Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
October 10, 2012
Well-designed and implemented fiscal regimes for natural resources can make a substantial contribution to the revenue needs of many developing countries.
Turning the valve to allow the first barrel of crude oil to flow from the Jubilee offshore oil field in Ghana (photo: Newscom)
Natural resource revenues
Sound macroeconomic management of natural resources can contribute significantly to these countries’ economic development, according to two new IMF papers.
Revenues from extractive industries have major macroeconomic implications, accounting for over half of government revenues in many petroleum-rich countries, and for over 20 percent in mining countries.
About one-third of IMF member countries find, or could find, resource revenues critical to their economies’ macroeconomic stability—especially with large numbers of recent discoveries and planned oil, gas, and mining developments.
Seizing the opportunity
Exhaustible natural resources offer vast opportunities for economic development—but the historical record in many countries is not good. New IMF research highlights some innovative approaches to enhance the quality of policy advice in resource-rich developing countries. The first step is creating the fiscal revenue from natural resources, as identified in the first of two IMF papers on the topic. The next, outlined in a related paper, is having in place macroeconomic policy frameworks that ensure resource revenue is well-used, and supports transforming subsoil assets into other productive assets.
“These papers make an important contribution to the Fund’s policy toolkit to help resource-rich developing countries better realize the resource revenue potential, and soundly manage and use these revenues,” said IMF Deputy Managing Director Min Zhu. “I am hoping that our bilateral surveillance and technical assistance in these economies will further focus on effectively managing natural resource wealth to support sustainable economic development.”
Revenue generation balances other concerns
IMF policy advice and technical assistance in the field have expanded in recent years—driven by demand from the countries and supported by more donor financing. The first study looks at the IMF’s country-specific advice and the analytical framework in which it has been given.
This follows the IMF’s earlier work in the area and responds to demand for further policy guidance.
Revenue objectives are the main concern when designing fiscal regimes for the extractive industries. But there are complex trade-offs.
Generating employment in related activities and addressing environmental impacts can be significant concerns, but the revenue from the extractive industries is often the main benefit to the country. It is the prospect of substantial rents—returns in excess of the minimum required by the investor—that makes the extractive industries especially attractive as a potential source of revenue.
Fiscal regimes for the extractive industries vary greatly, with the IMF working under tax and royalty, production sharing, or state participation frameworks—aiming for design efficiency in each case.
Policy frameworks make the difference
The distinct characteristics of resource-rich developing countries—low per capita incomes, scarcity of domestic capital, and limited access to international capital markets—require distinct policies, notes the IMF research.
Pilot studies will be conducted in a number of these countries to gauge how to adapt the new frameworks to country-specific circumstances, along with efforts to close information gaps and collaborate further with the World Bank.
Given the volatile nature of natural resource revenue, volatility of government expenditure is over 60 percent higher in these countries than in their comparators. Volatile expenditure is less effective in delivering needed services, and accentuates overall macroeconomic volatility that lowers growth, according to the IMF research, yet there are ways to address these gaps in policy frameworks, with priorities including:
• Ensuring that fiscal policy frameworks and institutions lock in high rates of savings from resource revenues;
• Strengthening overall institutions and building capacity to make good quality public investment; and
• Delinking expenditure from volatile revenue in the short to medium term.
Balancing short- and long-term considerations
For countries with short time horizons before their natural resources will be depleted, the study provides a framework for assessing the long-term sustainability of fiscal policies—taking into account that resource revenues are depleting—that accounts for the growth and revenue-enhancing impact of public investment.
The study also recommends a model-based “sustainable investment tool” to analyze the fiscal and macroeconomic implications of savings/investment scaling up scenarios. Fiscal indicators for inclusion in IMF country reports for these countries are also proposed, which would measure how much of a nonrenewable resource is being consumed, and how much of it is being invested. These assessments could help reorient policy discussions, and policy makers could use these for potentially resonant communication with their citizens.
The paper also offers practical guidance, along with an excel template, for designing short-term fiscal rules (price-based, non-resource balance, or expenditure growth rules for example) to smooth revenue volatility for countries with relatively long reserve horizons, where revenue volatility is the key issue.
Finally, since these same distinct savings and investment dynamics needed in resource-rich developing countries have implications for a country’s current account—the difference between savings and investment—the paper offers a new tool to compare actual current account balances to optimal “norms” in these countries, complementary to other IMF methodologies for assessing external sustainability.
