Professional Documents
Culture Documents
The views in this presentation are those of the authors and should not be attributed to the International Monetary Fund, its Executive Board, or its management.
Challenges posed by oil revenue Fiscal policy and macroeconomic stability The non-oil primary balance Fiscal policy and intergenerational issues Oil funds Expenditure management Some guidelines
Maturity of the oil industry / oil production horizon Ownership of oil industry Fiscal regime for the oil sector Macroeconomic situation Financial position of the government and the public sector (gross and net debt, liquidity) Quality of institutions
Stabilization
Uncertainty about value of resource and timing of revenues Instability caused by volatility of oil prices Taxes must respond robustly to realised outcomes
Stabilize by total expenditure and revenue management, not by reliance on stable taxes General economic stability
Reduces investors risk premia Avoids disruption of projects Strengthens negotiating & trading position Vital to poverty reduction
90
80
70
60
50
40
30
20
10
0 1970
1975
1980
1985
1990
1995
2000
2005
Sources: IMF, World Economic Outlook (Washington, various issues); and IMF staff estimates. 1/ Average of U.K. Brent, Dubai, and West Texas Intermediate. Real oil prices deflated by the US CPI (December 2005 = 100.)
Keep public sector demand in line with sustainable rate of capacity growth Save excess petroleum revenues abroad Use conservative price forecasts Save foreign assets in boom periods, use in downturns No need to fine tune the economy Rely on automatic stabilizers Oil funds are no substitute for sound fiscal management.
Derived from the overall fiscal balance, excluding oil-related revenues & expenditures and net interest.
Ideally, should include explicit or imputed expenditure on petroleum product subsidies if applicable. Analytical importance of the non-oil primary balance:
Reasonable indicator of domestic government demand Measure of injection of oil revenue into the economy Measure of fiscal effort and underlying fiscal policy stance Key input into fiscal sustainability and intertemporal analysis
macroeconomic objectives short-run vulnerability government wealth, including oil in the ground and net accumulated financial assetssustainability
In some petroleum exporters, large non-oil primary deficits are sustainable and do not pose vulnerability concerns. In others there may be a need to reduce the non-oil primary deficit due to vulnerability and sustainability considerations. In all cases, the non-oil primary deficit should be consistent with macroeconomic stability objectives.
Increases in spending may exceed the governments planning, implementation, and management capacity waste. Spending should not rise faster than transparent and careful procurement practices will allow.
Spending typically proves difficult to contain or streamline following expansions. Expenditure becomes entrenched and takes a life of its own.
Drastic spending cuts may lead to social instability, discouraging investment and reducing future growth.
Focus on the non-oil primary balance helps develop constituencies in support of prudent policies, thereby contributing to a less procyclical and more long term-oriented fiscal policy. This balance should be highlighted in budget documents used in parliamentary and public discussion. A clear presentation of the non-oil primary balance helps:
Make the use of oil revenue more transparent Delineate policy choices more clearly
2003
2013
2018
2023
2028
2033
2038
Financial assets
Oil Funds
Purposes Stabilization shield economy from revenue instability Savings wealth for future generations Precautionary if projects are uncertain or absorptive capacity is in doubt Links with Fiscal Policy
Oil funds are no substitute for good fiscal management; important producers operate without oil funds (UK, Saudi Arabia, Indonesia, Australia, Russia) Important features
1. 2. 3.
Consolidated budget framework Liquidity constraint on the budget Limits on domestic investment by the oil fund
Savings Funds
Fixed percentage of petroleum revenues [Alberta, Alaska] Percentage of total government revenue [Kuwait] Net government revenues (budget surplus) [Norway]
Precautionary Funds
Assign all or part of revenues to fund in early stages of petroleum development Goal to ensure financial viability if revenues are lower than expected Guards against poor absorptive capacity Recent examples in Azerbaijan and Timor-Leste [now a Norway-type fund]
Contingent funds
Mainly stabilization objectives Deposit and withdrawal depend on rigid exogenous triggers, usually oil prices or fiscal oil revenues. Triggers: multiyear (fixed/moving average) or intra-annual (relative to budget oil price) Examples: Venezuela Macroeconomic Stabilization Fund (1998 rules), Iran Mainly savings objectives A fixed share of revenues or oil revenues is deposited in the oil fund. Various rules (or discretion) for withdrawals Example: Kuwait Reserve Fund for Future Generations Both stabilization and savings objectives Net oil revenue is deposited in the fund. The fund automatically finances the budgets non-oil deficit through a reverse transfer. Example: Norway Government Pension Fund
Revenue-share funds
Financing funds
Fund Management
Potential for poor management with or without oil fund: Key
Regular public disclosure Accountability to elected representatives Independent audit of activities Clear investment strategy majority foreign assets Benchmarking of desired investment returns Competition in appointment of investment managers
Avoid separate oil fund institutional frameworks Stringent mechanisms to ensure good governance, transparency, and accountability are critical
Oil funds are sometimes confused with fiscal rules. Oil funds do not constrain fiscal policyunless the government is liquidity-constrained.
Attempt to insulate fiscal policy from political pressures. By placing restrictions or limits on fiscal variables (such as deficits, expenditure, debt), rules seek to constrain fiscal policy. Design of fiscal rules in oil producers must take into account their specific fiscal characteristics (oil volatility; expanded concept of sustainability). Rules should aim at decoupling expenditure and the non-oil deficit from the short-term volatility of oil revenues. But many oil producers are liquidity-constrainedcan these countries afford to decouple spending in the downswing? A sound fiscal management framework is a necessary (not sufficient) condition for the success of a fiscal rule.
Fiscal rules are no stronger than the will of the political class to abide by them.
MTEFs can help limit the extent of short-run spending responses to rapidly-changing oil revenues. They can allow a better appreciation of future spending implications of current policy decisionsincluding future recurrent costs of capital spending.
Expenditure
Public Expenditure Management
Extra-budgetary funds
No special rules for expenditure from petroleum revenues Consistent base data Budget preparation procedures Budget execution system Cash planning and management
Loss of central control and budget integrity Resource allocation distortion Entrenching old priorities Barrier to reallocation at the margin Potential transparency concerns
Final Remarks
Target smooth responses of expenditure to oil revenues and prudent nonoil primary balances.
Fiscal consolidation may be needed to reduce vulnerability and strengthen fiscal sustainability.
Enhance fiscal transparency, so that everybody can see how oil revenue is usedor misused.