How to Manage the Commodity Roller Coaster
IMF Blog, October 7, 2015
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- Authors: Vitor Gaspar
- Published: October 7, 2015
Global context and fiscal outlook
- The world economy is experiencing important transitions and associated uncertainties, including:
- Sharp falls in commodity prices with adverse consequences for exporting countries.
- China’s rebalancing and the prospect of U.S. interest rate increases generating costly spillover effects.
- Since the IMF's assessment in April, there has been a significant deterioration in fiscal positions (measured by the primary balance) for emerging economies and for commodity exporting countries.
- This deterioration has translated into higher levels of public debt.
- The Fiscal Monitor issue highlighted focuses on fiscal policy under uncertainty, with particular attention to commodity price fluctuations.
The rise and fall of commodity revenues — empirical findings
- Commodity prices are volatile and highly unpredictable; history shows booms and busts can move prices by as much as 40 to 80 percent.
- Price movements can be highly persistent.
- Fiscal policy is a key channel transmitting commodity price fluctuations to the broader economy because:
- Governments relying heavily on commodity revenues experience large fluctuations in fiscal revenues when prices move.
- Insulating government spending from revenue volatility has proven difficult, resulting in strongly procyclical spending (increasing in booms, falling in busts).
- Recent fiscal implications:
- The deterioration in the 2015 primary balance in commodity exporting countries is about 5 percentage points of GDP on average.
- Countries like Saudi Arabia and Venezuela experienced a particularly sharp decline.
- The reversal represents a massive unwinding of the revenue windfall accrued during the boom years; about half of this windfall has been reversed so far.
- External financing conditions have tightened for commodity exporting countries, making it harder and more expensive to finance spending.
- Global financial markets tend to worsen financial conditions precisely when commodity exporters need financing most.
- Countries that built buffers or had easier capital market access (examples: Chile, the Gulf countries, and Norway) have been better positioned to support government spending; many other commodity exporters face budget stress.
Non-commodity exporters, debt, and demographic pressures
- Fiscal balances in emerging market and low-income economies have worsened, reflecting weak growth prospects and country-specific factors.
- Prospects in advanced economies remain broadly unchanged compared to April as the modest recovery proceeds in line with earlier projections.
- Long-standing concerns about high public debt and adverse economic impacts persist:
- In some advanced and emerging market countries, debt levels have reached extraordinary levels.
- These economies face large future age-related spending obligations.
- The IMF estimates health and pension spending will rise to 25 percent of GDP, by the end of the century, in advanced economies and 16 percent of GDP in less developed countries.
- The Fiscal Monitor will present additional evidence on fiscal implications of demographic trends at the end of the month in Tokyo.
Policy framework: four pillars for fiscal risk management under uncertainty
- The Fiscal Monitor recommends adopting a robust and coherent risk management framework built on four pillars:
1. Revenue structure and mobilization
- Budget revenues should be mostly derived from broad-based taxation, backed by strong compliance.
- For commodity exporters, more efficient revenue mobilization can mitigate revenue volatility.
- Taxation of multinational corporations is cited as a specific aspect of revenue reform.
- These revenue reforms can form part of necessary fiscal adjustment strategies for commodity exporters.
2. Spending efficiency
- Improving efficiency of spending, including energy subsidy reform, is a priority and can facilitate fiscal adjustment.
- Efficiency improvements are particularly important in core areas for sustainable and inclusive growth such as public investment, health, and education.
3. Saving in good times and fiscal frameworks
- Establish fiscal frameworks that help countries save during good times to protect spending during bad times.
- For commodity producers, saving should balance accumulating financial assets, investing in physical infrastructure, and investing in people (health and education).
- It is essential to start implementing a more robust framework now to deal with future uncertainty.
4. Institutional quality
- The quality of institutions is crucial.
- Fiscal rules and procedures matter but must be underpinned by broader social and political commitment to adhere to rules and laws.
- These pillars are especially crucial in resource-rich countries where managing public finances is more challenging.
- The IMF remains committed to assisting members in building these pillars through analysis, policy dialogue, and technical assistance.
Source: How to Manage the Commodity Roller Coaster — Vitor Gaspar, October 7, 2015
Content in this bundle
- 如何管理大宗商品价格大起大落的“过山车”行情; 2015 年10 月7 日
- The Commodities Roller Coaster: A Fiscal Framework for Uncertain Times, Fiscal Monitor, October 2015
- Как справляться с взлетами и падениями цен на биржевые товары, Витор Гаспар, 7 октября 2015 года