Fiscal Surveillance in a Petro Zone: The Case of the CEMAC

IMF Working Papers, January 1, 2004

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The paper discusses fiscal surveillance criteria for the countries of the Central African Monetary and Economic Union (CEMAC), most of which depend heavily on oil exports.
The CEMAC's current macroeconomic surveillance exercise sets as fiscal target a floor on the basic budgetary balance.
Two shortcomings of the current target are identified:
- Fluctuations in oil prices and, hence, oil receipts obscure the underlying fiscal stance.
- Oil resources are limited, implying that some of today's oil receipts should be saved to finance future consumption.
The paper develops easy-to-calculate indicators that incorporate both price/receipt volatility and the finite nature of oil resources.
A retrospective analysis using these alternative indicators finds that, in recent years, the CEMAC's surveillance exercise has tended to accommodate fiscal stances at odds with sound management of oil wealth.

The paper proposes alternative, easy-to-calculate indicators that:
- Adjust for fluctuations in oil prices and oil receipts to reveal the underlying fiscal stance.
- Account for the limited stock of oil resources, implying an intertemporal smoothing or saving motive for a portion of oil receipts.
These indicators are designed specifically for fiscal surveillance in a petro-dependent region such as the CEMAC.

Using the alternative indicators, the retrospective analysis reveals:
- The established surveillance framework based on a floor on the basic budgetary balance has often permitted fiscal policies inconsistent with preserving oil wealth.
- Recent CEMAC surveillance has tended to accommodate fiscal stances that do not align with sound management of finite oil resources.
The analysis links the inadequacy of the basic-balance floor to:
- The masking effect of oil price volatility on true fiscal stance.
- The failure to operationalize saving from nonrenewable resource receipts.

Fiscal surveillance in petro zones should move beyond a simple floor on the basic budgetary balance to indicators that:
- Strip out the effects of oil price volatility to reveal the underlying non-oil fiscal stance.
- Incorporate intertemporal considerations that recognize oil resources are limited and part of current receipts should be saved to finance future consumption.
Adoption of easy-to-calculate, resource-adjusted fiscal indicators would better align surveillance with sound management of oil wealth.