Public Investment Scaling-Up, Growth and Debt Dynamics1
1. In 2006, CEMAC governments embarked on a scaling up of public capital spending. Public capital expenditure was relatively stable at around 5 percent of GDP in 2000–05 and surged to 7 percent of GDP in 2006, then increasing further in subsequent years, peaking up at 16–15 percent of GDP in 2012–13. Public capital spending was mainly financed with oil revenue which rose from an average of 11 percent of GDP in 2000–04 to 15 percent of GDP in 2005, reached 19 percent of GDP in 2011 and 2012, and stayed at around 17–16 percent of GDP in 2012–13. For the rest of the decade, the share of public capital spending in GDP is forecasted to decrease steadily, mirroring an expected fall in the ratio of oil revenue to GDP. This annex builds on the methodology suggested in Buffie, et al. (2012)2 to study the dynamics for growth and public debt implied by public investment programs in the CEMAC.
Box 1.Key Model Features
The model has three production sectors: a non-traded goods sector, a non-oil traded goods sector, and a traded oil sector. Production in non-oil sectors uses public capital, private capital, and labor. Every period, the economy receives an exogenous oil endowment which is exported, with proceeds shared between the government, households, and foreign extracting firms.
There are two types of households: savers and non savers. Savers may purchase government-issued bonds and may borrow with an exogenous risk premium in an international financial market, paying portfolio adjustment costs which limit their access to foreign borrowing. Non savers are hand-to-mouth households.
Governments may borrow at an exogenous interest rate of 6 percent1. Governments finance public capital investment, debt services, and lump sum transfers to households with consumption taxes and oil revenues. Governments monitor the path of public debt using adjustments to the consumption tax rate and transfers.
The capital formation process is subject to absorptive capacity constraints and government inefficiency. In the baseline, a public investment efficiency rate of 40 percent is assumed, implying that 1 million CFAF of public investment leads to 400,000 CFAF worth of public capital accumulation.2
2. Main findings are:
Given current forecasts for oil production, CEMAC’s current public investment programs would lead to a public-debt-to GDP ratio of 46 percent in 2030 (compared to the current level of 22 percent). Beyond 2020 when the public investment scaling-up would be completed, public spending would still need to remain elevated in order to maintain the stock of public capital accumulated.
Measures undertaken to improve the return of public capital (for instance by improving the collection of user charges on public infrastructure with better targeted subsidies) and the efficiency of public investment spending could significantly reduce public debt while enhancing non-resource GDP growth.
Oil discoveries required to keep debt stable at around 30 percent of GDP beyond 2030 would need to be large enough to allow the oil revenue-to-GDP to rise by 4.5 percentage points above its baseline level, starting in 2015. A negative shock to oil revenue of the same magnitude would lead to an oil revenue-to-GDP ratio close to 60 percent in 2030.
Figure 1.CEMAC Countries: Baseline Scenario Figure 2.CEMAC Countries: Alternative Scenarios for Efficiency and Return to Public Investment Figure 3.CEMAC Countries: Alternative Scenario: Shocks to Oil Resources
Prepared by Nathalie Pouokam
Buffie et al. (2012): “Public Investment, Growth, and Debt Sustainability: Putting Together the Pieces”, IMF Working Paper. The model was estimated with the assistance of W. Clark and M. Ghilardi (Research Department).