The Commodities Roller Coaster: A Fiscal Framework for Uncertain Times

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International Monetary Fund October 215 Fiscal Monitor The Commodities Roller Coaster: A Fiscal Framework for Uncertain Times Tidiane Kinda Fiscal Affairs Department Vienna, November 26, 215 The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.

Outline The Commodities roller coaster: Illustration of materialization of fiscal risks Fiscal risk management framework for commodity exporters 1

Commodity exporters in the World Nonrenewable Commodity Exporters, 214 Countries with more than 2% of exports from nonrenewable commodities Other countries 17% 17% 21% 22% Share of GDP Share of Imports Share of exports Share of FDI Sources: BP Statistical Review, Institutional Investor, National authorities, Sovereign Wealth Center, Sovereign Wealth Fund Institute, and the U.S. Geological Survey. 2

Natural resources and economic growth If resource wealth is consumed, the country will get poorer as reserves are depleted But, resources can be leveraged to promote sustainable growth Although this has been challenging 1,2 1, 8 6 4 2 GDP per capita in Resource-Rich countries PPP GDP per capita index (base year 197) Rest of the World Resource-Rich countries Resource Curse? 197 1975 198 1985 199 1995 2 25 21 Sources: IMF staff estimates 3

Part of the problem: highly volatile and unpredictable commodity prices A Poor Record of Forecasting Oil Prices (Crude oil, U.S. dollars per barrel) 12 1 28 214 8 29 6 26 4 2 Actual prices 1996 1998 2 24 199 92 94 96 98 2 2 4 6 8 1 12 14 16 18 2 Sources: IMF staff estimates and market projections. 215 represents an estimate based on actual data for part of the year and future contracts. Note: The solid line represents actual crude oil average prices for the year. 215 represents an estimate based on actual data for part of the year and future contracts. The dashed lines are based on market projections for prices 4

The commodities roller coaster has translated into large fiscal revisions Greece Hong Kong SAR Norway Korea Finland Czech Republic Austria Denmark Singapore Netherlands Israel Estonia Sweden Malta Spain Cyprus Italy Latvia Belgium Portugal Canada Slovak Republic France Ireland Lithuania Slovenia Switzerland Germany New Zealand Iceland Japan United States Luxembourg United Kingdom Australia -4-3 -2-1 1 2 3 4 Sources: IMF staff estimates Revisions to the Primary Balance relative to April 215 (% of GDP) Advanced Economies Emerging Market Economies Low-Income Developing Countries Libya Venezuela Saudi Arabia Kuwait Oman United Arab Emirates Azerbaijan Russia Brazil Algeria Chile Qatar Croatia Argentina India Pakistan Malaysia Poland Uruguay Peru Iran Hungary Indonesia Egypt Ukraine Turkey Morocco Kazakhstan China Romania South Africa Mexico Colombia Ecuador Thailand Sri Lanka Angola Philippines Belarus Dominican Republic -1.9-4.5-4.3-4 -3-2 -1 1 2 3 4 Congo, Republic of Zambia Yemen Nigeria Rwanda Uganda Bolivia Lao P.D.R. Madagascar Papua New Guinea Sudan Vietnam Kenya Mongolia Nicaragua Benin Senegal Tajikistan Zimbabwe Bangladesh Côte d'ivoire Burkina Faso Niger Uzbekistan Congo, DR Mozambique Ghana Honduras Nepal Haiti Ethiopia Tanzania Cameroon Cambodia Moldova Myanmar Mali Kyrgyz Republic Chad Guinea -4-3 -2-1 1 2 3 4 5

and higher uncertainty and risks for commodity exporters Standard deviation of revenue to GDP, 198-214 (min, 25-75 percentile band, and max) Oil Prices and Difference in EMBI spreads between commodity exporters and non-commodity exporters (basis points) 25. 4 35 Difference in EMBI spreads (left axis) Oil price (right axis) 12 2. 3 14 25 15. 2 88 1. 15 1 72 5. 5 56. Non-commodity Advanced All others Comm exp -5-1 7/1/14 Sources: Bloomberg and IMF staff estimates 6 8/1/14 9/1/14 1/1/14 11/1/14 12/1/14 1/1/15 2/1/15 3/1/15 4/1/15 5/1/15 6/1/15 7/1/15 8/1/15 4

Fiscal policy: a key to the transmission of fluctuations of commodity prices Impact of Commodity Price Swings on Fiscal Revenues (1972-214) Procyclicality of Spending in Commodity Exporting Countries (Procyclicality Coefficient, 1972-214) 2 Upswings Oil exporters Metal exporters.3 *** Procyclicality of total spending Procyclicality of capital spending 1 Percent of GDP (average) -1.2.1 *** *** -2 Fiscal revenue Downswings Fiscal revenue Upswings Downswings Sources: Fiscal Monitor 7

The large commodity revenue windfall experienced by resource-rich countries since 22 is being rapidly unwound 35 Commodity Fiscal Revenue Windfall (212 versus 22) 3 Commodity Fiscal Revenues Windfall (215 versus 22) 25 2 15 1 5 Angola Kuwait Saudi Arabia Oman Congo, Republic of Kazakhstan Brunei Darussalam United Arab Emirates Algeria Russia Bahrain Nigeria Gabon Bolivia Trinidad and Tobago Ecuador Suriname Zambia Niger Peru Colombia Cameroon Botswana As a percentage of 22 GDP Sources: IMF staff estimates 8

And the overall balance of resource rich countries deteriorated sharply General Government Fiscal Balance of Selected Oil Exporters (In Percent of GDP) 15 1 5 Angola Nigeria Russia Saudi Arabia (right axis) Venezuela (right axis) 4 3 2 1-5 -1-2 -1 25 26 27 28 29 21 211 212 213 214 215-3 Sources: IMF staff estimates 9

Booms and busts can be very costly to countries With few exceptions, most commodity exporters faced a long period of low growth after commodity prices fall in the 198s (Real GDP per capita, 197 = 1) 25 25 9 Norw ay 2 2 Saudi Arabia 15 Chile 6 15 Nige ria 1 Peru Ghana 1 Venezuela Iran Algeria 5 Botsw ana (Right hand axis) Mali Zambia 3 5 197 75 8 85 9 95 197 75 8 85 9 95 Sources: IMF staff estimates 1

Fiscal Risk Management Framework 11

Managing Natural Resources to Promote Growth Natural Resources (oil/gas, metals) are nonrenewable wealth If commodity revenues are consumed, the country will get poorer as reserves are depleted Promote sustainable and inclusive economic growth Revenues from natural resources should primarily be directed to build other capital (physical, human) Need balance between: financial savings; investment in public infrastructure, education The high volatility and uncertainty complicates policy management 12

A comprehensive Fiscal Framework to manage volatility and uncertainty 1. Improve Resilience of Budget Revenues Tax policies that diversify the revenue base and avoid an overdependence of government spending on the resource sector. 2. Improve Efficiency of Spending Strengthen public investment management and expenditure policies Energy subsidy reform 3. Fiscal anchors and volatility Long-term planning; take account wealth will be depleted Stabilization buffers to de-linking expenditures from volatile resource revenues 4. Strengthen Institutions Medium-term fiscal framework; management of fiscal risks; transparency and governance in the use of resource wealth 13

1. Improve the resilience of budget revenues Revenue Ratios from Personal Income Tax and Goods and Service Tax are Lower in Resource-rich Countries (21-214) 1 9 8 Resource-rich Countries Non resource-rich Countries 3.8 3.6 Efficiency of Revenue Mobilization Percent of GDP 7 6 5 4 3 213 Index 1 3.4 3.2 2 1 Personal Income Tax Goods and Services Tax Trade Tax Source: Fiscal Monitor 1 CPIA efficiency of revenue mobilization rating (1=low to 6=high), World Bank 14 3. resource-rich East Asia & Pacific Sub-Saharan Africa Latin America & Caribbean Europe & Central Asia

2. It also matters how and how well resources are spent. In the latest boom, countries have scaled up public investment Countries spent a large share of the 2-8 windfall 34 Public investment in low income commodity exporters (share of total expenditures) 16 3 26 Amount Spent (percent of windfall) 12 8 4 Average amount spent = 64% 22 After scaling up (5 year average) 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 15 1 5 2-8 Boom GDP per capita growth rate before and after public investment scaling up episodes 45 degree line 2 4 6 8 Windfall (percent of 2 GDP) -5-5 5 1 15 Before scaling up (5 year average) Sources: World Economic Outlook and IMF staff estimates. Note: The straight line represents 45 degree line. 15

3. Some countries saved significant share of the revenue windfall (23-8), building buffers to face future shocks 12 Saving Rates During Boom Years (Share of commodity revenues) 8 High 4 Low Average -4-8 23 8 29 14 Sources: IMF staff estimates. Note: Saving rates are calculated as the change in net assets as a percentage of commodity revenue during the 23 8 and 29 14 periods (used the longest sample available for each country within the specified periods). Countries included in the sample: Angola, Algeria, Azerbaijan, Chile, Equatorial Guinea, Iran, Kazakhstan, Kuwait, Libya, Nigeria, Norway, Peru, Qatar, Saudi Arabia, Trinidad and Tobago, United Arab Emirates. 16

4. Strengthen institutions Institutional Quality in Resource-rich Countries Resource rich countries tend to have lower institutional quality relative to other countries, 1996-213 Better Institutions Reduce Procyclicality of Expenditures to Prices. Procyclicality coefficient -.4 -.8 ** *** *** -.12 Bureaucratic Political risk Polity Legal setting Corruption quality Sources: IMF staff calculations, and Worldwide Governance Indicators (World Bank) for 1996-214 17

Concluding remarks Recent developments and analyses illustrate the importance of uncertainty for public finance management. Fiscal frameworks must be designed to manage public finance risks. The magnitude of the challenges in many commodity exporting countries credibility, end of commodity super-cycle, debt sustainability, financing conditions points to the need to give priority to adjustment. Availability of fiscal pace will determine the pace. 18

IMF/FAD Technical Assistance FAD has provided substantial Technical Assistance (TA) to resource-rich countries. About 15% of all TA in the past 5 years went to these countries (more than 4). The largest share went to Africa. TA covers several areas, including fiscal frameworks, public investment management, tax policy, and revenue administration. The IMF has produced research and manuals to support these efforts. These include the Public Investment Management Assessment, developed jointly with the World Bank, and Pillar IV of the Fiscal Transparency Code. FAD has also developed the Fiscal Analysis of Resource Industries (FARI) model to help countries build capacity in designing and analyzing fiscal regimes for extractive industries. 19