natural resource revenues needs to be saved or invested.
Consumption and investment benchmarks
7
0 T0 T1 Time
Resource Windfall
Optimal Consumption
Bird-in-hand Rule
Permanent Income (PIH) Rule
1Stylized example based on Collier et al. (2010), p. 93.
Incremental Consumption from a Resource Windfall1
Optimal Savings
The permanent income hypothesis (PIH) implies that the government should consume the real return on accumulated financial assets and the net present value of future resource revenues.
When living standards are expected to rise over time, it is optimal to tilt incremental consumption forward to benefit relatively poorer current generations (blue line).
Fiscal Policy Frameworks for RRDCs
8
Objectives of fiscal policy frameworks
Demand management • How does fiscal policy
contribute to domestic demand, growth, inflation and the balance of payments?
Solvency • Can fiscal policy be
sustained once resources have been exhausted?
9
As in other countries, the fiscal framework for resource rich countries needs to address two key issues:
These issues are complicated by resource revenue volatility and resource exhaustibility
Fiscal framework design is linked to the “resource horizon”
10
Resource Horizon: Duration Until Resources are Exhausted
Long Horizon Focus is on managing volatility
Short Horizon Focus is on sustainability
25-35 years
Managing resource revenue volatility in countries with short resource horizons
11
• Fiscal targets based on the non-resource primary balance (NRPB) are appropriate – The NRPB is defined as the primary balance less resource
revenues (or non-resource revenues less primary spending).
• Since resource revenues largely accrue from abroad, an increase in the non-resource primary deficit generally implies an expansionary fiscal stance.
• Setting fiscal policy based on an NRPB target can de-link expenditures from volatile resource revenues and avoid abrupt adjustments when resources are exhausted.
Managing resource revenue volatility in countries with long resource horizons
12
• Resource revenues are often a large share of overall revenues in countries with long resource horizons. – Excluding resource revenues from fiscal targets may not be intuitive,
easy to communicate and could be misinterpreted.
• A rule based on the “structural primary balance”, defined as the primary balance excluding cyclical resource revenues can help to de-link spending from volatile revenue swings.
• Spending will be a function of “structural” or “normal”
resource revenues and the primary balance target. – Price-based rules can be used to estimate structural revenues
Managing resource revenue volatility: Tradeoffs in price-based smoothing rules
13
1/ This chart simulates real primary expenditure growth for an oil-producing country following alternative price rules. The rules are a function of an M-year trailing average of historical prices; the current spot price, C; and an N-year average for market-based forward prices (e.g., M/C/N).
-5
0
5
10
15
20
1974 1979 1984 1989 1994 1999 2004 2009
Price Rule (5/1/5)
Price Rule (5/1/5) + Expenditure Growth Limit
Real Primary Expenditure Growth
(Percent change, year-on-year)
-5
0
5
10
15
20
1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Price Rule (5/0/0)
Price Rule (5/1/5)
Price Rule (12/1/3)
Real Primary Expenditure Growth
(Percent change, year-on-year)
Managing resource revenue volatility: Tradeoffs in price-based smoothing rules
14
0
10
20
30
40
50
60
70
80
90
100
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
Price rule (5/0/0)
Price rule (5/1/5)
Price rule (12/1/3)
Cumulative financial savings (Percent non-resource GDP)
0
10
20
30
40
50
60
70
80
90
1973
19
76
1979
19
82
1985
19
88
1991
19
94
1997
20
00
2003
20
06
2009
Price rule (5/1/5)
Price rule (5/1/5) + expenditure growth limit
Cumulative financial savings (Percent non-resource GDP)
Assessing fiscal sustainability
15
• While many fiscal policy paths are sustainable in principle, three “sustainability benchmarks” are of particular interest:
Permanent Income Hypothesis (PIH) • Government consumption
and wealth are held constant over time. The present value of non-resource deficits should equal the present value of resource revenues.
Modified PIH (M-PIH) • Allows for a temporary
drawdown of financial assets to scale up public investment. The initial drawdown is offset by a future fiscal adjustment to rebuild financial assets.
Fiscal Sustainability Framework (FSF) • Allows for a sustained
drawdown of financial assets to build human and physical capital to deliver an expected permanent gain in non-resource revenues.
Assessing Fiscal Sustainability
16
Fiscal Sustainability Frameworks for Resource-Rich Developing Countries
0
10
20
30
40
50
60
Primary expenditure Non-resource revenue
PIH framework (Percent non-resource GDP)
0
10
20
30
40
50
60
Modified PIH framework (Percent non-resource GDP)
Front- loading Period
Long-run Period
MPIH Adjust. Period
0
10
20
30
40
50
60
Fiscal sustainability framework (Percent non-resource GDP)
Front- loading Period
Long-run Period
MPIH Adjust. Period
Assessing Fiscal Sustainability
17
Fiscal Sustainability Frameworks for Resource-Rich Developing Countries
-35
-30
-25
-20
-15
-10
-5
0
2012 2017 2022 2027 2032 2037 2042 2047
PIH perpetuity
MPIH perpetuity
FSF perpetuity
Non-resource balance (Percent non-resource GDP)
Front- loading Invest. Period
Adjustment Period
Long-run Period
620
630
640
650
660
670
680
690
700
2011 2015 2019 2023 2027 2031 2035 2039 2043 2047
PIH perpetuity
MPIH perpetuity
FSF perpetuity
Financial wealth (Percent non-resource GDP)
Front- loading Invest. Period
Adjustment Period
Long-run Period
Transparency and Public Financial Management Considerations
18
The type of investment with the greatest impact on growth will be country specific
Many countries are focusing on infrastructure investment Investments in education and health could be key for some
Investments in social capital such as schools and hospitals also require higher recurrent spending to be made productive
The effectiveness of scaling up depends on capacity to appraise, select, implement and evaluate projects.
Resource Funds
19
Resource funds help deal with resource revenue volatility and save for future generations
Funding should come from fiscal surpluses and remain linked to the government’s overall cash management strategy
Fund flows should be integrated into the budget and should
not have independent spending authority With weak institutional capacity, it is advisable to have just
one resource fund (sometimes with separate portfolios for stabilization and saving).
Summary
20
Summary
21
Resource revenues are an opportunity to progress on key development goals, such as poverty reduction, infrastructure and growth.
Fiscal frameworks should be designed to avoid the resource curse of slow growth, pro-cyclical fiscal policies and inadequate savings and investment.
Fiscal rules can help resource-rich countries mitigate externally driven volatility from commodity prices by building saving cushions.
Public investment should only be front-loaded once implementation capacity and fiscal transparency have been strengthened to avoid misuse.
THANK YOU
22
Presentation is based on:
Macroeconomic policy frameworks for resources-rich developing countries. Available at: http://www.imf.org/external/np/pp/eng/2012/082412.pdf
Fiscal Regimes for Extractive Industries: Design and Implementation,
Fiscal Affairs Department, IMF, August 15, 2012. Available at:
http://www.imf.org/external/np/pp/eng/2012/081512.pdf
23
Other useful references from the IMF’s Fiscal Affairs Department
24
Resource-rich developing countries (RRDCs) have a mixed growth record
25
-2
-1
0
1
2
3
4
5
1980–89 1990–99 2000–11
RRDCs
Non-RRDCs
Growth in Real GDP Per Capita for RRDCs and Non-RRDCs (Averages for 1980-2011, median and interquartile range, in percent)
Sources: World Economic Outlook; and IMF staff estimates.
Median
Managing resource revenue volatility: Tradeoffs in price-based smoothing rules
26
0
20
40
60
80
100
120
1973 1978 1983 1988 1993 1998 2003 2008
1 percent NR-GDP PB target 0 percent NR-GDP PB target -1 percent NR-GDP PB target
Cumulative financial savings under 5/0/0 price rule with different overall primary
balance targets (Percent non-resource GDP)
• Price-smoothing rule can also help to address sustainability concerns.
• This can be achieved by targeting different structural primary balances (e.g., Chile targets a surplus of 1 percent of GDP)
• Adding a “prudence factor” in the forecast (e.g., Mexico multiplies smoothed oil prices by a factor of 0.84).