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Mrs. Harinder K Malothra, Mr. Milan M Cuc, Mr. Ulrich Bartsch, and Mr. Menachem Katz

Abstract

Transparency and accountability in oil sector operations are necessary to improve governance in oil-producing countries. The same transparency and accountability guidelines that apply to non-oil revenue should apply to oil revenue. Oil revenue is part of government budgetary operations, and it is of overwhelming importance in the countries we are dealing with in this paper. The IMF’s Manual on Fiscal Transparency (IMF, 2001) states that comprehensive coverage of all fiscal activity undertaken by the central government is essential from a transparency standpoint. In some cases, the coverage should extend beyond the government itself: the public sector balance should be reported when nongovernmental public sector agencies undertake significant quasi-fiscal activities. The public should accordingly be provided with full information on the past, current, and projected fiscal activity of the government.

Mrs. Harinder K Malothra, Mr. Milan M Cuc, Mr. Ulrich Bartsch, and Mr. Menachem Katz

Abstract

The fact that oil-producing countries in Africa have not achieved better social indicators than other African countries gives rise to the question of whether this was despite or because of the inflow of billions of U.S. dollars in foreign investment in oil installations, and government oil revenue. The persistent underachievement of development goals has come to be seen as the “resource curse.” This paper has shown, however, that macroeconomic policies and governance can be designed in a way that turn oil revenue into a “blessing.”

Mrs. Harinder K Malothra, Mr. Milan M Cuc, Mr. Ulrich Bartsch, and Mr. Menachem Katz

Abstract

While it may not be possible to identify an “optimal” fiscal policy for oil countries in general, the discussions in the previous section provide important issues for consideration by policymakers. In this section, we present some operational issues to help in the design of schemes for the use of oil revenue. This subsection presents (1) the case for a rule-based fiscal policy and (2) possible fiscal rules, including two “extremes” to be used as guideposts for the possible range of expenditure profiles.

Mrs. Harinder K Malothra, Mr. Milan M Cuc, Mr. Ulrich Bartsch, and Mr. Menachem Katz

Abstract

Oil-exporting countries have used a variety of exchange rate arrangements, as shown in Figure 9. At the end of 2001, about 18 of the 29 oil-producing IMF member countries (excluding the former Soviet bloc countries) used some form of fixed exchange rate regime, while 11 opted for either managed or independent floating. This suggests that, in practice, the choice of an exchange rate arrangement is not a straightforward exercise; instead, exchange rate policy has to be based on country-specific considerations, including the relative openness of the economy, in terms of both current and capital accounts, and the relative prevalence of real or nominal shocks. Exchange rate policy will also have to take into account the monetary policy and institutional framework in which it is set.18 This subsection describes first general considerations, then potential advantages of flexible exchange rates, and finally policies in support of fixed exchange rates.

Mrs. Harinder K Malothra, Mr. Milan M Cuc, Mr. Ulrich Bartsch, and Mr. Menachem Katz

Abstract

In this chapter, we present the structure of institutions that oversee the oil sector. After reviewing the legal framework, we discuss the role of national oil companies.

Mrs. Harinder K Malothra, Mr. Milan M Cuc, Mr. Ulrich Bartsch, and Mr. Menachem Katz

Abstract

How can a country turn oil revenues into a blessing rather than a curse? With growing international interest in new offshore oil deposits in sub-Saharan Africa, there is also greater scrutiny of the reasons why many oil-producing countries in the region have experienced disappointing economic performance over the past 20 to 30 years. This paper discusses the latest thinking on best-practice institutions and policies, compares this thinking with current practice in African oil-exporting countries, and presents a plan for the future, taking into account African policymakers’concerns.

Mrs. Harinder K Malothra, Mr. Milan M Cuc, Mr. Ulrich Bartsch, and Mr. Menachem Katz

Abstract

Over the last decade, the Atlantic Ocean off the coast of western and southern Africa has become one of the most promising oil-exploration areas in the world. Six countries in the area are by now well-established oil producers, and more are to join their ranks in the near future. Oil-producing countries are faced with some of the same challenges as other natural resource–based countries, but their difficulties seem to be accentuated by the peculiar nature of oil markets and oil production. The main challenges come from the high volatility of oil prices, the enclave nature of the oil sector, the exhaustibility of oil reserves, and the high concentration of revenue flows from the oil sector, which invites rent-seeking behavior and may lead to governance problems. In the past, many oil-producing countries have been disappointed in their expectations that favorable resource endowments would lead to rapid improvements in development indicators. This paper focuses on the policies that have been and should be implemented by the oil-producing countries. It summarizes proceedings of the Workshop on Macroeconomic Policies and Governance in Sub-Saharan African Oil-Exporting Countries, hosted jointly by the African Department of the International Monetary Fund and the Africa Region and the Oil and Gas Policy Unit of the World Bank. The workshop brought together high-level policymakers from African oil-producing countries during April 29–30, 2003, in Douala, Cameroon.

Mrs. Harinder K Malothra, Mr. Milan M Cuc, Mr. Ulrich Bartsch, and Mr. Menachem Katz

Abstract

The seven countries in the group of oil-producing African countries together produced an average of 3.8 million barrels of oil per day in 2001, equivalent to 5 percent of world oil production. Their total production is projected to increase to an average of 5 million barrels per day by 2006. In the past, Nigeria, Angola, and Gabon were the three biggest oil producers in the region, but Gabon is projected to fall behind both Equatorial Guinea and the Republic of Congo (see Figure 1 for an overview of oil production and exports in this group of countries between 1990 and 2006). Oil exports in the region totaled more than US$25 billion per year in the period 1997–2001 and are estimated to increase to $30 billion during 2002–06.

Mrs. Harinder K Malothra, Mr. Milan M Cuc, Mr. Ulrich Bartsch, and Mr. Menachem Katz

Abstract

Macroeconomic policy in oil countries faces challenges arising from three characteristics of oil revenue: (1) oil revenue is more volatile than revenue from other export commodities because of international market conditions; (2) oil revenue is a foreign exchange inflow, and its use can have large effects on macroeconomic stability and economic structure; and (3) oil is an exhaustible resource with a finite revenue stream. The challenge of macroeconomic policy in SSA oil countries is to stabilize budgetary expenditures and sterilize excess revenue inflows in the context of medium- to long-term sustainability considerations, and thereby provide an environment conducive to growth and poverty reduction. In most of the oil-producing countries, there has been a strong deficit bias, and a procyclical fiscal policy has been driven by oil price developments.

Mrs. Harinder K Malothra, Mr. Milan M Cuc, Mr. Ulrich Bartsch, and Mr. Menachem Katz

Abstract

We have presented the rationale for saving at least some of the current oil revenue. The question remains whether savings should be used for (1) repayment of existing government debt, (2) investment in domestic assets, or (3) investment in external assets. In some countries, debt service on existing concessional debt can be below the returns that would be achieved by investing reserves in a well-constructed international portfolio. Saving part of the oil revenue stream can, therefore, generate income-earning assets whose flows can be more than sufficient to cover existing debt-service payments. Prudence would advise against borrowing in anticipation of higher oil revenue in the future, and this includes borrowing when oil prices are thought to be temporarily below their medium-term average. Leaving aside the danger that higher oil revenue may fail to materialize, a high sovereign risk premium in oil countries in Africa can make borrowing very expensive.