Macroeconomic Policy Frameworks for Resource-Rich Developing Countries (RRDCs) IMF-World Bank 23 Spring Meetings CSO Policy Forum http://www.imf.org/external/pp/longres.aspx?id=698
Motivation and Presentation Plan Natural resource wealth opportunities for development Poor record on economic performance but some recent improvements Shortcomings of the Fund s approach Based on the permanent income hypothesis (PIH): sustain constant government spending across time, with no distinction between consumption and investment PIH is silent on where to invest (domestically or abroad) 5 key innovations of this project. New long-term fiscal sustainability framework 2. New toolkit to facilitate the design of fiscal rules 3. Sustainable investment tool. Set of complementary fiscal indicators 5. Framework to analyze external stability for RRDCs 2
Analytical considerations Traits of natural resource revenues Exhaustibility. How much to consume and save/invest? Where to invest? Volatility. What fiscal rules & macro policies? How much precautionary savings? RRDCs distinct characteristics low incomes per capita, limited access to international capital, domestic capital scarcity Low current incomes some titling of consumption toward relatively poorer current generations Credit constraints/capital scarcity invest in domestic assets Capacity constraints have implications for: Speed of scaling up Design of fiscal rules and savings institutions 3
Assessing Fiscal Sustainability Two approaches: MPIH or new FSF Choice depends on the assessed impact of public investment on growth Where productivity of public investment is highly uncertain, the MPIH might be an appropriately prudent approach Where there is greater confidence about the impact of investment, FSF can be a more effective approach
Assessing Sustainability Fiscal Sustainability Frameworks for Resource-Rich Countries Non-resource balance Financial wealth -5 Frontloading Invest. MPIH Adjustment Long-run 7 69-68 -5-2 67 66 PIH perpetuity MPIH perpetuity FSF perpetuity 65-25 -3 PIH perpetuity MPIH perpetuity FSF perpetuity 6 63 Frontloading Invest. MPIH Adjustment Long-run -35 22 25 28 22 22 227 23 233 236 239 22 25 28 62 2 2 27 22 223 226 229 232 235 238 2 2 27 25 5
Assessing Sustainability Fiscal Sustainability Frameworks for Resource-Rich Countries: Primary Expenditure and Non-Resource Revenue PIH framework Modified PIH framework Fiscal sustainability framework 6 6 6 5 5 5 3 3 3 2 Primary expenditure Non-resource revenue 2 Frontloading MPIH Adjust. Long-run 2 Frontloading MPIH Adjust. Long-run 6
Sustainable Investing Tool A macroeconomic framework to help implement the FSF Analyzes the macroeconomic and fiscal implications of different public investment paths Accounts for: Macro effects of investment on growth and non-resource revenue investment inefficiency and absorptive capacity constraints, Dutch disease, macro instability from spending volatile resource revenue Financing needs to sustain capital stock after resource revenue is exhausted 7
Angola Application: Effects of Fiscal Approaches under Baseline and Alternative Oil Price Scenarios Baseline Stabilization Fund, 2-22 (Balance as percent of GDP) 6 Baseline Public Investment, 2-22 (In percent of GDP) Baseline Non-oil GDP, 2-22 (Percent deviation from balanced growth path) 3 3 2 2 7 8 6 - -2-2 Alternative Stabilization Fund, 2-22 (Balance as percent of GDP) 6 Alternative Public Investment, 2-22 (In percent of GDP) Alternative Non-Oil GDP 2-22 (Percent deviation from balanced growth path) 3 3 2 2 7 8 6 - -2-2 8
Next steps Further developing and piloting the new frameworks and tools Better ways to analyze and gauge countries absorptive capacity Build cross-country database Further analysis of short-run macroeconomic challenges 9