The Commodities Roller Coaster: A Fiscal Framework for Uncertain Times

Thursday, November 26

Tidiane Kinda, Economist, International Monetary Fund

How should natural resource-rich countries design their fiscal frameworks in times when commodity prices are highly volatile, unpredictable, and subject to long-lasting shocks? On November 26, 2015, the JVI hosted a presentation of the newest issue of the IMF’s Fiscal Monitor by Mr. Tidiane Kinda of the IMF Fiscal Affairs Department (FAD).

Although highly unpredictable and volatile, commodity prices play a defining role for the state of government finance and fiscal policy in natural resource-rich countries, Mr. Kinda said. Although these countries benefited greatly from the commodities boom in the 2000s, the subsequent decline in commodity prices sent them plunging down the commodities roller coaster, which required significant downward fiscal revisions. The IMF estimates that, for example, in Venezuela and Saudi Arabia the revisions exceeded 4 percent of GDP in 2015 alone. In many commodity-exporting countries, overall balances not only deteriorated but went into negative territory, prompting those countries to tap their sovereign wealth funds.

Mr. Kinda stressed that in natural resource-rich countries fiscal policy is crucial to promoting sustainable and inclusive economic growth. However, not all such countries plan well: On average, over the last 30 years government revenue has been much more volatile in commodity exporters than in other countries. Moreover, because commodity prices correlate negatively with government bond spreads, in bad times financial conditions in natural resource-rich countries also tighten. Mr. Kinda also pointed out that fiscal policy has been on average highly procyclical in many commodity exporters. With few exceptions such as Norway, Chile and Botswana, most commodity exporters faced a long period of low income per capita growth after commodity prices fall in the 1980s.

How can fiscal frameworks help natural resource-rich countries harness the most from the resource wealth they possess? Mr. Kinda named four main areas:

(1) Make budget revenues more resilient to price fluctuations. In enhancing collection of non-resource taxes, commodity exporters would rely less on the volatile resource sector. Moreover, compared to other countries, they have a lot of space in improving the efficiency of revenue mobilization.

(2) Make public spending more efficient, for instance by managing public investment more carefully and by implementing energy subsidy reforms.

(3) Rely more on long-term planning and fiscal anchors. Because resource wealth is exhaustible, resource-rich countries have to take that depletion into account for long-term planning. Building stabilization buffers would also help in de-linking spending from volatile resource revenues.

(4) Improve the quality of institutions. On average, the institutions of natural resource-rich countries are not as sturdy as others on a variety of measures of institutional quality, and there is evidence that better institutions help reduce the procyclicality of fiscal policy.

During the Q&A session following Mr. Kinda’s presentation, audience members spoke to the importance of appropriate monetary policy for natural resource-rich countries. Mr. Kinda acknowledged this and stressed the role of fiscal policy as a key transmission channel of the commodity price shocks. Another comment was that it is impossible for fiscal policy to be fully countercyclical in a completely unpredictable revenue environment. Mr. Kinda acknowledged that it may be difficult to achieve fully countercyclical fiscal policies in uncertain times and noted that fiscal frameworks can be particularly helpful by for instance de-linking expenditures from volatile resource revenues.

Maksym Ivanyna, Economist, JVI


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