International Monetary Fund

Please send us your feedback

Macro Research for Development: An IMF-DFID Collaboration

Topic 3: Macroeconomic Management of Natural Resources

Last Updated: April 02, 2014

Major new natural resource discoveries have occurred in LICs. Unfortunately, most resource windfalls have historically failed to translate into economic development. Sound resource management is thus critical.

For years, policy advice—particularly at the IMF—has advocated saving resource windfalls externally in a sovereign wealth fund (SWF). However, LICs face credit constraints, which may mean that they have good, unexploited investment opportunities at home, e.g. in infrastructure and energy. Thus, policymakers need to consider not just how much to save, but where to save: abroad in financial assets or at home in public capital. Making this decision involves trading off the rate of return to these investments, absorptive capacity constraints, the possibility of Dutch disease, and the risk that export price collapses may create damaging volatility and even future debt crises.

To assist country authorities in LICs to manage natural resource revenues, the team developed a model-based "sustainable investing" tool, which allows policymakers to consider the macroeconomic and fiscal implications of different investment and saving strategies. A related research question on managing natural resource revenues concerns the appropriate current account balance in response to natural resource booms. The team is also in the process of developing another model for assessing current account norms in resource-rich LICs.

Both the sustainable investment tool and the current account model are among the five "key innovations" in a recently published IMF board paper on Macroeconomic Policy Frameworks for Resource-Rich Developing Countries. The paper recognizes that the distinct characteristics of LICs' natural resource exporters—scarcity of domestic capital and limited access to international capital markets—require distinctive policies and proposes new macro-fiscal frameworks and policy analysis tools that could enhance IMF policy advice.

Effects of Investing Natural Resource Revenues under Different Fiscal Approaches

Under baseline (with a less volatile resource revenue path), spend-as-you-go could build up higher public capital in the short run, resulting in more growth in non-resource GDP.

When large negative resource shocks occur (adverse scenario), gradual scaling-up, however, can support investment and maintain capital by a fiscal buffer built with a windfall. The economy following gradual scaling-up is likely to perform better in growth and stability than with spend-as-you-go in the longer runs.

A Sustainable Investing Tool

In a recent paper, Berg et al. (2013) develop a "sustainable investing" tool that allows policymakers to consider the macroeconomic and fiscal implications of different investment and saving strategies, taking into account the above factors and others. A typical case is one in which countries discover an exhaustible resource and want to know how much they can sustainably increase current spending and public investment. The tool can show how the answer to this question depends on the uses to which the resources are put, the efficiency of the investments, and so on. (See Box 1 for a summary of key features of the tool.)

Box 1. Key Features of the Sustainable Investing Tool

The sustainable investing tool is based on a macroeconomic model that accounts for the following aspects in gauging the fiscal and macroeconomic effects of investing natural resource revenues.

  • The growth effect of productive public investment: public capital can raise the productivity of private factors under explicit assumptions on the rate of return to pubic capital. The feedback effect of public investment on non-resource revenues is also captured. The additional non-resource revenues can be used for maintaining capital built with a resource windfall.
  • Investment inefficiency: The economic literature finds that one dollar of investment expenditures can be translated into much less than one-dollar worth of public capital in LICs. This feature reflects weak institutions and limited managing capacity of LICs.
  • Absorptive capacity constraints: When investment is scaled up too fast, limited absorptive capacity of LICs can further lower investment efficiency due to supply bottlenecks and lower administration and implementation quality.
  • Fiscal and capital sustainability: Financing needs to cover recurrent capital costs to operate and sustain public capital are considered. When large fiscal adjustments are required to sustain capital after resource revenues are exhausted, it implies that the scaling-up magnitude may be too large and should be revised downward.
  • Dutch disease: Spending a large amount of natural resource revenues can lead to real appreciation and hurt the competitiveness of tradable sectors. However, productive public investment can raise productivity in the non-resource sectors, counteracting and eventually reversing the effects of Dutch disease.
  • Volatility in natural resource revenues: The framework can account for uncertainties in either production quantities or prices of natural resources and hence provide probabilistic assessments of the macroeconomic outcomes in policy simulations.

A Model for Assessing Current Account Norm

The IMF is responsible for assessing the current account "norm" in each of its member countries, i.e., the level consistent with medium-term fundamentals. When a country receives a resource windfall, the appropriate current account deficit depends on the balance between investment at home and abroad (saving in a SWF). Until now, Fund country teams have used regression-based frameworks and/or models with only consumption decisions (which rely heavily on the permanent income hypothesis) to consider this question. Araujo et al. (2013) developed a model with private and public investment and frictions that capture certain low-income country characteristics, such as absorptive capacity and borrowing constraints. The model was applied to the CEMAC currency union in West Africa and is being applied to Ghana and Azerbaijan.

Country Applications

We and the African Department have applied the sustainable investing tool to Angola, comparing a "spend-as-you-go" strategy—similar to recent policy practice—to a smoother approach to scaling up investments. The results highlight the fragility of the "spend-as-you-go" strategy: an oil price collapse such as that observed in 2008/2009 could cause a destructive boom-bust investment cycle. A more gradual approach is able to provide the time to improve absorptive capacity and public investment efficiency and to build fiscal buffers against adverse price shocks. (See box 2 for a summary of the Angola application.) Other completed applications of the sustainable investing tool include the CEMAC currency union (see Berg et. al. (2013)) Azerbaijan, and Mozambique, as part of the technique assistance on building its fiscal framework provided by the Fiscal Affairs Department.

Box 2. Application of the Sustainable Investing Tool to Angola

Angola emerged from more than four decades of war to become the second largest oil exporter in Africa. The civil war, which ended in 2002, decimated infrastructure, weakened institutions, and slowed the economic growth. The combination of large oil wealth and great development needs underscores the importance of finding a strategy to bridge the capital gap with oil wealth.

Richmond, et al. (2013) apply the sustainable investing tool to analyze two strategies for investing volatile oil revenues in Angola: the current "spend-as-you-go" approach versus a "gradual scaling-up" approach. The gradual scaling-up combines a gradually increased investment path with external savings in a stabilization fund. By ramping up investment gradually, a stabilization fund can be shored up to provide a fiscal buffer to support a stable spending and tax regime. In addition to stability, the gradual scaling-up approach achieves capital sustainability, ensuring long-lasting growth benefits from investing resource revenues. While the spend-as-you-go approach may outperform the gradual scaling-up approach in the short-run with higher government spending, gradual scaling-up strikes a balance between promoting economic growth through investment and ensuring macroeconomic stability by a stabilization buffer.

Looking Forward

The team is currently combining the sustainable investing tool with the debt sustainability framework (see Topic 2) so that the tool can be applied to countries that scale up investment using natural resource revenues combined with external borrowing. More country applications of the sustainable investing tool will be pursued. Applications in progress include Kazakhstan and a more detailed analysis of Mozambique's fiscal strategies in managing the revenue from liquefied natural gas. The applications in progress for the current account model include Ghana and an updated analysis for the CEMAC currency union.

DIGNAR Model Applications
Country Status
Angola Completed
Azerbaijan Completed
CEMAC Completed
Kazakhstan Completed
Mozambique Completed
Turkmenistan Completed
Chad Ongoing
Congo Ongoing
Côte d'Ivoire Ongoing
Guinea Ongoing
Liberia Ongoing
Mongolia Ongoing
Myanmar Ongoing
Sierra Leone Ongoing
Current Account Norm Model Applications
Country Status
Azerbaijan Completed
CEMAC Completed
Ghana Completed
Turkmenistan Completed
Congo Ongoing
Equatorial Guinea Ongoing
Gabon Ongoing


  • Susan Yang and Felipe Zanna, in collaboration with Ioana Moldovan are working on the paper, "Optimal Macroeconomic Policy in Managing Volatile External Resources" which derives theoretical implications on the optimal policy in managing volatile external resources and applies implications to a model economy calibrated to an average low-income country in sub-Saharan Africa.

  • Andrew Warner is working the paper "A Framework for Efficient Government Investment," which presents a graphical framework to help guide investment policy for state agencies and international development institutions whose aim is to maximize government's impact on growth and development.


Working Papers

Published Papers