II Open Budget Processes

International Monetary Fund
Published Date:
October 2007
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72. Similar principles of transparency to those recommended for other parts of the government budget should apply to the processes for planning, allocating, spending, and reporting resource revenues. The special features of resource revenue, however, require that governments give particular emphasis to policy clarity with regard to explicit treatment of risks arising from the resource base, transparency of accounting, and control of receipts and spending. In particular, the government should clearly explain to the public its policies toward smoothing the impact of volatile revenue flows and ensuring long-term fiscal sustainability. If savings or stabilization funds have been established, they should be fully integrated into the overall fiscal policy framework. All resource-related asset holdings should be fully disclosed and asset management policies open. This section covers these and other good transparency practices that will lead toward an effective application of fiscal policy in resource-rich countries.

A. Fiscal Policy and Resource Revenues 2.1.2/2.1.4/3.1.7

The budget framework should incorporate a clear policy statement on the rate of exploitation of natural resources and the management of resource revenues, referring to the government’s overall fiscal and economic objectives, including long-term fiscal sustainability.

73. Governments benefiting from large flows of revenue from exploitation of natural resources face a range of issues that need to be explicitly considered for fiscal transparency. First, revenues are subject to high and unpredictable price volatility, with potentially destabilizing budgetary and liquidity effects. Second, because the resources are finite, it is important to take into account alternative options concerning possible exploitation rates and the intergenerational distribution of income flows, as well as the distribution of spending and the immediate social impact of resource industries. Third, the economic impact of large inflows of resource revenues needs to be carefully considered in light of possible “Dutch disease” effects, characterized by an appreciating real exchange rate and the associated adverse impact on the nonresource tradables sector of the economy.

74. A clear framework for government policy that recognizes all of these issues is an essential basis for design of an effective and transparent fiscal management system in resource-rich countries. The requirements in the Code for budgeting to be conducted in a medium-term macroeconomic and fiscal policy framework (practice 2.1.2) and for governments to publish a periodic report on long-term finances (practice 3.1.7) are therefore particularly compelling for resource-rich countries because they clarify the range of fiscal policy options arising from prospective resource revenues. Fiscal sustainability issues (practice 2.1.4) also need to be directly addressed, with a clear account of the sensitivity of the sustainability analysis to different assumptions about exploitation rates, export prices, and other economic variables.

75. Development of a medium-term framework and long-term fiscal sustainability analysis should be within the capacity of all countries, although the depth of detail may be constrained initially by the capacity of the public financial management system.67 For some countries, they may need to be implemented gradually.68 Elements that are particularly important for resource-rich countries are the following:69

  • Establishment of a medium-term fiscal framework (MTFF), with a comprehensive statement of fiscal policy objectives, broad medium-term macroeconomic projections (based on clearly stated and realistic assumptions), and aggregate fiscal targets;
  • Identification and regular analysis of major fiscal risks to the fiscal position and budget policy (including macroeconomic risks, control risks, and contingent liabilities);
  • Regular reviews of long-term fiscal sustainability, focusing on resource production and price expectations; and
  • An open process for setting budget spending priorities.

76. To ensure that the sustainability of fiscal policies is comprehensively addressed, the medium-term framework needs to incorporate all extrabudgetary funds, quasi-fiscal activities, and tax expenditures. Such a framework is most effective in the context of a unified budget and the use of risk management strategies. Publication of the medium-term projections, including the policy and economic assumptions used in the framework, is crucial in helping the public understand the future implications of current fiscal policies.

77. A medium-term fiscal policy framework and long-term assessments of public finances should assist in evaluating the implications of planned expenditures for future expenditure priorities and assessing the associated risks for sustainability. For example, both social entitlement and investment programs, which newly resource-rich countries might want to expand substantially, involve multiyear spending commitments and can increase budget rigidity. Also, although investment programs carry substantial implications for future recurrent costs, many resource-rich countries maintain capital budgets that are separate from recurrent budgets. Under such “dual budgeting” conditions, the planning and execution of each budget is separate, and the implications for later recurrent spending are not part of the decision-making process. Linking annual budgets transparently to medium-term plans and priorities helps ensure that resources for capital and recurrent expenditure are not overcommitted in the short term, allowing greater flexibility subsequently in responding to variations in resource revenues and other shocks. It can also encourage realistic appraisals of the impact of investment programs on economic growth.

78. OECD best practice guidelines suggest that a long-term report (10-40 year projections) assessing the sustainability of current fiscal policies be published every five years, with more frequent publication if there are major expenditure or revenue policy changes.70 For resource-rich countries, long-term reports should contain scenarios that allow for the return of commodity prices from transitory swings to longer-term trends. Because the longer-term horizon is subject to greater uncertainty, it is also important to provide appropriate sensitivity analysis showing the impact of different assumptions about economic variables, including the relative prices of commodities and alternative exploitation and taxation policies.

B. Fiscal Policy, Resource-Related Funds, and the Budget 2.1.5

Mechanisms for coordinating the operations of any funds established for resource revenue management with other fiscal activities should be clearly specified.

79. Many countries have established separate funds for resource revenues, either to channel resources for development investment or to promote saving to help address the stabilization and sustainability issues of large, volatile, and exhaustible revenue flows. Such funds need to be closely integrated with the budget, so that they clearly operate in a manner that supports the government’s overall fiscal policy and resource allocation. This requires that projections of transactions, and accounts giving details of actual spending by the funds, and their assets and liabilities, are presented to the legislature as part of the budget process, along with standard budget reports and accounts. Funds should ideally not undertake domestic expenditure directly because of the dangers of generating a “dual budget” and reducing fiscal transparency. Resource-related funds are best managed as an integral part of the medium-term fiscal policy framework to help ensure that expenditure plans are set within a sustainable path. Stringent mechanisms should also be in place to ensure efficiency and integrity in the management of assets and use of resources and to provide assurances of transparency, good governance, and accountability.71

80. Experience to date with stabilization and savings funds has been mixed. Two examples of countries with successful and transparent national funds are Botswana (for diamonds—see Box 3) and Norway (for oil).72 The operation of the Norwegian Pension Fund-Global (NPFG, formerly known as the Norwegian Petroleum Fund) can be considered as best practice for a resource-related fund, because it forms part of a coherent fiscal policy strategy. The strategy has two central pillars: first, it aims at smoothing public spending over time and decoupling it from volatile oil revenue; second, it seeks to replace oil wealth with financial assets, which are expected to grow in value over time, so as to be able to deal with the expected increase in public spending associated with an aging population (Skancke, 2003). Importantly, Norway’s fiscal policy drives the operation of NPFG rather than vice versa. NPFG accumulates all oil revenue and returns on financial investments, and it makes transfers to the budget only to the extent necessary to finance the non-oil deficit, which is determined by annual, medium-term, and long-term fiscal policy objectives. NPFG is thus characterized as a financing fund; stabilization and sustainability objectives are achieved by fiscal policy, not by NPFG.

Box 3.Botswana’s Prudent Management of Mineral Wealth

Diamond mining in Botswana started in the early 1970s, and the country has been a key player in the world diamond market since the 1980s. Diamonds are Botswana’s major natural resource, accounting for about a third of GDP, three-fourths of exports, and more than half of government revenue. Diamond mining is carried out by the private sector, but with significant government shareholdings in mining ventures, with foreign investors the other major shareholders. Mining agreements typically last for 25 years and marketing arrangements for 5 years, providing a stable and reliable framework for investors and the government. By some estimates, Botswana’s government takes about 75 percent of diamond mining profits through taxes, royalties, and dividends. The tax legislation is considered transparent, relatively simple, and characterized by low tax rates (e.g., the corporate tax rate has been reduced to 15 percent).

Botswana has achieved strong real GDP growth over a prolonged period of time (on average, almost 9 percent since the 1970s), reaching a per capita income of $3,500 in 2000. Inflation has generally been low, and large fiscal and current account surpluses have been recorded in many years. Foreign exchange reserves have been rising to more than $5 billion and, despite some decline in recent years, still amount to about two years of imports, while external debt is below 10 percent of GDP. Botswana has been awarded investment-grade sovereign debt ratings. Political and economic stability has helped greatly to attract substantial foreign direct investment across major economic sectors (Basu and Srinivasan, 2002). Prudent policies have also helped in recent years to master external shocks, such as a regional drought, a decline in diamond demand, and a significant depreciation of the South African rand, the currency of Botswana’s biggest trading partner.

Within a stable political system, Botswana has pursued broadly coherent and prudent economic policies over long periods of time, dealing effectively with large, variable diamond revenues, thereby avoiding the “resource curse” (Acemoglu, Johnson, and Robinson, 2003). Mostly appropriate monetary policies have contained inflation and stabilized the exchange rate, helping avoid real appreciation and a loss in competitiveness (“Dutch disease”). Fiscal policy has been the main tool for macroeconomic management. Public spending has increased strongly in many years, but these increases have not generally been excessive. Significant shares of diamond revenues have been saved over many years, adding to the country’s foreign exchange reserves and effectively sterilizing the liquidity impact of large external diamond revenue inflows. The government’s external reserves are managed prudently and transparently by the central bank and invested through the Pula Fund (80 percent) in long-term assets and the Liquidity Fund (20 percent) in the money market and short-term bonds.

Medium-term national development plans (NDPs) have been a key fiscal policy instrument for channeling diamond revenues into capital investments. The NDPs have some features of medium-term expenditure frameworks. They have generally been implemented in a disciplined fashion. Through public and private investments, the country has significantly expanded its physical infrastructure (e.g., roads, energy, health facilities, schools), although public investments have not always been of good quality. Before the HIV/AIDS pandemic began to spread, remarkable progress in social development had been made. NDPs have generally been formulated with a view to maintaining a sustainable fiscal position, as measured by the “sustainability ratio” (Modise, 2000; and IMF, 2004), defined as the ratio of noninvestment current spending (excluding health and education, which are considered as investment in human capital) to nonmineral revenue.

81. Whereas part of the explanation for Norway’s success with NPFG lies in the country’s historical strengths (a well-established institutional framework, a long tradition of fiscal and central banking transparency, and a broad revenue base), other countries are setting up funds precisely because they lack such advantages.73 For example, Wakeman-Linn, Mathieu, and van Selm (2003) outline the political economy case that appears to have been behind the establishment of funds in Azerbaijan and Kazakhstan (and likely more generally) that quarantine resource revenues, to a greater or lesser extent, from the rest of the budget. Essentially, the argument is that a separate fund with clearly defined policy objectives can protect some portion of resource revenue more effectively from political pressure and potential waste and corruption than the government budget can.74 Where the budget environment is nontransparent and administration is weak, such an argument has some merit, but such funds should still be integrated within a consistent fiscal policy framework-along the lines of the Norwegian model. This requires explicit procedural and operational rules, as discussed in the following section.75

C. Operations of Resource-Related Funds 2.1.2

Operational rules applied to resource-related funds should be clearly stated as part of an overall fiscal policy framework.

82. Operational rules for resource funds should facilitate the process of meeting basic fiscal policy objectives through the budget. Aligning resource funds with general budgetary practices will reduce the risks of creating a dual budget through direct spending from a resource-related fund or undermining the transparency or efficiency of budgetary spending by earmarking revenues for specific purposes.76 Rigid operational rules-such as a requirement that a predetermined share of specified resource revenues be deposited in the fund or that deposits or withdrawals be linked to the level of prices or revenues-can complicate, or at times conflict with, fiscal policy.77 In all cases, the law governing fund spending should clearly specify the purpose and encourage parliamentary scrutiny.

83. Key procedural rules that should apply to resource fund operations include the following:

  • There should be a clear specification of operational rules and responsibilities over spending and borrowing by resource funds.78
  • The fund revenues, expenses, and balance sheet should be presented to the legislature and the public together with the annual budget, including a consolidated account.79
  • No money should be spent directly from such funds; any use of such funds should be through the government budget and subject to normal budget appropriation processes.
  • Fund activities should be regularly reported to the legislature and the public and externally audited by an independent auditor; and reports and audit results should be published.
  • An independent supervisory board should be appointed to give assurance of good governance.80

D. Fiscal Policy and Asset Management 2.1.2/1.2.5

The investment policies for assets accumulated through resource revenue savings should be clearly stated, including through a statement in the annual budget documents.

84. For resource-rich countries that are accumulating financial assets from savings of resource revenue, establishing a sound asset management strategy becomes an important element of fiscal policy. The strategy should reflect ultimate objectives, such as the relative importance of savings and stabilization, and macroeconomic considerations, such as the desire to avoid exchange rate appreciation.81 Clear investment guidelines that are available to the public should govern the separate asset management function, and fund managers should be accountable for investment performance. The guidelines should provide clear direction on risks versus returns, types of assets allowed for investment, and geographical and currency composition of assets. Asset management formulation should be in the hands of the finance ministry to ensure coordination with overall fiscal policies; and changes to asset management policies should be clearly and publicly stated. The operational management could be delegated to the central bank or tendered to professional investment companies. Norway again provides a best practice example in asset management of an oil fund (Box 4).

Box 4.Norway’s Pension Fund–Global: Best Practice Asset Management

Norway has a well-formulated and transparent asset management strategy for its Government Pension Fund-Global. The Ministry of Finance bears overall responsibility for the fund’s asset management, but has delegated the task of the operational asset management to the central bank (Norges Bank) based on a management agreement. The Ministry of Finance defines the strategy for investment by identifying a benchmark portfolio against which Norges Bank seeks to achieve the highest possible return. However, the Ministry of Finance also controls exposure to risk so that the actual return should remain within a range around the return on the benchmark portfolio. (See

The benchmark portfolio is composed of stocks in the Financial Times Stock Exchange equity indices in 27 countries and of the bonds in the Lehman Global Aggregate bond indices in the currencies of 21 countries. Equities account for 40 percent of the benchmark portfolio as follows: 50 percent equities listed in European exchanges and 50 percent equities listed in the Americas, Africa, and Asia/Oceania. The remaining 60 percent of the portfolio consists of fixed-income instruments issued in European currencies (55 percent), American currencies (35 percent), and Asian currencies (10 percent).

Norges Bank has set up a separate wing for investment management (Norges Bank Investment Management, NBIM), which has separate business lines for the two asset classes. At the end of 2004 the NBIM relied on 19 professional investment companies to manage the equity portfolio of the fund with 44 different mandates, and the fixed-income portfolio of the fund was managed by 16 investment-managing companies with 21 mandates.

On November 19, 2004, Norway established ethical guidelines for the fund that came into effect in 2005. According to these guidelines, the ethical basis for the fund shall be promoted by the exercise of ownership (voting) rights to promote good corporate governance as well as negative screening and exclusion of companies from fund investment options. The guidelines can be found at

Annual and quarterly reports are published in a timely fashion, including on the central bank’s website ( These reports provide detailed information about recent changes in the management of the fund, transfers to and from the budget, market trends, returns on investments and income, trends regarding risk exposure, and administrative costs. In addition, the central bank regularly issues press releases, summarizing the fund’s quarterly financial performance. The fund is audited by the Office of the Auditor General based on the work performed by Norges Bank’s Auditing Department.

85. The Norwegian example demonstrates how such best practices can be applied. In some other countries, political economy arguments have been used to limit public access to information on resource-related asset holdings.82 Such prohibitions are likely to limit transparency and governance. However, even where applied, they should not preclude giving adequate assurance to the public regarding overall asset performance, including comparisons of actual performance against pre-identified benchmarks.

E. Accounting for Resource Revenues 2.2.1

The government accounting system or special fund arrangements should clearly identify all government resource revenue receipts and enable issuance of timely, comprehensive, and regular reports to the public, ideally as part of a comprehensive budget execution report. The reports should be based on a clear statement of the accounting basis (cash or accrual) and policies.

86. Resource revenues should be accounted for under the same system and rules as other revenue and expenditure, with the accounting system based on a well-established internal control system. Best practice is provided by an accounting system that allows accounting and reporting on both an accrual and a cash basis.83 This requirement is not easy to implement, considering that various types of resource revenues (e.g., signature bonuses, royalties, profit shares, corporate profit tax payments, indirect tax revenue) and recipient institutions (e.g., resource ministry, NRC, tax administration) may be involved. As a result, there may be a need for specific verification and reconciliation mechanisms and institutions.

87. In resource sectors such as oil, however, it may not be sufficient to use the existing accounting and internal control framework. It may be necessary to establish specific verification and reconciliation mechanisms and institutions to improve transparency in the flows of resource-related revenue. For example, as discussed in Chapter III, the EITI encourages governments and companies to use reporting templates that would ensure consistency and transparency in resource revenue flows between companies and host governments.


Colombia has implemented a medium-term fiscal framework that informs the annual budget process.


Some countries, such as Botswana, Indonesia, and Malaysia, have used national development planning processes relatively effectively to set medium- and long-term priorities.


See IMF (2007b), which describes the elements of medium-term frameworks. It notes, however, that although such frameworks are the norm in OECD countries, low-income countries have experienced mixed results to date.


See the Manual, Chapter III, practice 3.1.7.


IMF (2007b) notes that the quantitative analysis shows no evidence that the introduction of oil funds or fiscal rules has an impact on fiscal outcomes, including in containing spending, controlling for relevant factors.


Hannesson (2001) also looks at subnational funds, including Alaska in the United States and Alberta in Canada.


The need to develop a viable non-oil enterprise sector and avoid Dutch disease was also seen as particularly important in these transition economies.


As noted in The Role of Fiscal Institutions in Managing the Oil Revenue Boom (IMF, 2007b), oil-related funds have proliferated over the past decade. Of 31 oil-producing countries surveyed, 21 have established funds, 16 of which were created after 1995.


In some countries, funds have been set up with legal authority for own spending rather than through normal budget processes. Ghana’s Mineral Development Fund, for instance, is funded with earmarked royalty revenue and expected to pay for repairs of environmental damages and development projects for mining communities. Its appropriation and disbursement arrangements are complex and not transparent. See Ghana Fiscal ROSC, 2004, paragraph 76.


The government of Libya has indicated its intention to eliminate the practice of using the oil fund for extrabudgetary spending. The rules of the Kazakhstani oil fund have recently been amended to provide better integration with the budget.


Problems arising from oil fund spending in the cases of Nigeria and Venezuela are illustrated in Davis and others (2003, Box 11.1, p. 293). Clarity is also necessary for provisions that allow extra spending when the oil price exceeds a certain level. Apart from the point that this practice should be avoided on economic policy grounds because it is procyclical, such practices may not be implemented transparently.


Since 2005, Azerbaijan has reported the operations of its oil fund in the annual budget presentation to parliament (although the oil fund’s budget is not subject to parliamentary approval).


Wakeman-Linn, Mathieu, and van Selm (2003, Box 13.1, pp. 354-5) note that funds in both Azerbaijan and Kazakhstan are subject to independent audits by an international accounting firm, and the audit reports, in principle, are published. In Azerbaijan, the supervisory board is appointed with a six-month rotation of the chairmanship; in Kazakhstan, the board is chaired by the country’s president.


IMF (2007b) notes that oil funds can play a useful role in asset management.


For example, Davis and others (2003, p. 308) cite the case of Kuwait, where the Kuwait Reserve Fund for Future Generations, which operates according to well-established criteria and is subject to oversight by a board of directors and parliament, prohibits the provision of information to the public on its assets, in part to insulate it from spending pressure.


Also, accounts should be prepared on a gross basis. The Manual provides further details on good accounting practices.

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