## _wp0430

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### Context and motivation
- Framework developed for heavily indebted, exhaustible-resource-dependent countries; applied to Gabon.
- Gabon’s oil sector:
  - contributes over 30 percent to real GDP,
  - contributes some 75 percent to exports,
  - contributes 60 percent to government revenue.
- Oil output projections and fiscal pressure:
  - Oil output projected to decline by 50 percent in terms of output over the next five years,
  - Oil projected to be depleted over the next 30 years,
  - Gabon faces a heavy debt burden that will continue to absorb about 40 percent of government revenue during the remainder of the decade.

### Limitations of traditional fiscal sustainability concepts
- Two caveats of the traditional primary balance gaps concept:
  - Stabilizing the existing debt-to-GDP ratio does not imply stabilization at an optimal/desirable level.
  - For nonrenewable-resource-dependent countries, traditional “sustainable” fiscal balance and debt measures are misleading because of inevitable fall in resource-derived revenue.
- Need to treat oil revenue as conversion of resource wealth into financial wealth (portfolio transfer), not perpetual income.

### Analytical framework and key relations
- Normative targeting:
  - Target a normative debt-to-non-oil-GDP ratio and account for substituting declining resource revenue to preserve total net wealth.
- Key debt dynamics and steady-state relations (as presented):
  - ∆D_t = I_t - B_t, with I_t = rD_t-1.
  - ∆d_t = (r-g)d_t-1/(1+g) – b_t.
  - Steady-state primary balance: b* = d_t-1 (r-g)/(1+g) = d_t-1 (γ – 1), where γ = (1 + r)/(1 + g).
  - Primary surplus to reduce debt from d_o to d_n in n years: b = (γ^n d_o - d_n)(γ - 1)/(γ^n - 1).

### Forward-looking rule, FFG, and intergenerational equity
- Policy objectives for forward-looking non-oil primary balance:
  - equitable intergenerational distribution of existing oil wealth;
  - relatively stable primary balance path to reduce debt-to-non-oil GDP to sustainable levels;
  - invest part of oil revenue to reconstitute total government net wealth after oil exhaustion.
- Fund for Future Generations (FFG) role:
  - Simulations project FFG transfers into/out of budget, investment returns, and FFG stock dynamics over 2003–33.
  - Central objective examples: maintain a relatively constant oil-based income stream per capita and reconstitute total net wealth over 30 years.

### Baseline assumptions for Gabon simulations (2003–33)
- Oil production decline e = -6.0 percent (average annual).
- Existing oil reserves virtually depleted by 2032.
- Non-oil GDP nominal growth g = 5.0 percent.
- Oil prices unchanged nominally (λ = 0) at US$25.2 per barrel (2002 average).
- Market nominal interest rate r = 6.0 percent.
- Resulting estimates at end-2002:
  - Vo_t (oil wealth) = 268.2 percent of non-oil GDP (156 percent of GDP).
  - Total net wealth ≈ 136.4 percent of non-oil GDP.
  - Non-oil primary deficit ≈ 16.9 percent of non-oil GDP in 2002.

### Baseline projection outcomes (no policy change)
- If 2002 non-oil primary deficit maintained:
  - Government net wealth becomes increasingly negative from year 2010 onward.
  - Debt ratio reaches 469 percent of non-oil GDP by year 2033 (nominal deterioration).
- Selected Table 3 baseline series (percent of non-oil GDP unless otherwise indicated):
  - Non-oil GDP (billions CFAF): 2002 = 2,005.9; 2005 = 2,322.1; 2010 = 2,963.6; 2015 = 3,782.4; 2020 = 4,827.5; 2025 = 6,161.2; 2030 = 7,863.4; 2033 = 9,102.9.
  - Oil production (millions tons): 2002 = 12.6; 2005 = 10.4; 2010 = 7.7; 2015 = 5.6; 2020 = 4.1; 2025 = 3.0; 2030 = 2.2; 2033 = 1.8.
  - Debt, with no policy change: 2002 = -131.8; 2005 = -112.7; 2010 = -123.5; 2015 = -169.1; 2020 = -236.7; 2025 = -319.8; 2030 = -416.2; 2033 = -477.6.
  - Non-oil primary balance (each year reported) = -16.9.
  - Oil revenue: 2002 = 30.4; 2005 = 21.8; 2010 = 12.5; 2015 = 7.2; 2020 = 4.1; 2025 = 1.5; 2030 = 0.8; 2033 = 0.5.
  - Oil wealth (discounted oil revenue): 2002 = 268.2; 2005 = 192.4; 2010 = 110.6; 2015 = 63.6; 2020 = 36.6; 2025 = 21.0; 2030 = 12.1; 2033 = 8.7.
  - Total asset (without policy change): 2002 = 136.4; 2005 = 79.7; 2010 = -12.8; 2015 = -105.5; 2020 = -200.1; 2025 = -298.8; 2030 = -404.1; 2033 = -468.9.

### FFG statutory scheme (10 percent allocation; FFG invested at 6 percent) — simulated outcomes
- Under statutory FFG allocations (10 percent of budgeted oil revenue to FFG; invested at 6.0 percent):
  - FFG position would attain only 30½ percent of non-oil GDP by 2033.
  - Debt would continue to increase and net wealth would reach –468.9 percent of non-oil GDP by 2033 (similar deterioration as baseline).
- Sensitivity to FFG return (selected outcomes in percent of non-oil GDP):
  - FFG return = 2.0 percent → FFG position (2033) = 12.8; Total assets (2033) = -486.6.
  - FFG return = 6.0 percent → FFG position (2033) = 30.5; Total assets (2033) = -468.9.
  - FFG return = 8.0 percent → FFG position (2033) = 47.5; Total assets (2033) = -451.9.
  - FFG return = 10.0 percent → FFG position (2033) = 74.1; Total assets (2033) = -425.3.
- Policy implication: maximizing return on FFG resources is important; statutory 10 percent allocations at modest returns insufficient to avoid severe net wealth deterioration. FFG must be coupled with credible fiscal policy (clear non-oil primary balance targets).

### Sustainable-path scenario (targeted debt-to-non-oil GDP = 20% by 2033)
- Scenario assumptions:
  - g = 5.0 percent; η (population growth) = 2.4 percent; r = 6.0 percent; ρ = 6.0 percent; λ = 0; e = -6.0 percent; at+n = 20 percent.
- Key numerical findings:
  - Non-oil primary deficit must decline gradually from 16 percent of non-oil GDP in 2002 to about zero percent by year 2031 to reduce debt-to-non-oil GDP from 132 percent at end-2002 to 20 percent by 2033.
  - Under this sustainable scenario:
    - Primary balance b (for at+n = 20%): 2002 = 13.5; 2005–2033 = 4.4 (constant).
    - Oil transfers yo*_t (from 2003): 2005 = 8.4; 2010 = 7.5; 2015 = 6.6; 2020 = 5.8; 2025 = 5.1; 2030 = 4.5; 2033 = 4.2.
    - Non-oil primary balance f_t: 2002 = -16.9; 2005 = -4.1; 2010 = -3.1; 2015 = -2.2; 2020 = -1.4; 2025 = -0.7; 2030 = -0.1; 2033 = 0.2.
    - Total debt a_t (percent of non-oil GDP): 2002 = -131.8; 2005 = -122.3; 2010 = -106.0; 2015 = -88.9; 2020 = -70.9; 2025 = -52.1; 2030 = -32.3; 2033 = -20.0.
    - FFG position ffg_t (percent of non-oil GDP): 2002 = 0.0; 2005 = 47.8; 2010 = 90.9; 2015 = 106.5; 2020 = 107.3; 2025 = 100.5; 2030 = 89.9; 2033 = 82.9.
    - Total net wealth w_t (percent of non-oil GDP): 2002 = 136.4; 2005 = 117.9; 2010 = 95.6; 2015 = 81.3; 2020 = 73.0; 2025 = 69.4; 2030 = 69.7; 2033 = 71.6.
  - Monetary magnitudes (selected, in millions of U.S. dollars):
    - Total net wealth: 2002 = 3,935; 2005 = 3,937; 2010 = 4,075; 2015 = 4,423; 2020 = 5,069; 2025 = 6,152; 2030 = 7,886; 2033 = 9,367.
    - FFG position: 2002 = 0; 2005 = 1,596; 2010 = 3,876; 2015 = 5,795; 2020 = 7,450; 2025 = 8,900; 2030 = 10,171; 2033 = 10,849.

### Sensitivity analysis and alternative scenarios
- Price shock sensitivity:
  - Annual decline of 1 percent in nominal oil prices reduces oil-based transfers by about 0.5 percent of non-oil GDP; FFG and net wealth positions lower by 7–8 percentage points of non-oil GDP.
- Appendix I (lower growth / lower FFG return: g = 4.0 percent; ρ = 5.0 percent):
  - Results broadly similar; lower g requires higher primary balance by 0.8 percentage point of non-oil GDP.
- Appendix II (less ambitious debt target: at+n = 30 percent by 2033):
  - Primary balance lower by 0.3 percentage point of non-oil GDP versus baseline; total net wealth lower by 10 percentage points of non-oil GDP relative to baseline.

### Fiscal history highlights (1991–2002) and short-term assessment
- Debt and fiscal episodes:
  - External debt share of government revenue: about 23 percent in 1980–86 → 56 percent during 1987–95.
  - Six debt reschedulings from Paris Club creditors between 1987 and 2000.
  - Debt-to-GDP: about 30 percent in early 1970s → about 100 percent during 1998–99 → about 76 percent of GDP at end-2002.
  - Domestic debt averaged 20 percent of GDP in late 1990s → about 14 percent of GDP at end-2002.
  - External debt service represented over 10 percent of GDP and over 40 percent of government revenue during 1999-2002.
  - Primary fiscal surpluses averaged over 11 percent of GDP during 1999-2002; external payment arrears reached 8 percent of GDP at end-2002.
- Primary balance gap analysis (selected annual figures, percent of GDP):
  - Debt-to-GDP end t-1 (d_t-1): 1991 = 60; 1992 = 67; 1993 = 67; 1994 = 80; 1995 = 124; 1996 = 112; 1997 = 89; 1998 = 86; 1999 = 102; 2000 = 101; 2001 = 73; 2002 = 76.
  - Primary balance b: 1991 = 4; 1992 = 1; 1993 = 1; 1994 = 5; 1995 = 11; 1996 = 9; 1997 = 8; 1998 = -6; 1999 = 8; 2000 = 18; 2001 = 12; 2002 = 8.
  - Sustainable primary balance b*: 1991 = 10; 1992 = 8; 1993 = 5; 1994 = -21; 1995 = 1; 1996 = -11; 1997 = 1; 1998 = 23; 1999 = -1; 2000 = -15; 2001 = 12; 2002 = 4.
  - Short-term primary gap b*-b: 1991 = 6; 1992 = 7; 1993 = 4; 1994 = -25; 1995 = -10; 1996 = -19; 1997 = -7; 1998 = 29; 1999 = -9; 2000 = -33; 2001 = 0; 2002 = -4.
- Interpretation: progress toward fiscal sustainability since 1994 but fragility signaled by reemergence of positive gaps in 1998 and 2001.

### Policy recommendations and implications (preserving numeric detail)
- Define a debt reduction objective (numerical example: reduce debt-to-non-oil GDP from 132 percent to 20 percent by 2033 requires overall primary surpluses equivalent to 4.4 percent of non-oil GDP during 2003–33).
- Target a non-oil primary deficit that:
  - isolates expenditure decisions from volatile oil revenue,
  - ensures equitable intergenerational oil-based income transfer (constant per capita transfers in scenario with η = 2.4 percent and g = 5.0 percent).
- Constitute an appropriate savings fund (FFG) to insulate spending from volatile oil revenue and allow smoother real exchange depreciation; statutory 10 percent allocation at low returns is insufficient.
- Maximize return on FFG resources; illustrative gains:
  - FFG nominal return of 10.0 percent → FFG position 2033 = 74.1 percent of non-oil GDP (vs 30.5 at 6.0 percent).
- Fiscal consolidation measures:
  - Improve non-oil revenue through broadening tax base.
  - Strengthen expenditure management; reduce nonpriority spending including the wage bill to levels compatible with lower oil revenue.
  - Reorient public spending toward basic infrastructure and social services within a poverty reduction strategy.
  - Improve transparency and governance; audit and publish FFG accounts regularly.
  - Deepen structural reforms to foster non-oil sector development and diversification.
  - Consider debt relief to lengthen repayment given short debt maturities.
- Caveats and limitations:
  - Results sensitive to assumptions on r, g, ρ, λ, and oil-production path; stochastic oil-price risks not fully captured.
  - Framework depends critically on government commitment to good governance and effective management of FFG resources.

*Source: Staff estimates, simulations, and policy analysis from IMF working paper _wp0430 (References and appendices as provided).*

### References..............................................................................................................

### References

### Context and motivation
- The framework is developed for heavily indebted countries dependent on exhaustible resources, with a particular application to Gabon.
- Gabon’s oil sector:
  - contributes over 30 percent to real GDP,
  - contributes some 75 percent to exports,
  - contributes 60 percent to government revenue.
- Oil output is projected to:
  - decline by 50 percent in terms of output over the next five years,
  - be depleted over the next 30 years.
- Gabon faces a heavy debt burden that will continue to absorb about 40 percent of government revenue during the remainder of the decade.

### Key assumptions and projections
- The analysis highlights an unavoidable reduction in government revenue stemming from exhaustible (nonrenewable) resources as these resources decline and are depleted.
- The need to substitute the declining revenue derived from nonrenewable resources is emphasized as essential to preserve total net wealth.

### Limitations of the traditional primary balance gaps concept
- Two major caveats of the traditional concept of primary balance gaps are outlined:
  - Stabilizing the existing debt-to-GDP ratio does not necessarily imply that the debt-to-GDP ratio would be stabilized at an optimal or desirable level.
  - For countries dependent on nonrenewable resources, the traditional “sustainable” levels of government fiscal balance and debt (as defined by the standard concept) are misleading because of the inevitable fall in resource-derived revenue.

### Proposed framework and analytical extension
- The proposed framework extends the traditional approach by:
  - Targeting a normative (desirable) debt-to-non-oil-GDP ratio.
  - Taking into account the need to substitute declining revenue from nonrenewable resources to help preserve total net wealth.
- The first section of the paper applies the relation between primary fiscal balances and debt-to-GDP ratio developed by Blanchard and others (1990) and Buiter (1997) to Gabon.
- Using a quantitative measure for the primary balance gaps over the 1991–2002 period (the fiscal efforts necessary to stabilize the debt stock for each year), the paper suggests that Gabon has made progress towards fiscal sustainability, particularly since [text cut off in source].

### Organization (as provided)
- The paper is organized in two sections:
  - The first section applies the Blanchard/Buiter relation on primary fiscal balances and debt-to-GDP to Gabon and measures primary balance gaps for 1991–2002.
  - Further sections (described in the source) address longer-term substitution of oil revenue and preservation of wealth (details in subsequent sections of the paper).

*Source: _wp0430 - References.*

### 1994. The section also extends the analysis of fiscal sustainability by introducing a normative

### _wp0430 - 1994. The section also extends the analysis of fiscal sustainability by introducing a normative 

### Extended sustainability analysis and normative debt-to-GDP target
- Introduces a normative (desirable) debt-to-GDP ratio—much lower than today’s level and to be reached in a number of years.
- Derives the fiscal adjustment effort needed to:
  - (i) achieve such a lower debt-to-GDP ratio target in a given number of years; and
  - (ii) stabilize the debt-to-GDP ratio at that level thereafter.
- Provides formulae for debt dynamics and the primary balance required to stabilize or reduce debt ratios:
  - ∆D_t = I_t - B_t, with I_t = rD_t-1.
  - In GDP ratios: ∆d_t = (r-g)d_t-1/(1+g) – b_t.
  - Steady-state primary balance that stabilizes debt at d_t-1: b* = d_t-1 (r-g)/(1+g) = d_t-1 (γ – 1), where γ = (1 + r)/(1 + g).
  - Primary surplus required to reduce debt from d_o to d_n in n years: b = (γ^n d_o - d_n)(γ - 1)/(γ^n - 1) (equation (6a)); alternative form (6b) decomposes stabilization and incremental adjustment terms.

### Forward-looking rule for the non-oil primary balance and the Fund for Future Generations (FFG)
- Extends traditional analysis by accounting for expected decline in nonrenewable resources.
- Emphasizes that forward-looking fiscal policy entails a rule on the non-oil primary balance consistent with:
  - (i) an equitable intergenerational distribution of existing oil wealth;
  - (ii) a relatively stable path for the primary fiscal balance aimed at reducing the debt-to-non-oil GDP ratio to sustainable levels; and
  - (iii) investing part of oil revenue to contribute to reconstitution of total government net wealth after exhaustion of oil reserves.
- Recommends insulating government spending from volatile oil revenue and allowing a relatively smooth path for real exchange depreciation to support replacement of declining oil resources by non-oil tradable production.
- Uses a long-term projection and simulation model for 2003–33 that:
  - projects the non-oil economy, oil revenue, and fiscal accounts;
  - describes the path of an oil savings fund (the Fund for Future Generations, or FFG), transfers into it, and income transfers from it to the budget.
- Central objectives:
  - (i) a relatively constant oil-based income stream per capita over time to ensure intergenerational equity and shield the economy from volatility of oil revenues; and
  - (ii) sustained progress toward reconstitution of total net wealth position (oil-based assets minus non-oil financial debt) over the next 30-year period.

### Simulation assumptions and key simulation finding (2003–33)
- Simulations assume paths for:
  - (i) oil production and prices;
  - (ii) interest rates and the rate of return on the oil savings fund;
  - (iii) non-oil GDP growth; and
  - (iv) a target for the debt-to-non-oil GDP ratio at the end of the period.
- Simulation-derived sustainable paths include non-oil primary fiscal deficits, overall primary fiscal surpluses, and equitable oil-based income transfers across generations.
- Key numerical finding:
  - The non-oil primary deficit would have to decline gradually from 16 percent of non-oil GDP in 2002 to about zero percent by year 2031 if the authorities aim at reducing the debt-to-non-oil GDP ratio from 132 percent at end-2002 to 20 percent by year 2033 (a 30-year period).
- Total net wealth dynamics under the scenario:
  - Total net wealth declines from 136 percent of non-oil GDP in 2002 to some 69 percent in 2025 (reflecting declining oil wealth), then increases gradually to almost 72 percent by year 2033.
- After year 2033, to stabilize the debt ratio at 20 percent:
  - Required lower primary surplus would be 0.2 percent of non-oil GDP;
  - The country could run non-oil primary deficits that could be covered by transfers from the Fund for Future Generations.

### Background: fiscal history, oil dependence, and debt outcomes
- Fluctuating oil revenues and pro-cyclical fiscal policy increased government borrowing and resulted in a high debt burden.
- Membership in the CFA monetary zone implied fiscal deficits had no lasting impact on inflation, interest rates, and the exchange rate due to the fixed exchange rate of the CFA franc to the French franc and cointegration of prices.
- Oil discovery led to initial real exchange appreciation, raising the economy’s cost structure and hurting non-oil exports; oil rents inflated the size of an inefficient public sector and increased oil dependency.
- Debt and revenue statistics and episodes:
  - External debt share of government revenue rose from about 23 percent in 1980–86 to 56 percent during 1987–95.
  - Gabon resorted to six debt reschedulings from Paris Club creditors between 1987 and 2000.
  - Debt-to-GDP ratio rose from about 30 percent in the early 1970s to about 100 percent during 1998–99, then declined to about 76 percent of GDP at end-2002.
  - Domestic debt averaged 20 percent of GDP in the second half of the 1990s, reduced to about 14 percent of GDP at end-2002 with fiscal improvement.
  - External debt service represented over 10 percent of GDP and over 40 percent of government revenue during 1999-2002.
  - Despite large primary fiscal surpluses averaging over 11 percent of GDP during 1999-2002, external payment arrears reached 8 percent of GDP at end-2002.

### Traditional framework for debt and fiscal sustainability
- Fiscal policy is sustainable if it stabilizes the debt-to-GDP ratio.
- Intertemporal budget constraint (solvency condition): the stock of debt must be equal to or less than the present discounted value of future primary fiscal balances.
- Indicator of sustainability: comparison of actual primary balance with steady-state primary balance b* that would stabilize debt at current ratio.
  - If growth g > interest rate r, stock of debt could be stabilized with primary deficits; otherwise primary surpluses are needed.
  - Primary balance gap b* - b_t gives magnitude of fiscal adjustment required to stabilize debt-to-GDP ratio; positive gap indicates required fiscal effort, negative gap indicates budgetary margin.

### Assessing Gabon’s fiscal performance from 1991 to 2002 (table highlights)
- Simulation results suggest Gabon made progress toward fiscal sustainability since 1994.
- Primary balance gaps:
  - Positive from 1991 to 1993; became negative during most of the period since 1994 following CFA franc devaluation.
  - Reemergence of positive gaps in 1998 and to a lesser extent in 2001 indicates fragility of adjustment.
- Medium-term gaps constructed using three-year forward averages (b_3) broadly confirm annual findings.
- Selected figures from Table 1 (all entries in percent of GDP unless otherwise indicated):
  - Debt-to-GDP ratio at end of t-1 (d_t-1): 1991: 60; 1992: 67; 1993: 67; 1994: 80; 1995: 124; 1996: 112; 1997: 89; 1998: 86; 1999: 102; 2000: 101; 2001: 73; 2002: 76.
  - Primary balance (b): 1991: 4; 1992: 1; 1993: 1; 1994: 5; 1995: 11; 1996: 9; 1997: 8; 1998: -6; 1999: 8; 2000: 18; 2001: 12; 2002: 8.
  - Primary balance, three-year average ahead (b_3): 1991: 2; 1992: 2; 1993: 6; 1994: 8; 1995: 9; 1996: 3; 1997: 3; 1998: 6; 1999: 13; 2000: 12; 2001: 10; 2002: 9.
  - Interest rate (r), in percent (interest payments due in t divided by stock of debt at the end of t-1): 1991: 9; 1992: 9; 1993: 11; 1994: 13; 1995: 7; 1996: 7; 1997: 7; 1998: 8; 1999: 7; 2000: 7; 2001: 12; 2002: 6.
  - Nominal GDP growth (g), in percent: 1991: -6; 1992: -3; 1993: 3; 1994: 52; 1995: 6; 1996: 18; 1997: 7; 1998: -15; 1999: 9; 2000: 26; 2001: -5; 2002: 0.
  - Estimated primary balance gaps:
    - b* (sustainable primary balance): 1991: 10; 1992: 8; 1993: 5; 1994: -21; 1995: 1; 1996: -11; 1997: 1; 1998: 23; 1999: -1; 2000: -15; 2001: 12; 2002: 4.
    - b*-b (short-term primary gap): 1991: 6; 1992: 7; 1993: 4; 1994: -25; 1995: -10; 1996: -19; 1997: -7; 1998: 29; 1999: -9; 2000: -33; 2001: 0; 2002: -4.
    - b*-b_3 (medium-term primary gap): 1991: 8; 1992: 6; 1993: -1; 1994: -29; 1995: -8; 1996: -14; 1997: -3; 1998: 16; 1999: -14; 2000: -27; 2001: 3; 2002: -5.

### Achieving a normative debt-to-GDP ratio: numerical examples and policy implications
- Recognizes limitation of stabilizing current debt-to-GDP ratio when that level may not be desirable.
- Motivations for lower debt-to-GDP ratio include improving government credibility, reducing debt-service burden, and preparing for oil revenue exhaustion.
- Example numerical results (Table 2) — primary balance needed to achieve and maintain a target d_n in three years from an initial level of 70 percent of GDP (all figures in percent of GDP):
  - Interest rate = 6 percent; nominal GDP growth = 8 percent:
    - Annual primary balance needed to achieve d_n (b): for d_n = 70,60,50,40,30,20 → -1.3, 2.1, 5.5, 8.9, 12.3, 15.7 respectively.
    - Annual primary balance needed to maintain d_n (b_n*): for d_n = 70,60,50,40,30,20 → -1.3, -1.1, -0.9, -0.7, -0.6, -0.4 respectively.
  - Interest rate = 6 percent; nominal GDP growth = 5 percent:
    - Annual primary balance needed to achieve d_n (b): for d_n = 70,60,50,40,30,20 → 0.7, 4.0, 7.3, 10.5, 13.9, 17.2 respectively.
    - Annual primary balance needed to maintain d_n (b_n*): for d_n = 70,60,50,40,30,20 → 0.7, 0.6, 0.5, 0.4, 0.3, 0.2 respectively.
- Illustrative interpretation:
  - With r = 6 percent and g = 5 percent, reducing the debt-to-GDP ratio from 70 percent to 20 percent in three years requires a primary surplus of some 17 percent of GDP annually; maintaining 20 percent thereafter requires a primary surplus of some 0.2 percent of GDP annually.

### Fiscal sustainability in the face of exhaustible resources
- Traditional sustainability analysis is limited when government revenue base is not permanent; oil revenue should be treated as a reduction in wealth associated with an exhaustible resource rather than as perpetual income.
- For Gabon:
  - Oil production is projected to be reduced by almost one-half over the next five years.
  - Traditional intertemporal government budget constraints may underestimate sustainable primary balances when oil is finite.
- Policy prescriptions:
  - Fiscal policy should aim to replace oil resources by financial assets and ensure intergenerational equity.
  - Two ways to safeguard oil wealth:
    - Not exploiting the resource; or
    - Investing the value of oil production and consuming only part or all of the associated investment income.
  - Decisions depend on future oil prices and interest rates on oil-resource investments.
- Conceptual note: oil revenue should be viewed as a financing item — a portfolio transfer that converts oil wealth into financial assets.

*Italic: Source: _wp0430 - 1994. The section also extends the analysis of fiscal sustainability by introducing a normative (source PDF content provided).*

### 2002. The authorities project that, barring major discoveries, oil production would decline to

### _wp0430 - 2002. The authorities project that, barring major discoveries, oil production would decline to

### Oil production and immediate outlook
- Authorities project oil production would decline to about 7 million tons by year 2008.
- Recent exploitation of marginal oil fields has slowed down somewhat the fall in production.
- If the current oil recuperation policy continues, oil production could be slightly above current projections.

### Fiscal policy objectives: intergenerational equity and smoothing
- A forward-looking approach is needed to avoid forcing policy revisions at the expense of future generations when oil wealth is exhausted.
- Fiscal policy should aim at intergenerational equity by setting aside part of oil revenue in earlier years to be shared with future generations when oil resources are much lower or exhausted.
- Spreading the spending of foreign exchange earnings from oil over time would lead to a smoother path for the real exchange rate and help build financial reserves in foreign exchange early on.
- Investment in infrastructure, health, and education within a growth and poverty reduction strategy can raise non-oil-sector growth and non-oil revenues for future generations.
- A balance must be struck between current investment needs and the constitution of savings for future generations; this balance depends on variables including:
  - the time preference of the current generation,
  - information on the stock of oil reserves and remaining period until depletion,
  - the return on financial investments versus the cost of borrowing,
  - the country’s absorptive capacity and ability to use oil resources effectively.

### Framework for fiscal sustainability and intergenerational equity
- Fiscal sustainability is framed as progressively reconstituting government net wealth following exhaustion of oil reserves.
- Optimal fiscal policy hinges on carefully targeting the non-oil budgetary primary balance and converting oil revenue into financial assets to replace oil wealth.
- Unlike maintaining current net wealth, the paper proposes a gradual fiscal adjustment of the non-oil primary balance to allow progressive replacement of oil resources by financial assets without imposing specific paths for non-oil revenue or government expenditure.
- The framework introduces a target for the debt-to-non-oil GDP ratio.

### Key accounting and dynamic relations (as presented)
- Total government net wealth:
  - W_{t+1} = A_{t+1} + FFG_{t+1} + Vo_{t+1}  (equation 7a)
- Public debt dynamics:
  - A_{t+1} = A_t (1+r) + F_{t+1} + Yo_{t+1}  (equation 7b)
- Fund for Future Generations (FFG) dynamics:
  - FFG_{t+1} = FFG_t (1+ρ) + To_{t+1} - Yo_{t+1}  (equation 7c)
- Oil wealth evolution:
  - Vo_{t+1} = Vo_t (1+r) - To_t (1+r)  (equation 7d)

### Oil revenue and oil wealth expressions
- Oil revenue assumption: annual oil production O_t changes at constant rate (-1<e<0), tax rate τ constant, world oil price annual change λ.
- Oil revenue in period t+j:
  - To_{t+j} = τ P_t O_t (1+λ)^j (1+e)^j = To_t (1+λ)^j (1+e)^j  (equation 8a)
- Oil wealth (discounted future oil revenues):
  - Vo_t = τ P_t O_t (Σ[(1+λ)(1+e)/(1+r)]^j)_{j=0..∞} = To_t (1+r)/[1+r - (1+e)(1+λ)]  (equation 8b)
- Oil revenue in period t+j in terms of Vo_t:
  - To_{t+j} = Vo_t Φ (1+λ)^j (1+e)^j ; Φ = [1+r - (1+e)(1+λ)]/(1+r)  (equation 8c)

### Per-capita oil-based transfers and implications
- Oil wealth distributed equitably across generations through equal income transfers per capita y*:
  - Vo_t = y* N_t Σ[(1+η)/(1+r)]^j = y* N_t (1+r)/(r-η)  (equation 9a)
  - y* = Vo_t (r - η)/[N_t (1+r)]  (equation 9b)
  - Yo_t* = N_t y* = Vo_t (r - η)/(1+r)  (equation 9c)
  - Yo_{t+j}* = N_{t+j} y* = Vo_t [(r - η)/(1+r)] (1+η)^j  (equation 9d)
- Key implications from (9d):
  - (i) Higher oil wealth → larger oil-based transfer.
  - (ii) Higher (r - η) → higher oil-based transfer.
  - (iii) Oil-based income transfer increases at rate η (population growth rate).
- In terms of non-oil GDP, oil redistributed:
  - yo_{t+j}* = vo_t [(r - η)/(1+r)] [(1+η)/(1+g)]^j  (equation 9e)
- If η = g, yo_{t+j}* = yo* = vo_t (r - g)/(1+r), making transfers constant in terms of non-oil GDP (equation 9f).

### Fund for Future Generations (FFG) path (as ratio of non-oil GDP)
- FFG dynamics (discrete representation):
  - FFG_{t+j} = FFG_{t+j-1} (1+ρ) + Vo_t Φ [(1+λ)(1+e)]^j - Vo_t [(r - η)/(1+r)] (1+η)^j  (equation 10a)
- Expressed as ratio ffg_{t+j} to non-oil GDP (compact form given in equation 10b) with definitions:
  - Ω = (r - η)/(1+r)
  - Θ = (1+ρ)/(1+η)
  - Ψ = (1+λ)(1+e)
  - П = (1+ρ)/Ψ
  - Φ = 1 - Ψ/(1+r)
- Special cases:
  - When r = ρ, (10b) reduces to (10c).
  - When r = η, the transfer term is zero and all oil resources are channeled to and remain in FFG; ffg is driven by production/prices (Ψ) and return ρ (equation 10d).
- Long-run insight:
  - With declining oil production (-1<e<0) and plausible λ and g, the redistribution term tends to zero.
  - If ρ > g, investment returns on FFG can offset production decline and FFG could tend to or exceed vo_t, implying possible reproduction of oil wealth by financial assets.

### Non-oil debt and primary balance dynamics
- Debt-to-non-oil GDP target a_{t+n} leads to path for debt and primary balances:
  - b = f_t + yo_t* = a_{t+n} (γ - 1) + (a_t - a_{t+n}) (γ - 1) [γ^n/(γ^n - 1)]  (equation 11a)
  - a_{t+j} = a_t γ^j - b [(γ^j – 1)/(γ - 1)], (j=1,...,n)  (equation 11b)
  - f_t and yo_t* are expressed relative to non-oil GDP.
- Interpretation of (11a):
  - First term: overall primary balance (including oil-based transfers) required to stabilize debt-to-non-oil GDP at a_{t+n}.
  - Second term: incremental fiscal effort to reach the desired level in n years.
- Non-oil primary balance f_t is residual after political choices on yo_t* and debt target a_{t+n}.
  - f_t = b - yo_t*.
  - (i) Higher targeted debt reduction → higher required non-oil primary balance.
  - (ii) Higher oil wealth (thus higher yo_t*) → lower non-oil primary balance.
- Special cases:
  - If η = g, f_t and yo_t* constant and f = b - yo*.
  - If no debt reduction objective (b = 0), non-oil primary deficits could equal the oil-based transfer (f_t = - yo_t*); fiscal sustainability then requires actual non-oil primary deficit ≤ yo_t*.

### Application to Gabon: assumptions and baseline projections
- Gabon’s non-oil financial position at end-2002:
  - Domestic and external debt represent about 132 percent of non-oil GDP at end-2002 (76½ percent of GDP).
- Assumptions for 2003–33 baseline:
  - Oil production decline on average by 6 percent annually (e = -0.06).
  - Existing oil reserves assumed virtually depleted by 2032.
  - Non-oil GDP nominal growth g projected at 5 percent, based on deep structural reforms.
  - Oil prices unchanged in nominal terms (λ = 0) at average world price for 2002 of US$25.2 per barrel.
  - Long-term market nominal interest rate r assumed at 6 percent.
- Resulting oil wealth estimate:
  - Vo_t estimated at 268 percent of non-oil GDP (156 percent of GDP) at end-2002.
  - Vo_t projected to decline continuously and practically disappear after year 2032.
- Total net wealth position at end-2002:
  - Estimated at about 136 percent of non-oil GDP (table reference in source).
- Baseline fiscal projections and sustainability implication:
  - Non-oil primary deficit was almost 17 percent of non-oil GDP in 2002 despite recent fiscal strengthening.
  - If current policies continue (maintaining the deficit in terms of non-oil GDP), government net wealth would become increasingly negative from year 2010 onward, reaching 469 percent of non-oil GDP by year 2033, corresponding to the debt ratio.
  - Conclusion: A strong adjustment in the non-oil primary balance is needed to avoid such deterioration; current fiscal policy is unsustainable under the baseline.

*Source: IMF working paper content provided in the input PDF unit.*

### 1.3 percent of GDP in 2002). Similarly, privatization proceeds were not included, with past

### _wp0430 - 1.3 percent of GDP in 2002). Similarly, privatization proceeds were not included, with past

### Oil reserves, production, and price assumptions
- In the absence of new oil discoveries, oil production would fall to below 2 million tons in year 2033.
- A constant reduction in oil production of 6 percent implies a current stock of exploitable reserves of less than 2 billion barrels (or 274 million tons, based on the generally accepted conversion ratio of 7.3 barrels per ton).
- It is assumed that the best estimate of future prices is the current price (E_t P_{t+j} = P_t).
- According to Engel and Valdés (2000), most prices changes are transitory, implying, ceteris paribus, a decline in the real oil prices over the long run.
- With an annual decline of 1 percent (or λ=-1), nominal oil prices would drop to US$20 a barrel by 2025 and fall thereafter into the range of $16-20 a barrel for long-term oil prices in the August 2003 WEO (IMF, 2003a).
- Such unfavorable developments in oil prices would not alter fundamentally the results of this paper.

### Fund for Future Generations (FFG) — design and simulated outcomes
- The FFG was legally created in 1998; its statutes state that 10 percent of the budgeted oil revenue is to be transferred to the FFG until a minimum capital of CFAF 500 billion (about 25 percent of the 2002 non-oil GDP) is attained.
- Simulations at an interest rate of 6 percent show that statutory FFG allocations would not allow replacement of oil revenue in later years.
- Under the FFG statutes (10 percent allocation, invested at 6 percent), the FFG would attain only 30½ percent of non-oil GDP by 2033.
- Under that scheme, the stock of debt would continue to increase, and the net wealth position would reach –469 percent of non-oil GDP by year 2033, as under the baseline scenario.
- The results are sensitive to the assumptions on various parameters, notably on the return on the FFG resources.
- With a nominal return of 10 percent, the FFG position and the total net wealth would be about 44 percentage points of non-oil GDP higher than for a return of 6 percent by year 2033.
- Policy implication: It is important to maximize the return on FFG resources; keeping poorly remunerated funds is counterproductive when development needs are challenging and interest rates on debt are high.
- However, even with high remuneration of the current fund, the simulations show that fiscal policy would continue to be unsustainable given the serious deterioration in total net wealth.
- The FFG must be coupled with the implementation of a credible fiscal policy, notably clear targets for the non-oil primary balance; FFG resources should be saved effectively and should not interfere with fiscal policy.
- There is an urgent need for the CEMAC to put in place proper management safeguards for oil funds established by its member countries.

### Table 3 — Key projections and fiscal/d debt statistics (In percent of non-oil GDP, unless otherwise indicated)
- Non-oil GDP, in billions of CFA francs: 2,005.9 (2002); 2,322.1 (2005); 2,963.6 (2010); 3,782.4 (2015); 4,827.5 (2020); 6,161.2 (2025); 7,863.4 (2030); 9,102.9 (2033).
- Oil production, in millions of tons: 12.6 (2002); 10.4 (2005); 7.7 (2010); 5.6 (2015); 4.1 (2020); 3.0 (2025); 2.2 (2030); 1.8 (2033).
- Debt, with no policy change: -131.8 (2002); -112.7 (2005); -123.5 (2010); -169.1 (2015); -236.7 (2020); -319.8 (2025); -416.2 (2030); -477.6 (2033).
- Non-oil primary balance: -16.9 (each year reported).
- Oil revenue: 30.4 (2002); 21.8 (2005); 12.5 (2010); 7.2 (2015); 4.1 (2020); 1.5 (2025); 0.8 (2030); 0.5 (2033).
- Overall primary balance: 13.5 (2002); 4.9 (2005); -4.4 (2010); -9.7 (2015); -12.8 (2020); -15.4 (2025); -16.1 (2030); -16.4 (2033).
- Market nominal interest rate (percent): 6.0.
- Non-oil GDP nominal growth (percent): 5.0.
- Number of years before oil reserve depletion: 30.0 (2002); 27.0 (2005); 22.0 (2010); 17.0 (2015); 12.0 (2020); 7.0 (2025); 2.0 (2030); 0.0 (2033).
- Oil price changes (percent): 0.0.
- Oil production growth (percent): -6.0.
- Oil wealth (discounted oil revenue): 268.2 (2002); 192.4 (2005); 110.6 (2010); 63.6 (2015); 36.6 (2020); 21.0 (2025); 12.1 (2030); 8.7 (2033).
- Total asset (without policy change): 136.4 (2002); 79.7 (2005); -12.8 (2010); -105.5 (2015); -200.1 (2020); -298.8 (2025); -404.1 (2030); -468.9 (2033).

### With constitution of the FFG (10 percent allocation to FFG; FFG invested at 6 percent)
- Non-oil primary balance: -16.9 (each year reported).
- Primary balance, excluding the FFG: 13.5 (2002); 2.7 (2005); -5.6 (2010); -10.4 (2015); -13.2 (2020); -15.6 (2025); -16.2 (2030); -16.4 (2033).
- Annual allocation to the budget (oil revenue): 30.4 (2002); 19.6 (2005); 11.3 (2010); 6.5 (2015); 3.7 (2020); 1.3 (2025); 0.7 (2030); 0.5 (2033).
- Annual allocation to the FFG: 0.0 (2002); 2.2 (2005); 1.3 (2010); 0.7 (2015); 0.4 (2020); 0.1 (2025); 0.1 (2030); 0.1 (2033).
- FFG position: 0.0 (2002); 7.4 (2005); 15.8 (2010); 21.3 (2015); 25.0 (2020); 27.6 (2025); 29.5 (2030); 30.5 (2033).
- Debt: -131.8 (2002); -120.1 (2005); -139.3 (2010); -190.4 (2015); -261.6 (2020); -347.4 (2025); -445.7 (2030); -508.1 (2033).
- Oil wealth (discounted oil revenue): 268.2 (2002); 192.4 (2005); 110.6 (2010); 63.6 (2015); 36.6 (2020); 21.0 (2025); 12.1 (2030); 8.7 (2033).
- Total assets: 136.4 (2002); 79.7 (2005); -12.8 (2010); -105.5 (2015); -200.1 (2020); -298.8 (2025); -404.1 (2030); -468.9 (2033).

### Sensitivity of outcomes to FFG return (selected FFG return scenarios)
- FFG return (percent) 2.0:
  - FFG position: 0.0 (2002); 7.1 (2005); 13.6 (2010); 16.0 (2015); 16.3 (2020); 15.4 (2025); 13.8 (2030); 12.8 (2033).
  - Debt: -131.8 (2002); -120.1 (2005); -139.3 (2010); -190.4 (2015); -261.6 (2020); -347.4 (2025); -445.7 (2030); -508.1 (2033).
  - Total assets: 136.4 (2002); 79.4 (2005); -15.1 (2010); -110.7 (2015); -208.8 (2020); -311.0 (2025); -419.8 (2030); -486.6 (2033).
- FFG return (percent) 8.0:
  - FFG position: 0.0 (2002); 7.6 (2005); 17.1 (2010); 24.6 (2015); 31.1 (2020); 37.3 (2025); 43.5 (2030); 47.5 (2033).
  - Debt: -131.8 (2002); -120.1 (2005); -139.3 (2010); -190.4 (2015); -261.6 (2020); -347.4 (2025); -445.7 (2030); -508.1 (2033).
  - Total assets: 136.4 (2002); 79.9 (2005); -11.5 (2010); -102.2 (2015); -194.0 (2020); -289.1 (2025); -390.1 (2030); -451.9 (2033).
- FFG return (percent) 10.0:
  - FFG position: 0.0 (2002); 7.7 (2005); 18.5 (2010); 28.4 (2015); 38.8 (2020); 50.5 (2025); 64.3 (2030); 74.1 (2033).
  - Debt: -131.8 (2002); -120.1 (2005); -139.3 (2010); -190.4 (2015); -261.6 (2020); -347.4 (2025); -445.7 (2030); -508.1 (2033).
  - Total assets: 136.4 (2002); 80.0 (2005); -10.1 (2010); -98.3 (2015); -186.3 (2020); -275.9 (2025); -369.3 (2030); -425.3 (2033).

- Note: 1/ Each year, 10 percent of oil revenue is allocated to the FFG and invested at a rate of 6 percent.

### Possible scenario for a sustainable fiscal path — assumptions and approach
- Objective: A forward-looking scenario incorporating an equitable distribution of oil wealth across generations (keeping oil-based income transfers constant per capita across generations).
- Simulations conducted for a sustainable path for the non-oil primary balance, the net transfers from the FFG, and the overall primary balance (hence change in financial wealth) under the following assumptions:
  - (i) a nominal growth rate of non-oil GDP of 5 percent;
  - (ii) a population growth rate of 2.4 percent, equal to the growth rate of the oil-based income transfers;
  - (iii) a nominal interest rate on public debt of 6 percent;
  - (iv) a nominal return on FFG resources equal to nominal interest rate on public debt;
  - (v) a target for the debt-to-non-oil GDP ratio of 20 percent to be reached by year 2033.
- Rationale and caveats:
  - Although the 20 percent target for the debt-to-non-oil GDP ratio is somewhat arbitrary, it is considered a reasonable indicator of Gabon’s long-term fiscal consolidation.
  - Sustainable debt levels are usually estimated by discounting future primary balances based on extrapolation of past primary balances; however, that method is not appropriate for countries dependent on exhaustible resources, given projected declines in government revenue.
  - The issue of debt intolerance (Reinhart, Rogoff, and Savastano, 2003) is relevant: the government could lose credibility and access to financing if debt is perceived as too high by lenders.
  - Past primary balances (when the entire oil revenue was transferred to the budget) are not a good measure of Gabon’s capacity to borrow in the post-oil era.

### Policy recommendations and implications
- Constituting a savings fund (FFG) is an improvement relative to no policy change, but statutory allocations at modest returns are insufficient to prevent severe net wealth deterioration.
- Maximizing returns on FFG resources is important; higher nominal returns materially improve FFG positions and total net wealth outcomes.
- Effective use of the FFG requires credible fiscal policies and clear targets for the non-oil primary balance to prevent FFG resources from being diverted or undermining fiscal discipline.
- The CEMAC should implement proper management safeguards for oil funds established by member countries.
- Even with an FFG and higher returns, substantial fiscal adjustment will be needed to avoid unsustainable deterioration in total net wealth.

*Source: Staff estimates and projections from the provided IMF document.*

### 33. The long-term oil revenue, which should have been transferred to the budget, represents

### 33. The long-term oil revenue, which should have been transferred to the budget, represents

### Key findings on sustainability and debt limits
- Only 42 percent of the oil revenue during the period 2000–02 was transferred to the budget.
- The maximum debt limit that Gabon could sustain is estimated at some 21 percent of non-oil GDP, which is close to the proposed target.
- The debt would be reduced from 132 percent of non-oil GDP at end-2002 to below 70 percent by year 2021.
- The FFG position would be at about US$9 billion by 2025 and reach almost US$11 billion in 2033 (or 83 percent of non-oil GDP).
- Total net wealth would increase to some US$6 billion by 2025 and to over US$9 billion by year 2033.
- The limit for the debt-to-GDP ratio d* is estimated by: d* = b*(1+g)/(r-g). With the assumed inputs:
  - The assumed oil transfer to the budget (about 42 percent of current oil revenue in 2000–02) represents 15.4 percent of non-oil GDP.
  - Average non-oil primary deficit during 2000–02: 14.5 percent of non-oil GDP.
  - The “sustainable primary balance b* amounts to 0.9 percent of non-oil GDP.
  - r and g averaged about 8.5 percent and 4.0 percent, respectively.

### Baseline fiscal path and projections (2003–33)
- Debt reduction objective requires primary surpluses equivalent to 4.4 percent of non-oil GDP during 2003-33.
- Oil-based income transfer is calculated at about 8⅔ percent of non-oil GDP in 2003 (some US$200 per capita, about 30 percent of projected oil revenue in 2003).
- Non-oil GDP is assumed to grow faster than population; oil-based transfers decline to some 4 percent of non-oil GDP by year 2033.
- Sustainable fiscal path implies non-oil primary deficit declines from about 4 percent of non-oil GDP in 2003 to around zero around year 2031.
- After 2033, fiscal effort required to sustain a much lower non-oil GDP debt ratio (20 percent at end-2033) would be reduced (a primary surplus of 0.2 percent of non-oil GDP), and the country could run non-oil deficits financed by the oil-based income transfers.
- Transfers timeline:
  - During the first five years of the scenario, transfers to the FFG would represent over half of oil revenue.
  - From 2008 onward, the bulk of decreasing oil revenue would be transferred to the budget to finance non-oil primary deficits.
  - Initially projected non-oil primary deficits financed by oil revenue allocated directly to the budget; from 2017 onward, financed by transfers from the FFG.
- Outcome trajectory (selected table entries, in percent of non-oil GDP):
  - Oil revenue: 2002 = 30.4; 2005 = 21.8; 2010 = 12.5; 2015 = 7.2; 2020 = 4.1; 2025 = 2.4; 2030 = 1.4; 2033 = 1.0.
  - Primary balance (b for at+n =20 %): 2002 = 13.5; 2005–2033 = 4.4 (constant).
  - Oil transfers (yo*t from 2003): 2002 = 30.4; 2005 = 8.4; 2010 = 7.5; 2015 = 6.6; 2020 = 5.8; 2025 = 5.1; 2030 = 4.5; 2033 = 4.2.
  - Non-oil primary balance (ft): 2002 = -16.9; 2005 = -4.1; 2010 = -3.1; 2015 = -2.2; 2020 = -1.4; 2025 = -0.7; 2030 = -0.1; 2033 = 0.2.
  - Total debt (at, percent of non-oil GDP): 2002 = -131.8; 2005 = -122.3; 2010 = -106.0; 2015 = -88.9; 2020 = -70.9; 2025 = -52.1; 2030 = -32.3; 2033 = -20.0.
  - FFG position (ffgt, percent of non-oil GDP): 2002 = 0.0; 2005 = 47.8; 2010 = 90.9; 2015 = 106.5; 2020 = 107.3; 2025 = 100.5; 2030 = 89.9; 2033 = 82.9.
  - Oil wealth (vot, percent of non-oil GDP): 2002 = 268.2; 2005 = 192.4; 2010 = 110.6; 2015 = 63.6; 2020 = 36.6; 2025 = 21.0; 2030 = 12.1; 2033 = 8.7.
  - Total net wealth (wt, percent of non-oil GDP): 2002 = 136.4; 2005 = 117.9; 2010 = 95.6; 2015 = 81.3; 2020 = 73.0; 2025 = 69.4; 2030 = 69.7; 2033 = 71.6.
- Selected monetary values (in millions of U.S. dollars):
  - Total debt: 2002 = -3,801; 2005 = -4,085; 2010 = -4,517; 2015 = -4,833; 2020 = -4,921; 2025 = -4,612; 2030 = -3,653; 2033 = -2,618.
  - FFG position: 2002 = 0; 2005 = 1,596; 2010 = 3,876; 2015 = 5,795; 2020 = 7,450; 2025 = 8,900; 2030 = 10,171; 2033 = 10,849.
  - Oil wealth: 2002 = 7,736; 2005 = 6,425; 2010 = 4,716; 2015 = 3,461; 2020 = 2,540; 2025 = 1,864; 2030 = 1,368; 2033 = 1,136.
  - Total net wealth: 2002 = 3,935; 2005 = 3,937; 2010 = 4,075; 2015 = 4,423; 2020 = 5,069; 2025 = 6,152; 2030 = 7,886; 2033 = 9,367.
- Assumptions noted for Table 4: λ=0; e=-6%; r = 6%; ρ = 6%; g = 5%; at+n = 20%; and η = 2.4%.

### Sensitivity analysis and risk considerations
- Stochastic simulations would better capture risks related to oil-price volatility; proposed non-oil primary balance path should be seen as a minimum policy objective.
- Example sensitivity:
  - With an annual decline of 1 percent in nominal oil prices, oil-based transfers would be reduced by about ½ of 1 percent of non-oil GDP.
  - Under that shock, positions of the FFG and net wealth would be lower by 7–8 percentage points of non-oil GDP (FFG would require an equivalent adjustment in the non-oil primary balance).
- Appendix summaries:
  - Less favorable conditions for non-oil GDP growth and FFG return would not fundamentally change the thrust of the analysis.
  - A less ambitious debt-reduction target would not fundamentally differ from the baseline results.
- Caveats:
  - Given short maturities of Gabon’s debt, a primary surplus of 4.4 percent of non-oil GDP might not be sufficient to service debt obligations in the medium term; debt relief could help lengthen repayment.
  - If FFG return falls well below interest paid on public debt, faster debt repayment (maintaining total net wealth unchanged) should be considered.
  - A higher nominal return on FFG resources (example: 8 percent) would produce better results: FFG position would reach 159 percent of non-oil GDP by year 2033; net wealth would reach 148 percent of non-oil GDP (compared with current level of 136 percent).

### Alternative wealth-preservation frameworks
- Preservation of the ratio of net wealth to non-oil GDP (maintain wt unchanged) requires medium-term non-oil primary budgetary surpluses:
  - Surpluses decline from 2.2 percent of non-oil GDP in 2003 to 0.1 percent in 2011, then non-oil primary deficits increase to 1.2 percent by 2033.
  - Under this approach, debt could be paid off by around 2021, but the required adjustment could be unduly contractionary.
- Preservation of absolute net wealth (hold total net wealth at about US$3.9 billion) entails:
  - Non-oil primary deficits between US$130 million in 2003 to US$220 million in 2033.
  - As percent of non-oil GDP, non-oil primary deficit declines from 4.3 percent in 2003 to 1.7 percent in 2033.
  - Total net wealth as a ratio of non-oil GDP deteriorates from 130 percent in 2003 to 30 percent by 2033.
  - This policy would be unsustainable in terms of intergenerational equity (would not allow future generations equitable consumption possibilities in terms of non-oil GDP).

### Conclusions and policy implications
- Forward-looking policies are needed to avoid drastic reversals when oil resources are depleted; proposed framework actions:
  - Define a debt reduction objective.
  - Target a non-oil primary deficit that isolates expenditure decisions from oil revenue developments and ensures equitable intergenerational oil-based income transfer.
  - Set aside some oil revenue so future generations benefit from adequate provision of public goods after oil exhaustion.
- Policy recommendations:
  - Consolidate public finances by improving non-oil revenue through broadening the tax base.
  - Strengthen expenditure management and control; reduce non-priority spending (including the wage bill to levels compatible with lower oil revenue).
  - Reorient public spending toward basic infrastructure and social services, in line with the poverty reduction strategy.
  - Improve transparency and governance to ensure efficient management of public resources.
  - Deepen structural reforms to foster non-oil sector development and economic diversification.
  - Constitute an appropriate savings fund (FFG) to insulate spending from volatile oil revenue and allow smoother real exchange depreciation supporting non-oil tradable production.
  - Ensure FFG resources are invested abroad with clear management objectives; all FFG accounts should be audited and published regularly.
  - Consider debt relief to lengthen repayment in view of short debt maturities.
- Limitations:
  - Framework does not fully account for uncertainty in key variable projections; results depend heavily on government commitment to good governance and transparent management of FFG resources.

*Source: Staff estimates and projections as presented in the IMF chapter.*

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### _wp0430 - REFERENCES

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- Zee, Howell H., 1998, “The Sustainability and Optimality of Government Debt,” Staff Papers, International Monetary Fund, Vol. 35 (December), pp. 658–85.

### Appendix I — Alternative Path Under Lower Growth and FFG Return: Findings and projections
- Scenario assumptions:
  - Lower nominal growth rate of non-oil GDP: g = 4%.
  - Nominal return on FFG resources: ρ = 5% (the current yield of a 30-year U.S. treasury bond).
  - Population growth: η = 2.4%.
  - Nominal interest rate on public debt: r = 6%.
  - Target debt-to-non-oil GDP ratio: a_{t+n} = 20%.
  - Other assumptions: λ = 0; e = -6%.
- High-level conclusion: Results are not fundamentally different from the baseline. Lower non-oil GDP growth requires a higher primary balance (by 0.8 percentage point of non-oil GDP). Oil-based income transfers rise, widening the difference from 0.3 percent of non-oil GDP in 2005 to 1.4 percent by 2033. FFG position and total net wealth in U.S. dollars terms would be lower in later years; differences are less significant in terms of non-oil GDP.
- Policy variables (In percent of non-oil GDP) — selected years and series (exact figures preserved):
  - Oil revenue: 2002: 30.4; 2005: 22.4; 2010: 13.5; 2015: 8.2; 2020: 4.9; 2025: 3.0; 2030: 1.8; 2033: 1.3
  - Primary balance (b for a_{t+n} =20 %): 2002: 13.5; 2005: 5.2; 2010: 5.2; 2015: 5.2; 2020: 5.2; 2025: 5.2; 2030: 5.2; 2033: 5.2
  - Oil transfers (y o*_{t} from 2003): 2002: 30.4; 2005: 8.7; 2010: 8.0; 2015: 7.4; 2020: 6.9; 2025: 6.4; 2030: 5.9; 2033: 5.6
    - Direct budgetary allocations: 2002: 30.4; 2005: 8.7; 2010: 8.0; 2015: 7.4; 2020: 0.0; 2025: 0.0; 2030: 0.0; 2033: 0.0
    - Transfers from the FFG: 2002: 0.0; 2005: 0.0; 2010: 0.0; 2015: 0.0; 2020: 6.9; 2025: 6.4; 2030: 5.9; 2033: 5.6
  - Non-oil primary balance (f_{t}): 2002: -16.9; 2005: -3.5; 2010: -2.8; 2015: -2.2; 2020: -1.7; 2025: -1.2; 2030: -0.7; 2033: -0.4
- Outcomes (In percent of non-oil GDP) — selected series:
  - Total debt (a_{t}): 2002: -131.8; 2005: -123.6; 2010: -108.9; 2015: -92.7; 2020: -75.0; 2025: -55.4; 2030: -33.9; 2033: -20.0
  - FFG position (ffg_{t}): 2002: 0.0; 2005: 48.7; 2010: 94.1; 2015: 111.1; 2020: 111.4; 2025: 102.0; 2030: 87.3; 2033: 77.0
  - Oil wealth (v o_{t}): 2002: 268.2; 2005: 192.4; 2010: 110.6; 2015: 63.6; 2020: 36.6; 2025: 21.0; 2030: 12.1; 2033: 8.7
  - Total net wealth (w_{t}): 2002: 136.4; 2005: 117.5; 2010: 95.9; 2015: 82.0; 2020: 73.0; 2025: 67.7; 2030: 65.5; 2033: 65.7
- Outcomes (In millions of U.S. dollars) — selected series:
  - Total debt: 2002: -3,801; 2005: -4,010; 2010: -4,299; 2015: -4,454; 2020: -4,381; 2025: -3,940; 2030: -2,934; 2033: -1,946
  - FFG position: 2002: 0; 2005: 1,580; 2010: 3,716; 2015: 5,336; 2020: 6,509; 2025: 7,255; 2030: 7,552; 2033: 7,489
  - Oil wealth: 2002: 7,736; 2005: 6,244; 2010: 4,368; 2015: 3,056; 2020: 2,138; 2025: 1,496; 2030: 1,046; 2033: 845
  - Total net wealth: 2002: 3,935; 2005: 3,813; 2010: 3,785; 2015: 3,938; 2020: 4,266; 2025: 4,810; 2030: 5,665; 2033: 6,388

### Appendix II — Alternative Path Under Lower Debt Reduction: Findings and projections
- Scenario assumptions:
  - Debt-to-non-oil GDP ratio target declines from 132 percent in 2002 to 30 percent by 2033 (instead of 20 percent).
  - Other assumptions unchanged relative to baseline: r = 6%; ρ = 6%; g = 5%; a_{t+n} = 30%; η = 2.4%; λ = 0; e = 0.
- High-level conclusion: Results are not fundamentally different from the baseline. Given the less ambitious debt target, the primary balance is lower by 0.3 percentage point of non-oil GDP. The non-oil primary balance remains in deficit throughout the period. Although the debt ratio declines by 100 percentage points by 2033, the nominal debt level remains broadly unchanged relative to 2002 due to strong non-oil GDP growth. The FFG position is unchanged relative to the baseline, so total net wealth is lower by 10 percentage points of non-oil GDP.
- Policy variables (In percent of non-oil GDP) — selected years and series (exact figures preserved):
  - Oil revenue: 2002: 30.4; 2005: 21.8; 2010: 12.5; 2015: 7.2; 2020: 4.1; 2025: 2.4; 2030: 1.4; 2033: 1.0
  - Primary balance (b for a_{t+n} =30 %): 2002: 13.5; 2005: 4.1; 2010: 4.1; 2015: 4.1; 2020: 4.1; 2025: 4.1; 2030: 4.1; 2033: 4.1
  - Oil transfers (y o*_{t} from 2003): 2002: 30.4; 2005: 8.4; 2010: 7.5; 2015: 6.6; 2020: 5.8; 2025: 5.1; 2030: 4.5; 2033: 4.2
    - Direct budgetary allocations: 2002: 30.4; 2005: 8.4; 2010: 7.5; 2015: 6.6; 2020: 0.0; 2025: 0.0; 2030: 0.0; 2033: 0.0
    - Transfers from the FFG: 2002: 0.0; 2005: 0.0; 2010: 0.0; 2015: 0.0; 2020: 5.8; 2025: 5.1; 2030: 4.5; 2033: 4.2
  - Non-oil primary balance (f_{t}): 2002: -16.9; 2005: -4.4; 2010: -3.4; 2015: -2.5; 2020: -1.7; 2025: -1.0; 2030: -0.4; 2033: -0.1
- Outcomes (In percent of non-oil GDP) — selected series:
  - Total debt (a_{t}): 2002: -131.8; 2005: -123.2; 2010: -108.3; 2015: -92.7; 2020: -76.3; 2025: -59.2; 2030: -41.2; 2033: -30.0
  - FFG position (ffg_{t}): 2002: 0.0; 2005: 47.8; 2010: 90.9; 2015: 106.5; 2020: 107.3; 2025: 100.5; 2030: 89.9; 2033: 82.9
  - Oil wealth (v o_{t}): 2002: 268.2; 2005: 192.4; 2010: 110.6; 2015: 63.6; 2020: 36.6; 2025: 21.0; 2030: 12.1; 2033: 8.7
  - Total net wealth (w_{t}): 2002: 136.4; 2005: 117.1; 2010: 93.3; 2015: 77.5; 2020: 67.6; 2025: 62.3; 2030: 60.8; 2033: 61.6
- Outcomes (In millions of U.S. dollars) — selected series:
  - Total debt: 2002: -3,801; 2005: -4,113; 2010: -4,615; 2015: -5,042; 2020: -5,299; 2025: -5,244; 2030: -4,659; 2033: -3,927
  - FFG position: 2002: 0; 2005: 1,596; 2010: 3,876; 2015: 5,795; 2020: 7,450; 2025: 8,900; 2030: 10,171; 2033: 10,849
  - Oil wealth: 2002: 7,736; 2005: 6,425; 2010: 4,716; 2015: 3,461; 2020: 2,540; 2025: 1,864; 2030: 1,368; 2033: 1,136
  - Total net wealth: 2002: 3,935; 2005: 3,909; 2010: 3,976; 2015: 4,215; 2020: 4,691; 2025: 5,520; 2030: 6,880; 2033: 8,058

*Source: _wp0430 - REFERENCES, including Appendix I and Appendix II (tables and figures with staff estimates and projections).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2004/_wp0430.pdf_