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Liberia: Staff Report for the 2012 Article IV Consultation and Request for Three-Year Arrangement Under the Extended Credit Facility–Background Notes

Author(s):
International Monetary Fund. African Dept.
Published Date:
December 2012
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Managing Natural Resource Revenue in Liberia: Options for A Fiscal Framework1

1. With Liberia set to rejoin the group of countries with large mineral sectors, it is an appropriate time to consider how the fiscal framework should manage these revenue inflows. What principles should guide whether the revenues are spent or saved? How should spending be allocated across consumption and investment? How will Liberia manage volatility and uncertainty in its fiscal framework? Should savings and/or stabilization funds be created? How well have other countries managed their resource revenues?

2. This note aims to highlight the issues rather than provide definitive answers: there is no “one-size fits all” in the design of fiscal frameworks which should be tailored to country circumstances. The note is organized as follows. Section I summarizes the benefits and risks resulting from large natural resource revenue inflows; Section II outlines the challenges to fiscal policy posed by resource revenues. Section III discusses a menu of policies for managing resource wealth including experiences from Ghana and Botswana and an application of the permanent income approach.

I. Context

3. Liberia should receive large natural resource revenue inflows over the medium- to long-term. These will originate through exploitation of iron ore deposits and, potentially, petroleum. Revenue inflows of this magnitude offer significant opportunities, including accelerated reconstruction, development, and poverty reduction. Projections made at the time of the 2010 Article IV consultation indicated that an optimistic extraction schedule for four of the ratified iron ore projects could yield sufficient resources to finance Liberia’s transition to middle income status by 2030.

4. However, without proper management and preparation, there is a risk that the economic benefits of mineral wealth would be undermined or even dissipated. Studies indicate that several factors associated with dependence on mineral wealth such as loss of competitiveness in agriculture and manufacturing, macroeconomic volatility, and diversion of resources to rent-seeking (Box 1).

Box 1.The “Resource Curse”

The main negative aspects associated with natural resource wealth:

  • Dutch disease (loss of competitiveness): Large protracted foreign exchange inflows enter the country, bidding up the price of non-traded goods and appreciating the real exchange rate. Competitiveness declines, resources migrate to the now more profitable non-traded services sector and away from non-mineral tradable sectors.1 In the process, the agricultural and manufacturing sectors, the mainstay of employment, decline.

  • Volatility: International resource prices are channeled via budget to the domestic economy. If expenditure rises in years of high resource prices, then falls abruptly when prices reverse, fiscal policy becomes pro-cyclical. The resulting cycle of “boom and bust” can entail real macroeconomic and fiscal costs.

  • Governance and institutions: Abundant natural resource revenue may engender institutionalized corruption. Capture of decision making by elite groups can lessen the incentives—even create disincentives—for development of the institutions needed for broad-based growth. Revenue institutions do not develop to their full potential. Growth suffers further as resources are increasingly diverted from productive purposes towards rent seeking.

1 See Mastuyama (1991) and Krugman (1995) for theoretical treatment, and Ismail (2010) for empirical evidence on the Dutch disease.

II. Challenges to Fiscal Policy in Resource-Rich Economies

5. The presence of significant resource revenue complicates fiscal management in several respects: (i) revenue derives from depleting an asset unlike most other revenue which has implications for the sharing of wealth between current and future generations; (ii) spending resource revenue (from exports) pumps up domestic demand and may in turn generate inflation; (iii) revenue windfalls may strain the capacity of public financial management leading to waste; and (iv) revenue volatility can be damaging if there are not some savings to smooth changes to budget spending.

6. Conceptually, mineral wealth is an asset in an economic sense, rather than a recurrent flow. Mineral wealth, when extracted, can be transformed into financial assets (saved), tangible assets (investment), or fund current consumption (liquidation).

7. Intergenerational equity. Recognition of resources as an asset raises intergenerational equity issues. For example, arguments can be made that future generations would be better provided for by leaving part of the resource in the ground, by building up financial assets, or by transforming the resource into other growth enhancing assets such as infrastructure or human capital. Choices made here will have important ramifications for the fiscal policy strategy and stance going forward.

8. Macroeconomic stabilization. Movements in resource revenues due to price fluctuations affect the domestic economy primarily through public spending.2 If spending adjusts to the variation in revenue, the overall fiscal balance will remain unchanged but the level of domestic demand would clearly be altered.

9. Scaling up spending with capacity constraints. In capital scarce economies, such as Liberia, a good argument can be made to spend resource revenues on growth-enhancing investments. However, a sudden influx of resource revenue can strain national capacity, making it difficult to spend funds in an efficient, transparent manner. Systems, including PFM systems, may not be able to handle the new revenue volumes. Wasteful and non-productive expenditure may result unless capacity shortfalls are addressed in a prioritized manner. Where constraints are binding, a more gradual scaling up of expenditure may be warranted.

10. Revenue volatility. With weak access to international capital markets, fiscal buffers, i.e., savings, would be necessary to allow expenditure smoothing when there are large changes in resource revenues.

III. Fiscal Framework Options

11. The fiscal framework needs to take account of these abovementioned challenges with a policy rule or guideline to anchor fiscal policy around an appropriate indicator (Box 2). Importantly, the anchors used in resource intensive countries frequently differ from those employed in countries lacking natural resources.

Box 2.Fiscal Indicators for Natural Resource Intensive Countries

The choice of fiscal indicator is critical for the adoption of a fiscal rule or guideline.

The overall balance is used in many countries without natural resources in fiscal rules or guidelines to limit borrowing and assess fiscal vulnerability, including Liberia. However, in a resource dependent country the overall balance can improve with a fiscal expansion if an increase in spending is less than the increase in resource revenue, i.e., it encourages or disguises pro-cyclical fiscal policy.

The non-resource balance (the overall balance minus net resource revenue) preferably scaled to non-resource GDP is the key fiscal indicator in resource dependent economies. It measures the government impact on domestic demand and the injection of exported resource revenue into the economy.

The current balance excludes public investment from the overall balance. A practical drawback is that it fails to provide a clear anchor for fiscal policy.

12. The main practical challenge for Liberia is directing the income flows from exhaustible natural resources towards investment (in both physical and human capital) while building buffers to cushion against shortfalls in resource income. Countries with different institutional capacities and economic structures have opted for varying policy frameworks. These frameworks generally rely on fiscal rules or guidelines to finance development while building up some savings in stabilization funds and sovereign wealth funds or reserve funds. There are many frameworks in use and selected country experiences are considered next (Appendix I summarizes some country examples).

A. Price Based Rules: Chile, Mongolia, Nigeria and Ghana

13. Price-based rules aim to smooth the usage of resource revenues. They explicitly tackle resource price volatility. They set commodity reference prices by using a formula (such as a moving average as in Mongolia) or set by an independent panel (Chile). Revenues in excess of those expected at the reference price are saved in a stabilization fund (e.g., the excess crude account in Nigeria) and conditions are set to draw down in the case of shortfalls of revenues. By setting the price conservatively, or by other supplementary rules, longer term savings could also be incorporated into a price-based rule as is the intention in Ghana.

14. Ghana’s petroleum revenue legislation directs most petroleum revenue towards investment with some financial savings for future generations and for stabilization purposes. Expected revenue is calculated using a 7 year average of the oil price (benchmark price). All revenues are collected in a petroleum account which directs 70 percent of the oil revenue calculated at the benchmark price to the budget and the remainder is split between a stabilization fund and a heritage fund for intergenerational equity. Out of the funds directed to the budget about 70 percent is allocated towards long-term public investment based on national development plans and the remaining 30 percent is non-allocated spending. The petroleum act defines the conditions for the government to tap into the stabilization fund for resources. The stabilization fund covers up to 75 percent of budget shortfalls due to petroleum revenue fluctuations.

15. The emphasis on domestic investment is appropriate if channeled towards projects with high return, but may raise efficiency issues. Targeting a fixed share of resource income in capital spending can overwhelm administrative capacity and result in poor project execution during resource booms. Moreover, the fixed share implies volatility in capital expenditure, which may complicate accounting while making project budgets vulnerable to resource price shocks.

16. There have been challenges in implementation. Under the Petroleum Revenue Management Act (PRMA), the budget should be based on a crude oil reference price for each year. In 2011, the crude oil reference price was set at US$/bbl 70. It was later revised in a supplementary budget to US$/bbl 100: substantially reducing higher-than-expected petroleum revenue to be placed in the petroleum funds (stabilization and heritage). Without political will to resist such revisions, implementation can go astray.

B. Fiscal Rules on Expenditure: Botswana (since 1994)

17. Botswana—a diamond exporter— utilizes a fiscal rule, known as the Sustainable Budget Index (SBI). The SBI stipulates that the ratio of government expenditure, excluding development spending and recurrent spending on health and education, to non-mineral revenues should be less than one. This rule is meant to prevent the use of resource income to directly boost wages and subsidies. It directs resource revenue towards development and human capital spending (health and education) with the remainder directed to the Pula Fund, which acts as both a sovereign wealth fund and a stabilization fund. In addition to SBI, Botswana has an expenditure target equivalent to around 30 percent of GDP.

18. Botswana’s adherence to the SBI fiscal rule has enjoyed mixed success. The SBI fell below unity immediately after its introduction in 1994/95. The SBI exceeded unity in 2001/02, when exceptionally high custom duty revenues during 1999/00–2000/01 came to an end. In 2003/04, however, measures to raise domestic revenue, coupled with across the board cuts in all expenditures, resulted in a dramatic fall in the SBI.

19. As in Ghana’s case, the combination of the SBI with the expenditure target has some limitations. It can result in high volatility in capital expenditure and social spending, and may result in inefficiencies when administrative and absorptive capacities are limited. At the same time, the Pula Fund has provided a buffer for the budget, notably during the 2009 financial crisis when diamond production was halted temporarily.

C. Permanent Income (PI) Approach: Norway, Timor Leste, South Sudan

20. While there are a number of variants of the permanent income approach, the basic principle is that consumption is limited to the actual or imputed income from saving current and future resource revenues. In the case of Norway, petroleum revenues are saved in a sovereign wealth fund, and spending of these revenues is limited to 4 percent of the stock of assets in the Fund, i.e., the assumed long term rate of return. A variant of the PI approach, known as the annuity approach, is used in Timor Leste. The non-oil fiscal balance is set in line with estimated sustainable income (ESI), which is calculated annually as 3 percent of the sum of the petroleum fund balance and the present value of expected future petroleum receipts. Deficits can exceed the ESI if properly justified and approved by Parliament. A more extended discussion of the PI approach is contained in Annex II, while Annex III illustrates the application of the PI approach in Liberia using the annuity approach.

21. A permanent income approach would have some advantages over structural budget rules including those applied in Ghana and Botswana:

  • it limits pro-cyclicality in fiscal policy;

  • it may be more difficult for governments and pressure groups to deviate from the established rules for reasons of short-term expediency;

  • it may provide a sustainable long-term fiscal framework to support the development strategy;

  • it may provide additional impetus and justification for forming budgets within a medium-term framework, improving project identification and execution, and concession monitoring.

22. However, the PI approach also has some significant limitations:

  • The spending path in the annuity approach could change dramatically from year to year if prices are volatile or new reserves identified (Annex III, Figure 3);

  • There is a limited focus on short term issues, such as the impact of fiscal policy on demand, inflation and growth;

  • The PI approach is consumption-based and thus silent on how capital scarce countries should allocate resources towards critical social spending and high-yielding projects, especially when access to international capital markets is limited.3 For example, if the return on domestic investment is higher than the return on foreign saving, then a better economic outcome can be achieved by increasing the expenditure path above that implied by the PI approach.

IV. Conclusions and Points for Discussion

23. Fiscal frameworks (rules and guidelines) need to change to meet the challenges of large resource revenues. While resource revenues are not yet large in Liberia, there is a reasonable argument that the institutional framework should be in place in advance so that the revenues are used most productively. Another argument is that once revenue starts flowing, vested interests would resist institutional change.

24. The price-based or structural rules have an explicit focus on coping with volatility, which may be useful in the Liberian context.

25. The permanent income approach is useful in assessing the sustainability of fiscal policies and elements of it, such as targeting the non-resource fiscal balance, can help sustain long term fiscal viability. However, permanent income estimates are very sensitive to export price projections and are thus too volatile to provide a tractable policy benchmark in the case of Liberia. Moreover, given the massive infrastructure needs and the limited access to international capital markets, Liberia is in need of policies that direct mineral wealth to public investment, which lies outside the PI approach’s primary focus on consumption.

References
Annex I. Fiscal Frameworks in Resource Intensive Countries

(From Fiscal Frameworks for Natural Resource Intensive Developing Countries, IMF 2012 (forthcoming)

CountryRule PIHFramework Non-PIHResource Fund 1/Description
AzerbaijanXRA non-oil balance guideline (2004) consistent with constant real consumption out of oil wealth. Never observed. More recently reliance on ad-hoc balanced budget oil price. Complemented by state oil fund.
ChileXFStructural balance guideline (institutionalized in 2006 fiscal responsibility law). Adjustment by long-term price of copper and molybdenum (10-year forecast) as determined by an independent committee. Targets can be changed over time. Supported by two funds (stabilization and savings).
EcuadorXRVarious rules (e.g., non-oil balance, expenditure growth) over time. More recent rule states that current spending can only be financed by non-oil revenue (a sort of “non-oil golden rule”). Oil funds abolished in 2008.
Equatorial GuineaXRGuideline establishing that current expenditures should be limited to non-oil revenue. CEMAC convergence criteria: include various fiscal targets (e.g., a non-oil balance target). It has a fund for future generations.
GhanaRA petroleum revenue management framework built around a stabilization fund and a heritage fund. Benchmark oil revenue is calculated at a 7-year moving average, with 70 percent used to finance the budget. Remaining revenue allocated in fixed proportions to the funds. No fiscal anchor limiting budget deficit.
MongoliaXRA ceiling on the structural deficit with structural mineral revenues estimated using a 16-year moving average of mineral prices. Combined with a ceiling on expenditure growth defined by the non-mineral GDP growth rate (useful when structural revenue is growing fast). The structural balance target can be changed every four years. Flows to a stability fund linked to difference between actual and structural revenues.
NigeriaXR3 percent of GDP deficit ceiling for federal govt. computed at budget oil price. Budget oil price set every year in political negotiations, including with sub-national governments. Excess crude account receives “windfall” revenues; ad-hoc withdrawals.
NorwayXF“Bird-in-hand” fiscal guideline: the cyclically adjusted non-oil central government deficit as 4 percent (the expected long-run real rate of return) of the SWF assets. Guidelines are flexible: temporary deviations permitted over business cycle or if large changes in SWF value.
PNGX5-year medium-term fiscal strategy that sets a ceiling to the non-mineral deficit in line with “normal” mineral revenue. A portion of “windfall” mineral revenue (70 percent) can be spent up to a non-mineral deficit ceiling of 8 percent of GDP.
RussiaXRThe budget code includes a long-term nonoil deficit target of 4.7 percent of GDP. Annual budgets underpinned by rolling three-year medium-term fiscal frameworks. Two oil funds (stabilization and savings).
Timor-LesteXFFiscal guideline based on PIH framework (constant in real terms). Non-oil balance set in line with estimated sustainable income (ESI), which is calculated annually as 3 percent of the sum of the petroleum fund balance and the present value of expected future petroleum receipts. Deficits can exceed the ESI if properly justified and approved by Parliament.

1. The majority of resource economies manage resource revenue in a less structured manner through stabilization and savings funds. Both are essentially government accounts with distinct operating procedures and varying degrees of integration with the budget process:

  • Stabilization funds seek to stabilize resource revenues over time, but are non-accumulative as they seek to balance inflows and outflows over a cycle. A typical methodology is to establish a benchmark price of output as an approximation of a medium- to long-term average price. On the sale of output, the portion of the revenue corresponding to the benchmark price is transferred to the budget for spending, with the excess accruing to the fund. Should the actual price be less than the benchmark, the fund would subsidize the budget by the amount of the shortfall. Under such a mechanism, the fund remains solvent provided the benchmark price is not set above the actual average price observed. The same stabilization function would be performed by funds based on the permanent income approach, as these are designed to maintain a stable non-resource fiscal balance.1 Country examples include Chile, Papua New Guinea, and Venezuela.

  • Savings funds seek to establish a surplus justified usually on the concept of intergenerational equity. These surpluses can be mandated in a variety of ways, for example by the discretionary setting the benchmark price below the actual price or saving a fixed percentage of receipts (Oman, Alberta), or through adherence to the permanent income approach as discussed in Annex I.

2. Funds vary in the degree they are integrated into the budget process. At one extreme are the Norwegian, Timor-Leste, and South Sudan funds which are essentially government accounts and institutional arrangements to fund the budget, accumulate savings, and report on activity. At the other extreme, funds in Kazakhstan, Azerbaijan, Iran and Kuwait have discretionary authority to expend resources outside the budget process. In the middle range, some funds are characterized by institutionalized mandates to support specified areas of the economy. In general, with the exception of developed countries, integrated funds tend to be more transparent and rules based. They also avoid the pitfalls of dual administrations, conflicting macroeconomic and expenditure policies, and cumbersome earmarking that have led to a poor track record of performance in many LICs and prevented conduct of a unified fiscal policy.2

3. Legislation establishing a fund and defining its policy objectives, operational objectives, and operational rules can provide strong legal support for the long term fiscal strategy. Policy objectives include securing macroeconomic stability, ensuring that future generations benefit from the resource, enhancing transparency, and improving governance. Operational objectives are the means by which these policy objectives are achieved and may include smoothing the variation in resource revenues over time, building up financial assets, and reporting on operations of the fund. Operational rules are the mechanisms by which these latter objectives are affected, for example they could comprise rules on the division of resource revenues between the budget and savings in a given year; rules governing when funds are to be permanently sequestered for future generations; and rules specifying which reports need to be produced and on what time frame.

4. Many attempts at ad hoc stabilization and savings funds failed for reasons of political economy and capacity constraints long before errors in measurement came into play. There are numerous examples of resource producing countries being unable to resist expenditure pressures in the short term, sometimes liquidating mineral wealth to fund current spending (Venezuela, Nigeria). Moreover, with low capacity leading to poor expenditure decisions, attempts to transform mineral wealth into tangible productive assets have frequently led to inefficiency and waste (Ecuador, Nigeria).3

5. Better management of natural resource revenue is correlated with good governance, better capacity, and strong public financial management.4 The resource curse appears most acutely in countries with underdeveloped capacity and poor systems of governance—intuitively, large revenue inflows would do the least good in countries where they are treated in a nontransparent manner, spent on wasteful projects or diverted to private use. General policy implications are to institute measures and reforms aimed at correcting these deficiencies, including through enhanced transparency and accountability, capacity development, and institutionalization of the reforms, preferably through legislation.

Annex II. Permanent Income Approach

1. What would fiscal policy look like in a resource rich economy if, over the medium-to long-term, it promotes growth, maintains macroeconomic stability, and preserves intergenerational equity? The permanent income approach presented below is capable of accomplishing these three goals. However, there are sizable uncertainties involved that can complicate practical application.

2. In the presence of significant resource revenue, macroeconomic stability is best attained by having the fiscal target set on the non-resource fiscal balance. This reflects the preferred treatment of mineral wealth as an asset, similar in economic terms to financial wealth.1 Use of the asset should, therefore, be conceptualized as a financing item in the budget.

Revenue (excluding resource revenue)
less
Total expenditure
equals
Non-resource fiscal balance
Financing:
Changes in net mineral wealth
Inflow of mineral revenue
Outflow of mineral revenue
Other financing

3. In a resource economy, it is changes in the non-resource balance—not the overall balance—that reflects the impact on domestic demand from fiscal activity. Maintaining macroeconomic stability would, therefore, generally require that governments avoid rapid changes in the non-resource fiscal balance, unless the intention is to provide a well thought out fiscal impulse to the economy. A transparent fiscal policy would, therefore, require that the budget and fiscal process provide readily available information on the non-resource balance so that demand forces in the economy and the underlying fiscal impulse can be clearly understood.

4. The appropriate size of the non-resource fiscal deficit is linked to the issue of intergenerational equity.

  • Intergenerational equity requires that the net present value (NPV) of government wealth be preserved over time. Wealth is defined in an economic sense, where its actual form is variable—wealth starts out as the NPV of minerals in the ground, and is transformed through extraction and sale to financial wealth or human and physical capital.2 Whatever the form, the value of wealth should theoretically be conserved so that it can deliver the same real rate of return each year.

  • The implication is that the size of the non-resource deficit is limited over time to the permanent income generated by the mineral wealth. This does not, however, preclude frontloading of expenditure for productive purposes—in capital-poor countries the marginal product of capital is high, implying that well designed and efficiently executed public investment may be the best use of funds. But the requirement of sustainability, and appropriate institutional arrangements, should force governments to better justify the front loading and to design fiscal policy that is sustainable within a longer term framework.

5. While the permanent income approach is conceptually simple and intuitive, practical application can be complex and prone to error. Accurate measurement of the base of the mineral wealth (the actual size and quality of the resource) is difficult. Technologies are changing—which can affect the cost and profitability of extraction, alter competitive advantage, and introduce a tail risk that advances in other areas may render the resource redundant. Future prices are even more uncertain—they are volatile in the short term, with past performance being a poor predictor of long-term trends. As overly optimistic estimates of mineral wealth can lead to unsustainable fiscal and debt positions, the need for a relatively conservative approach to estimation is indicated, with clear procedures in place to justify and alter them when necessary.

6. There are only a few countries explicitly applying the permanent income approach to resource revenue:

  • South Sudan and Timor-Leste estimate the NPV of mineral wealth, and then allow the budget to use the estimated permanent income arising from this wealth in each year (rate of return multiplied by NPV of mineral wealth). Essentially, the permanent income from mineral wealth is set as the non-resource fiscal deficit.3 As exploitation of the resource is a new phenomenon, this likely implies some front loading of expenditure, as assets in the funds are as yet insufficient to generate this level of income.

  • Norway has taken a more conservative “bird in the hand” approach, in which the non-resource deficit in any year is largely limited to the real return on monetized mineral wealth already accumulated. As this calculation is not dependent on estimates of the value of resources in the ground, rates of return, or future prices, it is subject to less uncertainty, but at a cost of back loading expenditure in favor of future generations.

Annex III. Application of the Permanent Income Approach in Liberia

1. Application of the permanent income approach in Liberia would require long term adherence to a sustainable level of the non-resource deficit. This would not preclude frontloading the transformation of mineral wealth into productive assets through debt-financed investment. However, frontloading would need to be demonstrated to be consistent with macroeconomic stability with safeguards to support efficient expenditure and a sustainable debt position. Given current capacity constraints, in the short- to medium-term this would be best provided by borrowing only for well designed donor-supported and designed projects.

2. As an illustration, the permanent income approach is applied to the projected revenues of the existing ArcelorMittal iron ore mine at Yekepa. The present value (2011) of the future stream of revenues is estimated to be US $2.4 billion. The permanent income from this is calculated to be US $20 million per year at constant prices (in current prices the income would rise by inflation). Permanent income would be about 1.3 percent of 2011 GDP. As real GDP increases over time the permanent income relative to GDP would decline (Figure 1).

Figure 1.Liberia: Estimated Permanent Income from One Iron Ore project, 2011-30

3. Using the permanent income approach would set the non-resource deficit at the level of permanent income i.e. non-resource revenue less expenditure equals permanent income. For comparison, a “hand-to-mouth” policy of spending all resource revenue as it is received (with no borrowing) would set the non-resource deficit as equal to the amount of resource revenue. The comparison of the permanent income approach to the “hand-to-mouth” approach shows both the stabilization and savings aspects of the permanent income approach (Figure 2). In initial years, spending would be higher in the permanent income approach, as meeting the non-resource deficit target would involve borrowing. As resource revenues rise, the permanent income approach would result in savings. When the resource runs out, there is no revenue and no spending in the hand-to-mouth approach, but spending equivalent to the permanent income continues out of income from past saving in the permanent income approach. Given current forecasts on iron ore prices, there is limited scope to frontload expenditure (the permanent income is less than “hand-to-mouth” by the second year); however, the permanent income is very highly sensitive to forecasts which highlights a key weakness of the methodology (Figure 3).

Figure 2.Liberia: Non-Resource Deficit Using Permanent Income and “Hand to Mouth” Approaches, 2011-44

Figure 3.Liberia: Volatility in the Permanent Income

Source: IMF staff estimates and World Economic Outlook.

Prepared by Geoffrey Oestreicher and Kareem Ismail with input from Lamin Leigh and Enrique Gelbard (all AFR) and Chris Lane (SPR).

But other channels exist as well. For example, higher prices might call forth more accelerated extraction which could affect domestic demand through greater economic activity at the mine site and through the value chain. Wealth effects could also play a role.

This latter stabilization method would be more relevant to Liberia as revenues from iron ore are less directly linked to output levels than they are in oil sector production sharing agreements.

The argument has been advanced that giving a fund independent spending authority may create needed centers of bureaucratic efficiency in some LICs, but there is little evidence excellence for this.

The economic equivalence of mineral wealth, physical assets, and human capital presupposes government has sufficient capacity to identify and execute projects efficiently. In the absence of this capacity, spending mineral revenues can result in the destruction of wealth.

See Aydin 2010, Collier (2008), Alayli (2005), and Sachs (1995).

In cases where resource revenue has resulted in a sizeable build-up of financial wealth, the appropriate fiscal target would be the primary non-resource fiscal balance. Note that with resource wealth treated formally as a financing item, the non-resource fiscal balances collapses to the overall fiscal balance.

Assuming it is not expended in current consumption or destroyed through unproductive investment.

Legislation in Azerbaijan also limits the non-resource (oil) deficit to the permanent income from oil wealth, but actual practice has deviated from this goal.

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