International Monetary Fund Managing Nonrenewable Natural Resources Vitor Gaspar Fiscal Affairs Department Third IMF Statistical Forum: Official Statistics to Support Evidence-Based Policy-Making Frankfurt, November 19-2, 215
Outline How to leverage resource wealth to promote growth A volatile and uncertain world A Fiscal 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 wealth and economic growth Opportunity to leverage resource wealth towards promoting growth and economic development But, economic performance has been weaker among resource-rich economies 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
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 8 2 Saudi Arabia Norway 2 7 Botswana Chile 6 15 5 15 Nigeria 4 1 Ghana Venezuela 1 Iran Algeria Venezuela 5 197 75 8 85 9 95 3 Peru Mali Chile 2 5 Zambia Peru Ghana 1 Mali Zambia 197 75 8 85 9 95 Source: IMF staff estimates 4
Today s decisions have long-term consequences
GDP or Wealth? The oil sector has accounted for about 2 percent of Norway s GDP since 199 Norway accumulated large financial assets as hydrocarbon reserves were extracted 7 14 Billion USD 6 5 4 3 2 Oil GDP Non-oil GDP Billion BOE 6 5 4 3 2 Hydrocarbon Reserves Net Financial Assets (RHS) 12 1 8 6 4 billion USD 1 1 2 Sources: BP statistical review of world energy; World Economic Outlook (IMF), IMF staff calculations 6
How to use the wealth? If consumed (spend-asyou-go), the country will get poorer as reserves are depleted; If saved, returns from those savings can finance budget beyond depletion Savings can also promote more stable fiscal path Benefits from Natural Resource Wealth (Consumption out of natural wealth under different scenarios) 12 1 8 6 4 2 1 6 11 16 21 26 Years Source: authors' simulations Sources: IMF staff estimates Spend as you go Save (3%) Save (1%) Constant spending 7
Where to save is key Long-term financial savings (future generations; avoid Dutch disease) Precautionary motives Public Investment in Low-income Commodity Exporters (Percent of total spending) 34 The Quality of Public Investment in Low-Income Resource-Rich Economies is Low (Percent of GDP) 25 2 Invest in domestic economy. Physical infrastructure and education to promote growth. The right balance will depend on country circumstances 3 26 2-8 Boom 22 199 92 94 96 98 2 2 4 6 Sources: IMF staff estimates. 8 1 12 15 1 5 197 Public capital Public capital (quality adjusted) 198 199 Efficiency gap 2 Source: Gupta and others (214) and authors' calculations 8
A Volatile and Uncertain World
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 1
result in 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 Sources: Bloomberg and IMF staff estimates All others Comm exp -5-1 7.1.14 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 11
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 Sources: IMF staff estimates 12 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
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 13
This argues for building up precautionary savings during commodity windfalls Past approaches tended to focus on limited buffers to manage volatility Conservative budget prices Reduce gross liabilities during windfalls Value-at risk approach; buffers to be depleted in few years Need larger and long-lasting buffers (due to persistence of shocks) Financial returns from stabilization savings to protect from most shocks to budget Adds a countercyclical component to fiscal policy 14
Windfalls allow to accumulate savings, while sustaining public expenditures Countries could have boosted expenditures and accumulate significant buffers during the 2s commodity revenue windfall 5 average expenditure yearly growth rate (23-12) 4 3 2 1 Actual spending Spending with 3% savings Sources: IMF staff estimates 15
and preserve economic growth Countries that saved a large share of the resource windfall had stronger economic growth over the last decades (Real GDP per capita, average yearly growth rate) 8 Pre-boom (1993-22) 6 Resource boom (23-212) 4 2-2 High savers Others Source: World Economic Outlook and authors' estimates 16
A Fiscal Framework
Resource-rich countries need to decide how to best use natural wealth under high uncertainty Colombia's Oil Wealth (Production is estimated using WEO average price for crude oil) 1 4 8 Uncertain prices and reserves 3 6 4 2 Production (USD billion, righthand side) Estimated Reserves (billion barrels) 2 1 198 1985 199 1995 2 25 21 215 22 Sources: BP statistical review of world energy; Staff estimates and simulations 18
A comprehensive Fiscal Framework to manage volatility and uncertainty 1. Resilience of Budget Revenues Tax policies that diversify the revenue base and avoid an overdependence of government spending on the resource sector. 2. 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 19
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 3, resource-rich East Asia & Pacific Sub-Saharan Africa Latin America & Caribbean Europe & Central Asia Source: Fiscal Monitor 1 CPIA efficiency of revenue mobilization rating (1=low to 6=high), World Bank 2
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 ** *** *** Sources: IMF staff calculations, and Worldwide Governance Indicators (World Bank) for 1996-214 -,12 Bureaucratic quality Political risk Polity Legal setting Corruption 21
Concluding remarks We are in the midst of one of the largest booms and busts faced by resource-rich countries over the last 1 years. It once again reminds us the importance of volatility and uncertainty to fiscal management. Ignoring it can have large economic costs. The magnitude of the challenges in many commodity exporting countries points to the need to give priority to adjustment. The size of fiscal buffers will determine the pace. But, countries also need to prepare for the next commodity cycle. This is the time to start strengthening fiscal frameworks to manage the large risks and promote sustainable growth. 22
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 (e.g. Peru). 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. 23
Thank you!
Background slides
New Zealand: Managing the Government s Balance Sheet Objective The Crown balance sheet is managed effectively and efficiently with the overall performance and risk profile of assets and liabilities supporting the Government's medium-term objective. Specific focus The core Crown debt portfolio is well managed The composition of the balance sheet aligns with government priorities Appropriate returns, risks, and long-term value are achieved from assets Risks are managed consistent with the government s risk appetite and tolerance 26
New Zealand: Managing the Government s Balance Sheet Areas of Focus Develop an investment strategy for managing the Crown's capital Develop a structured, systematic mechanism to collect better information to support the prioritization and performance of investment Introduce performance targets to meet legislative requirements More rigorous investment decision-making to support the alignment between investment and the Government s long-term priorities Explore ways to recycle capital to meet changing demands Develop and utilize metrics to measure and monitor the performance of the assets relative to the Government s objectives Build a fuller understanding of aggregate Crown financial risk Focus on strengthening the Crown s balance sheet buffers to improve resilience 27