References
Barnett, Steven, and Rolando Ossowski, 2002, “Operational Aspects of Fiscal Policy in Oil-Producing Countries,” IMF Working Paper 02/177 (Washington: International Monetary Fund).
Baunsgaard, Thomas, 2001, “A Primer on Mineral Taxation,” IMF Working Paper 01/139 (Washington: International Monetary Fund).
Bjerkholt, Olav, 2002, “Fiscal Rules for Economies with Non-Renewable Resources,” paper prepared for the conference “Rules-Based Fiscal Policies in Emerging Market Economies,” Oaxaca, Mexico, February.
Daniel, James, 2001, “Hedging Government Oil Price Risk,” IMF Working Paper 01/185 (Washington: International Monetary Fund).
Engel, Eduardo, and Rodrigo Valdés, 2000, “Optimal Fiscal Strategy for Oil-Exporting Countries,” IMF Working Paper 00/118 (Washington: International Monetary Fund).
Hausmann, Ricardo, and Roberto Rigobon, 2002, “An Alternative Interpretation of the Resource Curse: Theory and Policy Implications for Stabilization, Saving, and Beyond,” paper presented at the IMF Conference on Fiscal Policy Formulation and Implementation in Oil-Producing Countries, Washington, June 5–6.
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Kaufmann, Daniel, Art Kraay, and Pablo Zoido-Lobatón, 1999, “Governance Matters,” World Bank Policy Research Working Paper No. 2196 (Washington: World Bank).
Laidler, David, 1999, “The Exchange Rate Regime and Canada’s Monetary Order,” Working Paper No. 99-7 (Ottawa: Bank of Canada).
Mauro, Paolo, 1997, Why Worry About Corruption?IMF Economic Issues No. 6 (Washington: International Monetary Fund).
McPherson, Charles, 2002, “National Oil Companies: Evolution, Issues, Outlook,” paper presented at the IMF Conference on Fiscal Policy Formulation and Implementation in Oil-Producing Countries, Washington, June 5–6.
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Sunley, Emil M., Thomas Baunsgaard, and Dominique Simard, 2002, “Revenue from Oil and Gas Sector: Issues and Country Experience,” paper presented at the IMF Conference on Fiscal Policy Formulation and Implementation in Oil-Producing Countries, Washington, June 5–6.
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Government revenue in Nigeria is gross revenue, that is, before the payment of the national oil company share in joint-venture operating and capital costs. The large government take, therefore, goes along with exposure to exploration and development risks.
Since the 1970s, very large price swings have been brought on by unforeseen elements. Examples include the Iranian revolution in 1979, which cut oil supplies by 3 million barrels per day; the switch from price policy to market share policy by Saudi Arabia in 1985; and the occupation of Kuwait in 1990, followed by its swift end in 1991.
For an overview of possibilities for hedging, see Daniel (2001).
If oil revenue is relatively unimportant in the economy and the factors of production are underemployed prior to the oil boom, aggregate demand expansion does not necessarily lead to appreciation.
Profits accruing to foreign-owned companies also need to be excluded from the calculation of the national oil wealth.
In principle, we could let private households decide how much of the oil revenue to save for future generations. But they might not take the macroeconomic effects of their collective actions sufficiently into account, and intervention might still be necessary to sterilize the foreign exchange inflow.
The strategy of sharing the oil wealth across generations is taken here as given. Emergency humanitarian conditions in some of the countries in certain periods—for example, the Congo after the civil war—are likely to lower the priority given to intertemporal equity considerations.
These results should be interpreted with caution: while they give a sense of the cyclicality of fiscal spending, it is also important to keep in mind that price is but one key element. When a country has experienced large changes in oil production, a simple correlation between oil price and spending is likely to be a poor proxy for the correlation between government oil revenues and spending. Nevertheless, the table does convey the idea that government spending has been driven to an important extent by changes in current oil revenues in most countries.
This section draws heavily on Barnett and Ossowski (2002).
WEO projections reach only until 2007. From then on, prices are assumed to increase by 2 percent a year.
Actual spending in the 2002 budget is $140 million.
The expression was first used in this context by Bjerkholt (2002). See Barnett and Ossowski (2002).
Exceptions are Angola, where the Ministry of Finance and Sonangol recently moved deposits to private banks, and Equatorial Guinea, where oil companies pay government revenue in bank accounts abroad and fiscal surpluses remain in these bank accounts.
For a recent reminder, see, for example, Laidler (1999), who uses the term monetary order to describe the set of arrangements comprising monetary policy, along with the framework of institutions, goals, and beliefs in which this policy is conducted.
The decline in manufacturing in response to this price change is a phenomenon commonly called the Dutch disease (see Section 3). This is an unfortunate term because it gives an undeserved negative connotation to a resource allocation process that is economically quite rational and that, in and of itself, does not imply a decrease in the country’s overall GDP.
Reinhart and Rogoff (2002) find that, between 1971 and 2001, the CFA franc zone countries—commodity exporters with a hard exchange rate peg—experienced more frequent episodes of deflation than other countries.
In sub-Saharan Africa, most of the income generated in the oil sector is shared by foreign oil companies and the domestic public sector. With the repatriation of the foreign portion of the income, the risk to domestic stability comes largely from procyclical fiscal expenditures. In these circumstances, fiscal policy needs to aim at stabilizing public expenditures.
This will be even more important in countries where the oil sector has some interaction in domestic factor markets.
According to its statutes (Article 1) “… the Bank issues the currency of the Union and guarantees its stability. Without undermining this objective, the bank provides support to the economic policies within the Union. The mission of the Bank is to define and conduct the monetary policy for the countries of the Union; to buy and sell foreign currency; to hold and manage the exchange reserves of member countries; to ensure smooth functioning of the payments system of the Union.”
We prefer to use the term “fiscal regime” rather than taxation. This has been a politically sensitive subject since the nationalization of the oil industry in many countries in the 1970s. The national ownership of resources means that governments see themselves as principals and foreign oil companies as agents that help them develop their resources. The fiscal regime is designed to give incentives to the agents to produce oil efficiently, while leaving as great a share as possible of the proceeds of the oil sales to the resource owner. Taxation, meanwhile, implies that something is taken from companies that would otherwise be theirs.
See Baunsgaard (2001).
As an example, McPherson (2002) cites Pertamina of Indonesia, which has operating expenses of $5.50 per barrel of oil, compared with an industry average of $1.20. Another example is SOCAR in Azerbaijan, which in 1999 employed roughly the same number of people as ExxonMobil, even though the latter operated in 100 countries, produced 16 times as much oil, and operated 33 refineries, compared with 2 for SOCAR.
This risk exposure can be mitigated by so-called carried interest, when international investors finance the government’s equity share out of future oil revenues; this form of equity participation is equivalent to profit-based fiscal instruments or cost recovery under PSAs (see Sunley, Baunsgaard, and Simard, 2002).
Except in ultradeep exploration blocks in Nigeria.
Because of data constraints, we use the government’s share in export revenue, rather than the total value of production; given the low ratio of domestic consumption to exports, this is a useful proxy for the African oil-producing countries.
Financial audits can play a useful role only if NOCs prepare regular financial statements, with proper coverage and based on proper accounting.