Commodity Price Shocks and Fiscal Outcomes

IMF Working Papers, May 1, 2012

Source details

Study period: 1990-2010.
Main conclusion: Commodity prices have a significant impact on fiscal outcomes in developing countries.
Revenue and expenditure both rise in response to commodity (import or export) price increases.
The response of the fiscal deficit is ambiguous.
A floating exchange rate regime only partially offsets the impact of commodity price shocks.
Foreign-exchange reserves do not dampen the effects of commodity price shocks.
There is a strong case for fiscal hedging against commodity price shocks.
Hedging instruments based on a limited set of benchmark world prices for a narrow set of commodities may suffice to realize most of the potential benefits.

Both revenue and expenditure increase when commodity import or export prices rise.
Fiscal deficit response to commodity price shocks is ambiguous (no definitive directional effect reported).
Exchange rate regime effects:
- A floating exchange rate regime only partially offsets the fiscal impact of commodity price shocks.
Foreign-exchange reserves:
- Foreign-exchange reserves do not dampen the fiscal effects of commodity price shocks.
Fiscal hedging:
- Fiscal hedging is recommended.
- Simple hedging instruments tied to a limited set of benchmark world prices for a narrow set of commodities can capture most potential benefits.

Consider fiscal hedging strategies to manage exposure to commodity price volatility.
Focus on hedging instruments that reference a limited set of benchmark world prices for a narrow set of commodities to achieve most of the benefits with potentially lower complexity.

Source: IMF Working Papers, "Commodity Price Shocks and Fiscal Outcomes" by Issouf Samaké and Nikola Spatafora (May 1, 2012).