## How to Design a Fiscal Strategy in a Resource‑Rich Country (How to Note) ## Source details **Canonical URL:** [How to Design a Fiscal Strategy in a Resource‑Rich Country (How to Note)](https://www.imf.org/-/media/files/publications/howtonotes/2021/english/htnea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/howtonotes/2021/english/htnea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/howtonotes/2021/english/htnea2021001.pdf.json) --- ### Introduction and purpose - Provides operational guidance for policymakers and IMF staff teams on designing—or revising—a fiscal strategy in resource-rich countries (RRCs). - Intended to be general and applicable to RRCs with a range of income levels, resource endowments, and macroeconomic contexts. - Designed primarily to help policymakers analyze trade-offs associated with alternative fiscal paths and select a fiscal strategy given country-specific circumstances. - Centered on (i) fiscal sustainability and intergenerational wealth sharing, based on a long-term fiscal anchor; and (ii) macroeconomic stabilization, through the maintenance of a stock of liquid financial assets (“buffers”). - Supported by an online Excel template (and companion guidance note) that users can customize to operationalize the framework for a particular RRC. ### Context and evidence base - Guidance is timely for RRCs revising fiscal strategies in response to the coronavirus disease (COVID-19) pandemic, which has caused widespread short-term deterioration of fiscal balances through declining tax revenues and additional spending needs. - Producers of commodities for which demand may be durably lower in the wake of the pandemic (oil) are likely to experience a more persistent deterioration in the fiscal outlook. - Concepts based on IMF work (for example, IMF 2012 and IMF 2015); note prepared by Olivier Basdevant, John Hooley and Eslem Imamoglu. ### Stylized organizing framework (core elements) - Resource Wealth → Objectives → Fiscal Anchor → Transition Path → Stress Test → Precautionary Buffers → Publication → Implementation. - Key operational components: - Long-term fiscal sustainability anchor (typically PIH-based), translated into a target for the non-resource primary balance (NRPB). - Transition from current fiscal stance to long-term anchor (may require consolidation or allow investment from newly discovered reserves). - Stabilization via liquid financial assets (“buffers”) saved in booms and drawn in busts. - Implementation: communication, fiscal institutions, and publication. --- ### Principles for designing fiscal strategies H3: Sustainability - Fiscal sustainability criterion: present value of future non-resource primary deficits does not exceed initial net asset position (including public resource wealth). - Resource wealth is finite—sustainability must ensure fair distribution across generations by saving/investing a portion of resource rents. - Investment income sources: accumulation of financial assets (interest and dividends), or physical or human capital (higher non-resource fiscal revenues). - Avoid sudden large fiscal adjustment as resources are depleted; plan gradually for post-resource era. H3: Stability - Fiscal strategy should support countercyclical stabilization to dampen volatility from business cycles and commodity revenue swings. - Goal: shield public expenditure from resource revenue volatility by drawing on financial resources during commodity “busts” and saving during booms. - Cuts to capital expenditure can be particularly harmful and amplify procyclicality. --- ### A long‑term anchor to ensure fiscal sustainability H3: Recommended anchor and complementarity - The non-resource primary balance (NRPB) is an appropriate long-term fiscal anchor for RRCs. - If debt vulnerabilities are high, a debt anchor can complement or serve as an interim anchor. H3: Main steps to select an NRPB anchor - Step 1: estimate resource wealth and project the flow of future resource revenues. - Step 2: define objectives for consumption of resource wealth across generations. - Step 3: translate objectives into an appropriate NRPB anchor. H3: Step 1 — Estimate resource wealth - Public resource wealth Vt defined as present value of future resource revenue RTt (net of resource-related expenditure): - Vt−1 = ∑_{s=t}^{N} RTs / (1 + i)^{s−t+1} - Forecasting approaches: - Bottom-up: aggregation of project-level revenue projections; IMF’s Fiscal Analysis of Resource Industries (FARI) model assists at project level. - Top-down: extrapolation of historical extraction and fiscal revenue trends adjusted for projected commodity prices. - Main inputs: reserves in the ground (extractable portion uncertain), commodity prices (volatile; use futures and IMF World Economic Outlook near-term), and include generally only sanctioned extractives projects for budgetary forecasts. H3: Analytical foundations (key fiscal identities and PIH anchor) - Fiscal accounting and identities include: - Overall fiscal balance OBt = NRTt − Et + RTt + i^a_t A_{t−1} − i^b_t D_{t−1} - Change in net financial assets OBt = Δ(A_t − D_t) - Non-resource primary balance NRPBt = NRTt − Et - Law of motion for net financial assets: A_t − D_t = NRPBt + RTt + (1 + i^a_t) A_{t−1} + (1 + i^b_t) D_{t−1} - Government intertemporal budget constraint (discounting at constant rate i, no-Ponzi): - A_{t−1} − D_{t−1} = −∑_{s=t}^{∞} NRPBs / (1 + i)^{s−t+1} − ∑_{s=t}^{N} RTs / (1 + i)^{s−t+1} - Government net wealth: W_{t−1} = A_{t−1} − D_{t−1} + V_{t−1} - Law of motion for wealth: ∀ s ≥ t, Ws = (1 + i) Ws−1 + NRPBs - PIH fiscal anchor (constant NRPB over infinite horizon): - ∀ s ≥ t, NRPBs = NRPBt = −i W_{t−1} - Generalized PIH with NRPB growth at rate g: - ∀ s ≥ t, NRPBs = NRPBt (1 + g)^{s−t} - NRPBt = −(i − g) W_{t−1} - Note: finite‑horizon PIH increases annuity for t ≤ T but raises intergenerational equity questions; nominal interest rate must be greater than g for non‑declining wealth. --- ### Box 1 — Derivation of fiscal sustainability anchors (summary) H3: Long‑term price and production inputs - Baseline approach: use a constant‑in‑real‑terms price and stress test with alternative deterministic or stochastic scenarios. - Project production/costs consistent with prices and extractable reserves; account for country price premium. - Fiscal instruments: corporate tax, non‑tax royalties, resource rent taxes, state participation, production sharing. H3: Step 2 — Define objectives for long‑term consumption - Intergenerational options: - Bird-in-hand (BIH): invest all resource revenues in financial assets; consumption equals interest on accumulated wealth. - Spend-as-you-go (SAYG): spend all resource revenues on receipt; highly procyclical and risky. - Implement intergenerational sharing via NRPB anchor growth rate g in PIH. - Considerations for choosing g: population growth, purchasing power, relative weighting for current vs future poorer generations. H3: Formulas for anchor growth g (as presented) - Constant real annuity per capita: g = π + α. Here π is the annual rate of inflation and α is annual population growth. Ensures NRPB constant in real per capita terms. - Constant annuity as a share of non‑resource GDP: g = π + γ. Here π is inflation and γ is rate of real non‑resource GDP growth. Ensures NRPB constant in percent of non‑resource GDP. - Constant real annuity: g = π. Ensures NRPB grows in line with prices and is constant in real terms. H3: Step 3 — Calibrate the anchor (sensitivities) - Calibration inputs: initial wealth and fiscal position; assumptions for GDP growth, population, inflation, interest rates. - Common calibrations: - NRPB constant in real per capita terms → equal distribution across generations. - NRPB as constant share of non‑resource GDP → easy translation to budget but may favor future generations if growth > population growth. - NRPB constant in real terms → consumption may decline in real per‑capita terms if population growth positive. - Sensitivities: - Anchor level rises with lower yields on invested revenues and with lower resource revenues. - Resource wealth estimates sensitive to prices and discount factor, especially with large reserves and long horizons. - Illustrative sensitivity: impact on NRPB anchor of a 25% reduction in interest rates and a 50% reduction in resource revenues (as shown in source figures). H3: Step 4 — Design transition path (speed, composition, end point) - Speed trade-offs: - If current NRPB far below anchor → fiscal consolidation needed; immediate adjustment builds credibility but can be painful; gradual adjustment lowers near‑term pain but increases vulnerability to shocks. - If current NRPB above anchor → may scale up spending or lower taxes; respect absorptive/institutional capacity. - Caution against borrowing to finance spending on uncertain future resource revenues. - Composition: - Prioritize long‑term structural revenue and expenditure measures; mitigate growth and inequality impacts from spending cuts. - Scaling‑up guided by national development priorities and SDGs; cautious approach to infrastructure due to quality and efficiency risks. - Wealth preservation: - Option to stabilize wealth at initial level (preserve value for future generations) or at post‑transition level (smoother fiscal path). Choose smoother path if differences small. H3: Transition challenges and recommendations - Establish credibility: communicate strategy, set supporting policies and financing sources, adopt medium‑term fiscal framework. - Interim targets: where gross debt is an issue, set interim gross/net debt targets aligned with stabilization goals. - Begin adjustment promptly but manage pace: small initial measures can signal credibility if buffers exist. - Use both revenue and expenditure measures: review size and efficiency of spending; increase non‑commodity revenues where possible. - Consider macro‑financial context: flexible exchange rates can mitigate growth losses after shocks; fixed regimes may require stronger fiscal responses. - Support adjustments with structural reforms: energy subsidy reform, civil service reform, PFM improvements, and build political/social consensus via transparency and accountability. --- ### Box 2 — Large fiscal adjustments and investment trade‑offs H3: Transition path design and fiscal multipliers - Simulations should incorporate expected impact of discretionary revenue/expenditure changes on non‑resource GDP and non‑resource revenues via fiscal multipliers. - Example scenario: - NRPB anchor calibrated as constant share of non‑resource GDP is attained over a 10 year transition. - Transition: capital spending increased first 5 years; current spending reduced in subsequent 5 years. - Two cases compared: - Productive investment: short‑ and long‑term multipliers 0.3 and 1.4 respectively. - Non‑productive investment: multipliers assumed zero. - Outcomes: - Productive case: non‑resource revenues and expenditure higher; debt declines. - Non‑productive case: no revenue benefit; debt breaches standard vulnerability thresholds. H3: Capital vs current spending and investment productivity - Using resource revenues to scale up investment may be preferable to investing in financial assets in low‑income countries with infrastructure gaps. - Marginal returns on quality investment may exceed financial asset returns when capital stock is low. - Benefits of productive scaling‑up: sustainable growth, SDG progress, economic diversification, job creation. - Risks: weak investment management and absorptive capacity lower multipliers; IMF (2014) evidence: about half of increased government investment translated to productive capital in 1980–2012. - Empirical multipliers: - Advanced economies: output up ~0.4 percent same year, 1.5 percent after four years. - Emerging/low‑income: ~0.25 same year, 0.5 after four years. - Guidance: assess returns vs financial assets, absorptive capacity, and PIMA for infrastructure governance; adopt gradual scaling‑up if capacity weak; maintain fiscal buffers. H3: Precautionary stabilization buffer and stress testing - Save windfall revenues in booms; draw assets in busts to maintain stable spending. - Buffer need and size depend on commodity revenue risks, initial debt, borrowing availability, and policymakers’ risk aversion. - Stress tests of commodity revenue shock scenarios are a useful assessment tool. Step 5: Design Stress Test - Specify shock (example: oil prices falling to $30 a barrel) or use VaR approaches. - Shock should have low but reasonable probability and be important enough to insure against. - Estimate revenue impact accounting for exchange rate movements and fiscal regime non‑linearities. - Policy responses to shortfall: - i) Maintain spending and finance shortfall with liquid assets or borrowing. - ii) Reduce spending (or raise taxes) to fully offset shortfall. - iii) Combination: partial spending reductions. - Temporary shocks with minimal long‑run wealth impact: best to leave spending paths unchanged and finance via additional financing. - Persistent shocks: may require structural expenditure reduction; borrowing or assets can smooth adjustment. Step 6: Set Precautionary Buffer Target - Use stress test to assess need for additional liquid buffers; first check if debt breaches vulnerability thresholds under the stress. - If no breach: existing debt may suffice. - If breach: accumulate buffers or revise near‑term fiscal path (more front‑loaded adjustment or postpone scaling‑up). - Even if debt sustainable, assess effects on spending, GDP growth, and interest costs. - If buffer needed: set target and plan to achieve it, including size/composition and contingency planning (pre‑identified adjustment measures). - Buffer typically set in gross terms; if debt high, set net terms or separate assets and debt targets. - Buffer composition: liquid assets in cash or short‑term securities, usually in foreign exchange; distinct from other liquid holdings used for cash/debt management. H3: VaR illustrative example - VaR‑based estimate: a $1 billion buffer, with p=0.1 and t=3 means there is a 10 percent chance that the buffer would fall by more than 1 billion over the next three years. A $1 billion buffer would cover 90 percent of shocks over that horizon; fiscal adjustment needed for remaining 10 percent. --- ### Spending, shock scenarios, and implementation H3: Shock scenario and modeling assumptions (spending section) - Commodity prices assumed to decline to $45, $30 and $45/barrel in years 1, 2 and 3 of the shock period respectively. - Policy responses modeled: - No adjustment: spending unchanged; revenue shortfall met by running down liquid assets and then new borrowing. - Full adjustment: spending reduction fully offsets revenue shortfall. - Partial adjustment: reductions in spending limited to a maximum of 10 percent of the pre‑shock path. H3: Key quantitative outcomes from the scenario - No adjustment: - Liquid buffers are exhausted. - The already‑elevated gross debt ratio increases by a further 4 percent of GDP to almost 65 percent of GDP. - Partial adjustment: - Leads to an almost 2 percent of GDP reduction in expenditure. - Liquid buffers are exhausted (although there is only a small increase in debt). - Full adjustment: - Leads to a very large 8 percent reduction in spending. H3: Interpretation and policy implications - Partial adjustment may be the only feasible course without immediately large debt increases or complete depletion of buffers, or the near‑term fiscal path should be revised to accumulate additional fiscal buffers. - Commodity price volatility and long‑run uncertainty around resource income justify maintaining a precautionary stabilization buffer. - Calibrate fiscal strategies under baseline and alternative scenarios; policymakers’ risk tolerance may justify a more conservative strategy than baseline. H3: Implementing and updating the fiscal strategy (practical considerations) - Communication and legal framework: - Publish strategy as a policy document and, ideally, set it out in separate legislation including rationale, choices, and revision process. - Use simple indicators to communicate share of revenue saved in financial assets versus invested domestically; compute additional public expenditure from resource revenues in per‑capita terms for current and future generations. - Revisions policy (timing and assessment): - Do not adjust too often; periodic assessments could guide updates. - Formal assessments possibly every three to five years by an independent fiscal institution or expert committee; exceptional assessments after very large shocks. - Align updates with the budget cycle and support with a revised medium‑term fiscal framework. - Supporting institutions and policy areas: - Public financial management (PFM): credible medium‑term framework, robust forecasts, budget execution, cash and debt management, accounting and reporting, fiscal transparency, fiscal risk monitoring. - Fiscal rules: introduce once adequate PFM established; numerical constraints on balances, spending, or debt strengthen discipline. - Financial asset management: balance risk, return, and liquidity; integrate resource funds with the budget, ensuring transparency and accountability. - Tax policy and administration: increase non‑resource revenue where possible; move to higher non‑resource‑based taxation as soon as possible; design resource‑sector fiscal regimes balancing revenue and investment attraction. - Governance and corruption: strengthen frameworks to reduce corruption risks in property rights allocation, revenue collection, and oversight of state‑owned enterprises. H3: Guidance on responses to shocks - Small and cyclical deviations: generally do not revise the overall fiscal strategy; projected price path remains best predictor and deviations should broadly cancel over time. - Large and/or persistent shocks: adjust the fiscal anchor and targets because resource wealth estimates could shift substantially; err on side of minimizing adverse consequences, especially for negative shocks. - Asymmetry of prediction errors: underpredicting persistent negative shocks risks rapid depletion of buffers and macro instability; underpredicting positive shocks builds buffers. --- *International Monetary Fund | March 2021.* ### 1. Introduction ........................................................................................................ ### 1. Introduction ### Purpose and scope - Provides operational guidance for policymakers and IMF staff teams on designing—or revising—a fiscal strategy in resource-rich countries (RRCs). - Intended to be general and applicable to RRCs with a range of income levels, resource endowments, and macroeconomic contexts. - Designed primarily to help policymakers analyze trade-offs associated with alternative fiscal paths and select a fiscal strategy given country-specific circumstances. - Centered on (i) fiscal sustainability and intergenerational wealth sharing, based on a long-term fiscal anchor; and (ii) macroeconomic stabilization, through the maintenance of a stock of liquid financial assets (“buffers”). - Supported by an online Excel template (and companion guidance note) that users can customize to operationalize the framework for a particular RRC. ### Context and recent relevance - Guidance is timely for RRCs revising fiscal strategies in response to the coronavirus disease (COVID-19) pandemic, which has caused widespread short-term deterioration of fiscal balances through declining tax revenues and additional spending needs (for example, health-care and support to vulnerable workers). - Producers of commodities for which demand may be durably lower in the wake of the pandemic (oil) are likely to experience a more persistent deterioration in the fiscal outlook, implying pre-COVID-19 fiscal policy stances may no longer be sustainable. - Framework helps assess the size of any new medium-term fiscal adjustment needs and design fiscal consolidations that balance sustainability and development concerns. ### Underlying evidence base and contributors - Concepts are based on a large body of IMF work on fiscal frameworks in RRCs (for example, IMF 2012 and IMF 2015), including analytical and policy papers and technical assistance and training. - Note prepared by Olivier Basdevant, John Hooley and Eslem Imamoglu; authors acknowledge comments from multiple IMF colleagues. ### Stylized organizing framework (Figure 1) - Framework elements described: - A long-term fiscal sustainability anchor, typically based on a version of the permanent income hypothesis (PIH), translated into a target for the non-resource primary fiscal balance (NRPB). Distinction noted between PIH as a long-term anchor versus PIH used as a fiscal rule. - A transition from the current fiscal stance to the long-term anchor; may require fiscal consolidation where current stances are unsustainable (for example, due to past loose policy or shocks such as COVID-19). For newly discovered reserves, resources may finance domestic investment to speed development—requiring careful planning if temporarily departing from an adjustment path. - Stabilization via saving resource wealth in liquid financial assets (“buffers”) during good times for use in bad times to support spending and delivery of essential services and infrastructure. - Implementation considerations including communication and supporting fiscal institutions. - The framework is an organizing device and not definitive; main elements: Resource Wealth → Objectives → Fiscal Anchor → Transition Path → Stress Test → Precautionary Buffers → Publication → Implementation. ### Practical support - An online Excel template and companion guidance note are available to operationalize the framework for a particular RRC and were used to generate illustrative figures for a stylized RRC in the note. --- ### Principles for Designing Fiscal Strategies in Resource-Rich Countries ### Sustainability - Fiscal position is sustainable if the present value of future non-resource primary deficits does not exceed initial net asset position (including public resource wealth). - Assessment of sustainability differs from non-RRCs because RRCs often have large stocks of public wealth in both financial assets and resources in the ground. - Because resource wealth is finite, sustainability should ensure fair distribution across generations. Saving and investing a portion of resource rents (often implying fiscal surpluses) can produce a stable future stream of additional budgetary income after depletion of the resource. - Investment income can come from accumulation of financial assets (interest and dividends), or physical or human capital (higher non-resource fiscal revenues). - Need to avoid a sudden large fiscal adjustment as resources in the ground are depleted; gradual planning for the post-resource era is generally desirable. ### Stability - Fiscal strategy should support countercyclical stabilization to dampen macroeconomic impact of both business cycle and commodity revenue volatility (prices and production). - Fluctuations in resource revenue can translate into changes in public spending, producing procyclical fiscal stances that amplify economic volatility; cuts to capital expenditure can be particularly harmful. - Key goal: shield public expenditure from resource revenue volatility by drawing on financial resources during commodity “busts” and saving during booms. --- ### A Long-Term Anchor to Ensure Fiscal Sustainability ### Recommended anchor - The non-resource primary balance (NRPB) is an appropriate long-term fiscal anchor for RRCs. If debt vulnerabilities are high, a debt anchor can complement or serve as an interim anchor. ### Main steps to select an NRPB anchor - Step 1: estimate resource wealth and project the flow of future resource revenues. - Step 2: define objectives for consumption of resource wealth across generations. - Step 3: translate objectives into an appropriate NRPB anchor. Step 1: Estimate Resource Wealth - Public resource wealth Vt is defined as the present value of the stream of future resource revenue RTt (net of resource-related expenditure) expected to flow to the budget: - Vt−1 = ∑_{s=t}^{N} RTs / (1 + i)^{s−t+1} - Projections of resource revenue can be generated using: - Bottom-up approach: aggregation of project-level revenue projections; most accurate but requires project-specific information. IMF’s Fiscal Analysis of Resource Industries (FARI) model assists in forecasting natural resource revenues at the project level and can capture non-linear sensitivities of revenues to prices and fiscal regimes. - Top-down approach: extrapolation of historical extraction and fiscal revenue trends adjusted for projected commodity prices; used when project-level data are limited. - Main inputs into resource revenue forecasts: - Reserves in the ground: estimates of discovered reserves are available, but extractable portions are uncertain and subject to technology, costs, demand, prices, and downside risks (for fossil fuels, future climate-policy action can reduce demand and affect production). Be conservative about future demand projections. For budgetary purposes, revenue forecasts should generally include only sanctioned extractives projects (approved final investment decision and/or development plan). - Commodity prices: highly volatile and difficult to forecast. Futures markets and statistical models are guides in the near term; IMF’s World Economic Outlook database provides projections for major commodities one to two years ahead in US dollars. Medium- to long-term outlook is more difficult to predict. ### Analytical foundations (Box: Derivation of fiscal sustainability anchors) - Fiscal accounting identities laid out: - Overall fiscal balance OBt = NRTt − Et + RTt + i^a_t A_{t−1} − i^b_t D_{t−1} - Change in net financial assets OBt = Δ(A_t − D_t) - Non-resource primary balance NRPBt = NRTt − Et - Law of motion for net financial assets: A_t − D_t = NRPBt + RTt + (1 + i^a_t) A_{t−1} + (1 + i^b_t) D_{t−1} - Government intertemporal budget constraint (discounting assets and liabilities at constant rate i and assuming no-Ponzi condition): - A_{t−1} − D_{t−1} = −∑_{s=t}^{∞} NRPBs / (1 + i)^{s−t+1} − ∑_{s=t}^{N} RTs / (1 + i)^{s−t+1} - Define government net wealth W_{t−1} = A_{t−1} − D_{t−1} + V_{t−1} where V_{t−1} = ∑_{s=t}^{N} RTs / (1 + i)^{s−t+1} - Law of motion for wealth: ∀ s ≥ t, Ws = (1 + i) Ws−1 + NRPBs - Permanent Income Hypothesis (PIH) fiscal anchor: - PIH implies a constant non-resource primary balance over time for an infinite horizon: - ∀ s ≥ t, NRPBs = NRPBt = −i W_{t−1} - More generally, if NRPB grows at constant rate g: - ∀ s ≥ t, NRPBs = NRPBt (1 + g)^{s−t} - NRPBt = −(i − g) W_{t−1} - Economic intuition: part of financial returns iW is used to keep wealth growing at rate g (gW) so annuity grows at rate g; remaining income finances spending. Variations depend on choice of g (for example, g = growth rate of non-resource GDP produces an NRPB constant in percent of non-resource GDP). - Notes: - Finite horizon PIH would generate a time-bound annuity (higher consumption out of resource wealth for t ≤ T), but raises intergenerational equity questions. - Equations imply nominal interest rate must be greater than g over the long run; if i − g is negative, income on wealth insufficient to prevent wealth declining in real terms. --- *Italic: Source — How to Design a Fiscal Strategy in a Resource-Rich Country (How to Note), International Monetary Fund, March 2021.* ### Box 1. Derivation of Fiscal Sustainability Anchors for Resource-Rich Countries ### Box 1. Derivation of Fiscal Sustainability Anchors for Resource-Rich Countries ### Overview and context - Baseline practical approach for long-term commodity prices: use a constant-in-real-terms price as a baseline forecast and stress test the fiscal framework using alternative assumptions about the long-term. - Statistical support for a random walk in real commodity prices is described as weak, and structural factors (for example, persistent changes in global demand or supply, transition to cleaner energy, geopolitical changes) can significantly affect prices. - Forecasting fiscal revenues at the project level requires projections of production and costs that are consistent with expectations for prices and extractable reserves. - Different fiscal instruments in extractives: corporate tax, non-tax royalties, resource rent taxes, state participation, production sharing systems. ### Step 1: Long-term price, production, and fiscal regime inputs (findings) - Use a constant-in-real-terms price as a baseline and conduct alternative deterministic or stochastic scenarios for sensitivity analysis. - Project production and costs consistent with price expectations and extractable reserves. - Account for country price premium (for example, due to differences in quality of the product compared to the world benchmark). ### Step 2: Define objectives for the long-term consumption of resource wealth - Principle: future generations should also derive benefit from resource wealth, though alternative approaches exist: - Bird-in-hand (BIH): invest all resource revenues in financial assets; consumption is the interest earned on accumulated financial wealth; prudent but benefits future generations more and is inflexible for borrowing. - Spend-as-you-go (SAYG): spend all resource revenues on receipt; highly procyclical and risky. - Intergenerational sharing is implemented through the NRPB anchor growth rate g in the PIH framework. - Considerations for choosing g: - To ensure future individuals are not worse off, NRPB should grow in line with expected changes in population. - To ensure future generations enjoy the same level of consumption in real terms, expected changes in purchasing power should be taken into account. - Some argue a growth rate below GDP or population growth can justify a consumption profile tilted in favor of current, relatively poorer generations. ### Formulas for anchor growth g (as presented) - Constant real annuity per capita: g = 흅 + 휶 . Here π is the annual rate of inflation and α is annual population growth. This ensures the NRPB is constant in real per capita terms. - Constant annuity as a share of non-resource GDP: g = 흅 + 휸 . Here π is inflation and γ is the rate of real non-resource GDP growth. This ensures the NRPB grows in line with nominal non-resource GDP growth and is constant in percent of non-resource GDP. - Constant real annuity: g = 흅 . As before, π is the annual rate of inflation. This ensures the NRPB grows in line with prices and so is constant in real terms. ### Step 3: Calibrate the fiscal sustainability anchor (key points and sensitivities) - Calibration requires: data on initial wealth and fiscal position; assumptions for long-term evolution of GDP growth, population, inflation, interest rates. - Common calibrations: - Anchor constant in real per capita terms → equal distribution across generations (NRPB = $X per individual in today’s prices). - Anchor as constant share of non-resource GDP → facilitates translation into budget framework but may give future generations higher resource consumption if growth > population growth. - Anchor constant in real terms → leads consumption to decline in real-per-capita terms if population growth is positive. - Sensitivities: - Calibration is highly dependent on macroeconomic assumptions; sensitivity analysis is recommended. - The level of the anchor increases with lower yields on invested resource revenues and with lower resource revenues themselves. - Estimates of resource wealth are highly sensitive to resource prices and the discount factor, especially for countries with large reserves and long horizons. - Illustrative notes from figures in the source (descriptive): - Example calibrated with g = non-resource GDP growth and charts shown as percent of non-resource GDP. - Figure 5 shows impact on the NRPB anchor of a 25% reduction in interest rates and a 50% reduction in resource revenues. ### Step 4: Design the transition path (speed, composition, end point) - Speed: - If current NRPB is far below the anchor, fiscal consolidation will be needed. - Trade-offs: immediate adjustment builds credibility but can be painful; gradual/lengthy adjustments can lower future wealth, increase vulnerability to price shocks, or create time inconsistency. - If current NRPB is above the anchor, opportunity to increase spending or lower taxes, but scaling-up should respect absorptive/institutional capacity and productive spending opportunities. - Caution against borrowing to finance spending based on uncertain future resource revenues. - Composition: - Long-term structural revenue and expenditure priorities should guide adjustment composition. - Negative impacts on growth or inequality from spending cuts should be offset with mitigating measures. - Scaling-up of spending should be guided by national development priorities and SDGs; cautious approach to infrastructure scaling-up due to risks of poor-quality, low-efficiency projects. - Wealth preservation: - Wealth can be stabilized at its initial level or at its post-transition level. - Stabilizing at initial level preserves value for future generations but may require smaller deficits later to rebuild wealth. - Stabilizing at post-transition level allows a smoother fiscal path; choose smoother path if differences are small. ### Transition challenges and general considerations (policy recommendations) - Establish credibility upfront: immediate communication of new/revised fiscal strategy, set out supporting policies and financing sources, accompany with a medium-term fiscal framework. - Interim targets: where gross debt is an issue, set an interim debt target (gross or net) consistent with stabilization at a prudent level. - Begin adjustment promptly but manage pace: start early, ensure gradual enough to minimize growth impacts and social risks; small initial measures can signal credibility if buffers exist. - Use both revenue and expenditure measures: design expenditure measures based on review of size and efficiency of spending; revenue measures can be fruitful in RRCs with low non-commodity revenues. - Consider wider macro-financial context: flexible exchange rates can mitigate growth losses after shocks; fixed exchange regimes may require stronger fiscal responses. - Support adjustments with structural reforms: reforms (for example, energy subsidies and civil service reforms) and medium-term frameworks increase sustainment; build political and social consensus via transparency, accountability, engagement. ### Key statistics and specific numeric scenarios (preserved as presented) - Sensitivity example: Figure shows impact on NRPB anchor of a 25% reduction in interest rates and a 50% reduction in resource revenues. - Example chart calibration: anchor calibrated with g = non-resource GDP growth; all charts shown as percent of non-resource GDP. - Note on comparative magnitudes in illustrative ordering: nominal interest rate > inflation > non-resource GDP growth > population growth (as shown in an example). *International Monetary Fund | March 2021* ### Box 2. Large Fiscal Adjustments in Resource-Rich Countries ### Box 2. Large Fiscal Adjustments in Resource-Rich Countries ### Transition path design and fiscal multipliers - Choice of transition path should be informed by assessment of likely impact on growth, debt, wealth, and spending. - Simulations of different options should incorporate the expected impact of discretionary changes in revenues or expenditure on non-resource GDP and non-resource revenues, based on an analysis of short- and long-term fiscal multipliers. - It is useful to check sensitivity of the path to underlying assumptions for the fiscal multiplier (reflecting, for example, alternative scenarios for spending productivity, efficiency, and absorption capacity), since different values can have large implications. - Example scenario features: - NRPB anchor calibrated as a constant share of non-resource GDP is attained following a 10 year transition period. - During the transition, capital spending is increased during the first 5 years and current spending is reduced in the subsequent 5 year period to attain the anchor. - Two cases compared: - Productive investment scaling-up with short- and long-term multipliers of 0.3 and 1.4 respectively. - Non-productive investment scaling-up with fiscal multipliers assumed to be zero. - Outcomes: - Productive case: non-resource revenues and expenditure are higher and debt remains on a declining path. - Non-productive case: no additional revenue benefit and debt breaches standard vulnerability thresholds. ### Capital versus current spending trade-offs and investment productivity - Using resource revenues to scale up investment can be preferable to investing in financial assets, especially in low income countries with large infrastructure gaps. - Marginal returns on quality investment can be higher than from financial assets when the stock of capital is low. - Scaling up investment in physical—or human—capital in the non-resource sector can: - Enhance prospects for sustainable and resilient growth. - Help meet the Sustainable Development Goals. - Diversify the economy away from natural resources and reduce vulnerability to “Dutch disease.” - Create jobs in more labor-intensive sectors than extractive industries. - If the growth impact of an investment project leads to fiscal returns, it can provide fiscal space that supports a higher level of spending. - Financial market imperfections may justify financing productive projects from a country’s own revenue sources when external financing is insufficient. - Empirical evidence and multipliers: - IMF (2014) finds only half of the increase in government investment in emerging market and developing economies during 1980–2012 translated into productive capital. - Public investment shocks raise output by about 0.4 percent in the same year, and 1.5 percent after four years in advanced economies. - Impact in emerging market economies and low-income countries: around 0.25 in the same year, and 0.5 after four years. - Lower multipliers can result from weaknesses in investment management, capacity constraints, and supply bottlenecks leading to wage-inflation pressures and/or higher imports. - Guidance for scale-up decision: - Assess likely benefits and ensure scale is commensurate with institutional and absorptive constraints. - Conduct a thorough assessment of infrastructure gaps, likely returns versus financial assets, and impact on fiscal sustainability and intergenerational wealth sharing. - Analyze public investment management processes and absorptive capacity (cost and price dynamics in labor and product markets). - Adopt gradual and cautious scaling-up if appraisal, selection, and implementation capacity are weak. - Maintain adequate fiscal buffers to avoid investment projects being affected by revenue shortfalls during commodity price declines. - Public Investment Management Assessment (PIMA) is the IMF’s framework to assess infrastructure governance and identify reform priorities. ### A precautionary stabilization buffer and stress testing - Maintaining a stable level of spending during temporary shocks to commodity revenues is important to avoid procyclicality. - During a commodity boom, windfall resource revenues should be saved, leaving the pre-shock spending path unchanged. - A sudden unexpected fall in commodity revenues poses challenges; unless shortfalls can be met via drawing down assets or new borrowing, a reduction in expenditure (or increase in taxes) may be needed. - To mitigate risks, maintaining a precautionary financial buffer composed of liquid financial assets can be prudent in some cases. - Need and size of an additional liquid asset buffer depend on factors including risks to commodity revenues, initial level of debt, availability of new borrowing, and policymakers’ risk aversion. - Useful assessment tool: stress tests of the impact of a range of commodity revenue shock scenarios on macroeconomic and fiscal variables. Step 5: Design Stress Test - First step: specify a shock scenario. - Can be a simple “worst-case” path for commodity prices (example: oil prices falling to $30 a barrel). - Or use value-at-risk (VaR) approaches based on historical stochastic properties of revenue volatility. - Shock should have both a low but reasonable probability of occurring and be important enough to insure against. - Estimating impact of a price shock on actual resource revenues should take into account exchange rate movements and any non-linearities because of the fiscal regime or other factors. - Impact on overall fiscal revenues will depend on the level of resource dependence. - Policy response options to a resource revenue shortfall: - i) Maintain spending at its pre-shock level and finance the shortfall with liquid assets or new borrowing. - ii) Reduce spending (or raise taxes) to fully compensate for the lost revenue. - iii) A combination: spending reductions partially offset the shortfall. - For temporary shocks with minimal impact on long-term resource wealth estimates, it may be best to leave spending paths unchanged and replace revenue with additional financing. - More persistent shocks may reduce projections of future resource revenue, necessitating a structural reduction in expenditure. - Even when spending needs to be cut, borrowing or using financial assets could help smooth the adjustment rather than immediate cuts. Step 6: Set Precautionary Buffer Target - Use stress test results to assess need for additional financial buffers; a simple first test is debt sustainability: - For a given policy response, does the shock lead to additional borrowing needs such that debt breaches vulnerability thresholds? - If no, existing debt may be sufficiently low that additional borrowing can finance the shortfall. - If yes, precautionary financial buffers are insufficient and near-term fiscal path should be revised (for example, a more front-loaded fiscal adjustment or postponing planned scaling-up), or the policy response reconsidered (for example, tolerating larger spending reductions) to accumulate sufficient financial assets or pay down debt. - Even if debt remains sustainable in the stress test, assess whether impacts on spending, GDP growth, and interest costs are tolerable before ruling out additional buffers. - If an additional buffer is needed, set a target and plan to achieve it, including: - (i) the size and composition of buffers needed to protect spending plans against a specified range of shocks; and - (ii) contingency planning: pre-identified fiscal adjustment measures to be triggered when buffers are insufficient. - A liquid asset buffer target is usually set in gross terms; if debt is high, it could be set in net terms (net liquid asset/debt target, or two targets for assets and debt individually) and paying down debt to a specific level can be explicitly incorporated into the fiscal strategy. - Buffer composition and attributes: - Composed of liquid assets held in cash or short-term liquid securities, usually in foreign exchange. - Distinct from liquid asset holdings dedicated to other purposes (e.g., cash or debt management). - VaR illustrative example from the text: - A VaR-based estimate of a $1 billion buffer, with p=0.1 and t=3 means there is a 10 percent chance that the buffer would fall by more than 1 billion over the next three years. - In other words, a $1 billion buffer would cover 90 percent of shocks over that horizon, and fiscal adjustment would be needed for the remaining 10 percent of adverse shocks. - Figure 6 and Figure 7 described (stylized RRC stress-test and transition scenario): - Figure 6: transition with a 10 year period, initial 5-year investment scale-up, subsequent 5-year current spending consolidation; productive vs non-productive investment cases and their impacts on non-resource revenues, expenditure, and gross debt. - Figure 7: stress test showing commodity prices (baseline and shock, example $30 a barrel), liquid assets, and gross debt under baseline, no adjustment, full adjustment, and partial adjustment scenarios. *Source: IMF staff.* ### 4. Spending ### 4. Spending ### Shock scenario and modeling assumptions - Commodity prices are assumed to decline to $45, $30 and $45/barrel in years 1, 2 and 3 of the shock period respectively. - The charts (in the source) show the impact on liquid assets, debt and spending for three different policy responses: - No adjustment: spending remains unchanged and the revenue shortfall is met through running down liquid assets and new borrowing (in that order). - Full adjustment: spending reduction fully offsets the revenue shortfall. - Partial adjustment: reductions in spending are subject to a maximum of 10 percent of the pre-shock path. ### Key quantitative outcomes from the scenario - No adjustment: - Liquid buffers are exhausted. - The already-elevated gross debt ratio increases by a further 4 percent of GDP to almost 65 percent of GDP. - Partial adjustment: - Leads to an almost 2 percent of GDP reduction in expenditure. - Liquid buffers are exhausted (although there is only a small increase in debt). - Full adjustment: - Leads to a very large 8 percent reduction in spending. ### Interpretation and policy implications - The scenario suggests that a partial adjustment may be the only feasible course of action without immediately large debt increases or complete depletion of buffers, or alternatively the near-term fiscal path should be revised to accumulate additional fiscal buffers. - Commodity price volatility and the long-run uncertainty surrounding resource income provide additional reasons for maintaining a precautionary stabilization buffer. - Calibrating fiscal strategies under both baseline and alternative scenarios (based on different assumptions for key determinants of resource income) is a practical approach; policymakers’ risk tolerance may justify a more conservative strategy than the baseline. ### Implementing and updating the fiscal strategy (selected practical considerations) - Communication and legal framework: - Publish the strategy as a policy document and, ideally, set it out in separate legislation, including rationale, choices, and a process for revisions. - Use simple indicators to communicate the share of revenue saved in financial assets versus invested domestically and compute additional public expenditure from resource revenues in per-capita terms for current and future generations. - Revisions policy (Box 4: When and How to Revise the Fiscal Strategy): - Do not adjust too often; a fiscal strategy should provide long-term guidance and avoid excessive procyclicality. - Periodic assessments could guide updates; formal assessments possibly every three to five years by an independent fiscal institution or expert committee, with exceptional assessments after very large shocks. - Updates should be aligned with the budget cycle and supported by a revised medium-term fiscal framework. - Supporting institutions and policy areas (high-level priorities): - Public financial management (PFM): develop strong PFM practices, including a credible medium-term fiscal framework, robust forecasts and risk analysis, budget execution, cash and debt management, accounting and reporting, fiscal transparency, and fiscal risk monitoring. - Fiscal rules: introduce fiscal rules once adequate PFM systems are established; fiscal rules are numerical constraints on budget balances, spending, or debt and can strengthen discipline through accountability and transparency. - Financial asset management: establish a policy balancing risk, return, and liquidity; if a separate resource fund is created, integrate it with the budget and ensure transparency, controls, and accountability; resource funds should be complementary tools, not the main fiscal instrument. - Tax policy and administration: increase non-resource revenue where possible; move to higher non-resource-based taxation as soon as possible; design resource-sector fiscal regimes to balance revenue maximization and investment attraction. - Improving governance and fighting corruption: strengthen governance frameworks to reduce corruption risks in allocation of property rights, revenue collection from extractive industries, and oversight of state-owned enterprises. ### Guidance on responses to shocks - Small and cyclical deviations in commodity prices: generally do not revise the overall fiscal strategy; projected price path remains the best predictor and deviations should broadly cancel out over time. - Large and/or persistent shocks: adjust the fiscal anchor and targets because estimates of resource wealth could shift substantially; policymakers should err on the side of minimizing adverse consequences, especially for negative shocks. - The costs of prediction errors are asymmetric: underpredicting a persistent negative shock risks rapid depletion of fiscal buffers and macroeconomic instability; underpredicting positive shocks builds buffers. *Source: IMF staff (from "4. Spending", How to Design a Fiscal Strategy in a Resource-Rich Country, March 2021).* --- _Source: https://www.imf.org/-/media/files/publications/howtonotes/2021/english/htnea2021001.pdf_