Summary of Fiscal Policy Sustainability in Oil-Producing Countries

Fiscal Policy Sustainability in Oil-Producing Countries

WP/94/137-EA
Fiscal Policy Sustainability in Oil-Producing Countries
by Claire Liuksila, Alejandro García, and Sheila Bassett

The need for meaningful, yet easily calculable, indicators of fiscal
sustainability has long been recognized. Conventionally defined measures of
the government deficit and public debt may misstate both government solvency
and the sustainability of a given fiscal policy because they focus on only a
portion of government assets and liabilities and have a narrow time
perspective--generally a single budget year. A number of economists have
called for a forward-looking balance sheet approach to analyzing fiscal
sustainability that would focus on maintaining a desired level of government
net worth over the long term. In this view, net worth would encompass the
whole range of government assets and liabilities, including, for example,
the expected stream of income from the exploitation of exhaustible natural
resources.

This paper proposes that such an approach is particularly useful for
assessing the sustainability of fiscal policies in countries in which a
significant share of government revenue is derived from petroleum
exploitation. Political and growth pressures often push governments in
these countries into a cycle of stop-go fiscal policies, dictated by the
swings in international petroleum prices. Taking a long view is especially
important to help these countries avoid this policy pitfall.

The paper argues that for countries in which a significant proportion
of government revenue is derived from the exploitation of an exhaustible
natural resource, fiscal policy sustainability can best be assessed within a
permanent income framework that takes into account total government wealth,
including the imputed wealth from reserves of natural resources. Using this
framework, the paper takes a sample of six countries in which government
revenue from petroleum extraction is significant and draws conclusions about
the sustainability of their fiscal policies during 1980-92.