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Mr. Rolando Ossowski, Mr. Steven A Barnett, Mr. James Daniel, and Mr. Jeffrey M. Davis

Abstract

A country with large exhaustible resources such as oil can benefit substantially from them, but the revenues from exploiting these resources can pose challenges. Fiscal policymakers need to decide how expenditure can be planned and insulated from revenue shocks arising from the volatility and unpredictability of resource prices. Decisions also need to be made on the extent to which resources should be saved for future generations.

Mr. Rolando Ossowski, Mr. Steven A Barnett, Mr. James Daniel, and Mr. Jeffrey M. Davis

Abstract

A country with large fiscal revenues derived from exploiting a nonrenewable resource such as oil typically faces two main problems—that the revenue stream is uncertain and volatile, and that it will eventually dry up. NRFs are sometimes proposed to deal with both these problems. First, a fund may be seen as able to stabilize budgetary revenues. When the resource price is “high,” the fund would receive resources, which it would then pay out to the budget when the price is “low.” Second, a fund may be seen as a way to save some of the revenue generated by exploiting the finite stock of the resource, which can then provide income after it has been exhausted. Funds may also be set up for other reasons: to counteract real exchange rate volatility and “Dutch disease,”2 for liquidity and political economy purposes, and to enhance governance and transparency.

Mr. Rolando Ossowski, Mr. Steven A Barnett, Mr. James Daniel, and Mr. Jeffrey M. Davis

Abstract

Some countries have considered, or turned to, the use of NRFs to address some of the issues discussed above, such as the short-run stabilization and long-run saving challenges posed by nonrenewable resource revenues. The general characteristic of such funds is that they are public sector institutions, separate from the budget, that receive inflows related to the exploitation of a nonrenewable resource.Table 3.1 summarizes the main objectives and design features of selected funds.

Mr. Rolando Ossowski, Mr. Steven A Barnett, Mr. James Daniel, and Mr. Jeffrey M. Davis

Abstract

The establishment of an NRF requires decisions about its integration within the fiscal framework and its asset-management strategy. Governance, transparency, and accountability issues also need to be addressed.

Mr. Rolando Ossowski, Mr. Steven A Barnett, Mr. James Daniel, and Mr. Jeffrey M. Davis

Abstract

This chapter examines whether funds can help countries pursue good macroeconomic, and especially fiscal policies, and consequent design issues. Nonrenewable resource funds (NRF) have been suggested as a way of dealing with the effects of price variability, making it easier to put revenues aside when prices are high so that they can be made available to maintain expenditures when prices are low. Funds may also serve as mechanisms to allow part of the nonrenewable resource wealth to be shared by future generations. A detailed evaluation of country experience suggests that NRFs have been associated with a variety of operating rules and fiscal policy experience. In several cases, rules have been bypassed or changed and they do not themselves seem to have effectively constrained spending, and the integration of the fund's operations with overall fiscal policy has often proven problematic. Whether the political economy arguments for an NRF outweigh the potential disadvantages will need to be considered based on the situation in each country.

Mr. Rolando Ossowski, Mr. Steven A Barnett, Mr. James Daniel, and Mr. Jeffrey M. Davis

Abstract

This section provides an evaluation of the effectiveness of NRFs in two ways. First, it considers the effect of NRFs on government expenditure and its relationship to resource export receipts. The empirical evidence draws on econometric estimates, using data for a number of countries with NRFs.18 Second, it provides a review of selected country experience with NRFs to assess whether, and in what way, the rules of the NRF may have constrained government behavior.

Mr. Rolando Ossowski, Mr. Steven A Barnett, Mr. James Daniel, and Mr. Jeffrey M. Davis

Abstract

Fiscal policy in countries with a high degree of dependence on oil and other nonrenewable resources is complicated by the uncertainty and volatility of revenues, as well as by the fact that the resources are exhaustible. NRFs have been suggested as a way of dealing with the effects of price variability, making it easier to put revenues aside when prices are high so that they can be made available to maintain expenditures when prices are low. Funds may also serve as mechanisms to allow part of the nonrenewable resource wealth to be shared by future generations.