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Macro Research for Development: An IMF-DFID Collaboration

Topic 3: Macroeconomic Management of Natural Resources

Last Updated: July 28, 2017

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 Model-Based Policy Framework for Resource-Rich Low-Income Countries

Fund staff have developed model-based frameworks to assess the macroeconomic implications of investment surges, including on debt sustainability, in natural resource-rich developing countries. The frameworks are dynamic stochastic small open economy models that make explicit the role of pervasive features in these countries including public investment inefficiency, absorptive capacity constraints, Dutch disease, and financing needs to sustain capital. (See box 1 for a summary of key features of the tool.) The models—named as the sustainable investing tool and the DIGNAR model—developed, respectively, in Berg et al. (2013) and Melina et al. (2014)—have been applied to several countries in Article IV consultations and TA missions (see table below). The applications showed that a more gradual scaling-up approach could pose smaller risks for debt sustainability, especially in those countries that could use resource discoveries as collateral to borrow—e.g., Mozambique—but where resource revenues might not end being as high as projected. This underscored the role of the volatility of resource prices, the uncertainty of resource output, and the exhaustibility of resource reserves in strategies to avoid excessive and unsustainable borrowing. Furthermore, the applications showed that a sustainable investing approach that combined a gradual investment scaling-up with a resource fund—a fiscal buffer mechanism that saves additional resource revenues in boom times and can be drawn down to support investment spending during low resource revenues—could help protect the economy from boom-bust cycles and therefore support macroeconomic stability—e.g., see box 2 for a summary of the Angola application.

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, Azerbaijan, Congo, Equatorial Guinea, Ghana, and Turkmenistan, and is currently being applied to Gabon.

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

Looking Forward

The team is working on developing friendly front-ends for the DIGNAR model and the current account norm model to facilitate the applications and dissemination of these tools. Besides modeling and ongoing country application efforts, empirical work is also underway. For instance, Professor Michael Bleaney (University of Nottingham) is working on an empirical project that looks at the effect changes in natural resource exports have on per capita growth. He will also investigate how this effect varies with public investment scaling ups, country institutional quality and investment volatility, among others.


  • Susan Yang and Felipe Zanna, in collaboration with Paul Levine (University of Surrey) and Giovanni Melina (City University of London), are working on a project that analyzes optimal scaling-up of public investment in resource-rich developing countries. The results of this work should shed light on how natural resource-rich countries should optimally allocate some of their natural resource windfalls to public infrastructure spending, while taking into consideration key characteristics of developing countries such as inefficiencies in public investment and tax collection as well as high returns to public capital, among others.


Working Papers

Article IV Consultations

Published Papers

  • "Current account norms in natural resource rich and capital scarce economies," by Juliana D. Araujo, Bin Grace Li, Marcos Poplawski-Ribeiro and Luis-Felipe Zanna. Journal of Development Economics, May 2016.
  • “From natural resource boom to sustainable economic growth: Lessons from Mongolia,” by Bin Grace Lia, Pranav Gupta, and Jiangyan Yu. International Economics, March 2017.
  • World Economic Outlook, Box 2.2. “Commodity Booms and Public Investment”, Rudolfs Bems and Bin Grace Li, Chapter 2 “Where Are Commodity Exporters Headed? Output Growth in the Aftermath of the Commodity Boom”, October 2015.
  • Berg, Andrew, Portillo, R., Yang, S., and Zanna, L.F., 2013, "Public Investment in Resource Abundant Developing Countries." IMF Economic Review.
  • International Monetary Fund, 2012, Macroeconomic Policy Frameworks for Resource-Rich Developing Countries - Analytic Frameworks and Applications


  • 5th Emerging Scholars in Banking and Finance Conference (December 2016) featured a presentation on Commodity Prices and Bank Lending in Low-Income Countries
  • Challenges Facing Commodity-dependent LICs: Prakash Loungani gave a presentation at an United Nations General Assembly high-level dialogue on fiscal and structural challenges facing commodity-dependent developing economies.


  • Workshop and Toolkit on Macro-Fiscal Issues in Natural Resource Management: In partnership with East AFRITAC, a five-day workshop was held at the Bank of Tanzania to train government officials from Kenya, Tanzania, and Uganda on macro-fiscal issues in natural resource management.