Fiscal Policy Formulation and Implementation in Oil-Producing Countries

11 Stabilization and Savings Funds for Nonrenewable Resources: Experience and Fiscal Policy Implications

Jeffrey Davis, Annalisa Fedelino, and Rolando Ossowski
Published Date:
August 2003
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Jeffrey Davis, Rolando Ossowski, James A. Daniel and Steven Barnett 1

I. Introduction

Acountry with large exhaustible resources such as oil can benefit substantially from them, but the revenues from exploiting these resources can pose challenges. Fiscal policymakers need to decide how expenditures can be planned and insulated from revenue shocks arising from the volatility and unpredictability of resource prices. Decisions also need to be made on the extent to which resources should be saved for future generations.

In some countries that are dependent on the export of oil and other nonrenewable resources, governments have established, or are considering setting up, nonrenewable resource funds (NRFs) to help in the implementation of fiscal policy Recent volatility in oil prices has lent importance to this discussion in several countries.

NRFs can take various forms, ranging from separate institutions with discretion and autonomy to funds that in practice amount to little more than a government account. The general justification for such funds is that some share of government revenues derived from the exploitation of a nonrenewable resource should be put aside for when these revenues decline, because the price of the resource has fallen, or the resource has been depleted or both. Stabilizatio funds aim to reduce the impact of volatile revenue on the government and the economy. Savings funds seek to create a store of wealth for future generations.

The operational implications and effectiveness of NRFs are considered in the following sections. Section II discusses some key fiscal policy implications of reliance on nonrenewable resource revenues. Section III considers the rationale for funds and discusses their main design characteristics. Section IV examines the operational aspects of funds, including their relationship with the budget; asset-management issues; and governance, transparency, and accountability. Section V provides a preliminary assessment of the effectiveness of funds, using both econometric evidence and country case studies. Section VI concludes.

II Nonrenewable Resource Revenues: Policy Implications

A country with large fiscal revenues derived from exploiting a nonrenewable resource such as oil typically faces two main problems—that the revenue stream is uncertain and volatile, and that it will eventually dry up. NRFs are sometimes proposed to deal with both these problems. First, a fund may be seen as able to stabilize budgetary revenues. When the resource price is “high/’ the fund would receive resources, which it would then pay out to the budget when the price is “low.” Second, a fund may be seen as a way to save some of the revenue generated by exploiting the finite stock of the resource, which can then provide income after it has been exhausted. Funds may also be set up for other reasons: to counteract real exchange rate volatility and “Dutch disease,” 2 for liquidity and political economy purposes, and to enhance governance and transparency.

Volatility and Uncertainty of the Revenue Stream

A volatile and uncertain fiscal revenue source renders fiscal management, budgetary planning, and the efficient use of public resources difficult. This is particularly the case when it makes up a large share of total revenue. The nonrenewable resource sector is an important source of foreign exchange and fiscal revenues in many countries, making them vulnerable to external variables largely beyond the control of policymakers and domestic agents (Table 11.1). The uncertainty and volatility of nonrenewable resource revenues is typically greater than for other kinds of revenue, mainly as a result of unpredictable and frequently large fluctuations in international commodity prices.

Table 11.1.Indicators for Selected Countries with Nonrenewable Resource Funds (NRFs)
Average Size of
Resource Revenue2NonrenewableExternal Shock3
(In percent of totalResource Exports2(In percentage
Country1government revenue)(In percent of GDP)points of GDP4)
Papua New Guinea11.427.93.4
Sources: IMF, World Economic Outlook (various issues); and authors’ estimates.

The nonrenewable resource for Kuwait, Norway, Oman, and Venezuela is oil; for Chile, cop-per; and for Papua New Guinea, gold, copper, and oil.



Average absolute value of the annual difference in the ratio of nonrenewable resource exports to GDP.

Excludes 1991-93.

Sources: IMF, World Economic Outlook (various issues); and authors’ estimates.

The nonrenewable resource for Kuwait, Norway, Oman, and Venezuela is oil; for Chile, cop-per; and for Papua New Guinea, gold, copper, and oil.



Average absolute value of the annual difference in the ratio of nonrenewable resource exports to GDP.

Excludes 1991-93.

When revenue falls sharply and unexpectedly, expenditure often falls sharply too, which is typically costly Cutting current expenditures can be notoriously difficult and unpopular, and it may be socially damaging, especially if not done in the context of a medium-term comprehensive strategy of expenditure adjustment. Cutting capital spending might involve the abandonment of viable projects, where the return on some additional expenditure may be high. As a result, the productivity of public investment could be affected. But if expenditure is not reduced in the face of large permanent negative shocks, fiscal sustainability could be questioned.

Dissaving to smooth the downward adjustment of spending in response to a negative revenue shock or to completely insulate spending from such a shock should reflect the extent to which the revenue shock is permanent or temporary. If temporary, the government could dissave until revenue recovers (the scope of financing permitting). If permanent, dissaving should be used to smooth the downward adjustment in spending, but not to prevent expenditure adjustment. Spending that is not adjusted to a permanent shock could be unsustainable, with the government continuously dissaving and eventually being forced to adjust. In particular, catastrophic negative price shocks that prompt major solvency reassessments (as in the case of oil in 1986) may require large adjustments even in the presence of smoothing mechanisms.

In practice it is often difficult to distinguish, ex ante, between permanent and temporary nonrenewable resource revenue shocks. Assuming the revenue shock is due to a change in the price of the resource,3 the decision whether the shock should be treated by the government as permanent or temporary should reflect the following three considerations.

First, oil prices would appear to have no well-defined and timeinvariant averages. Barnett and Vivanco (Chapter 5 in this volume) discuss the statistical properties of oil prices and conclude that a given oil price change may not convey much information about oil prices over the long run. In particular, the evidence suggests that oil prices display significant mean reversion, especially since the 1980s, but that the mean being reverted to may not be constant over time. Moreover, there may also be periodic permanent, or at least more long-lasting, shocks, such as those in 1973 and 1986.

Second, prudence would suggest that a negative shock should be seen as permanent, and a positive shock as temporary, until proven otherwise. The stronger a government’s financial position, the less it needs to heed this advice because it can better afford to delay cutting expenditures. Also, the less costly expenditure is to adjust, the quicker it should be adjusted.

Third, there may be exceptional reasons why the current price of a resource is not likely to be its price in the future. For example, global production may be known with reasonable certainty to increase or decrease. Where resources have forward markets, however, this information should be largely reflected in the resource’s forward price. For example, the spot price of oil rose sharply after the Iraqi invasion of Kuwait in 1990, but the forward price of oil rose significantly less, because financial markets expected the situation to be temporary.

In fiscal management, a distinction should be made between countries that rely heavily on revenue from nonrenewable resources and those that have a broader fiscal revenue base. For countries that have a relatively diversified production structure and alternative sources of fiscal revenue, the impact of resource price volatility would be less severe. As discussed in Section V, this distinction has important implications for NRFs.

Exhaustibility of the Revenue Stream

Government revenue derived from exploitation of nonrenewable resources differs from other revenue in that it partly represents a depletion of wealth. When a significant share of government revenue is derived from the exploitation of such resources, intergenerational equity and fiscal sustainability require consideration of the finite nature of the resources and of the prospective evolution of government net wealth, since analysis based solely on indicators of fiscal balance could be misleading. In particular, government wealth can be seen as the sum of net financial wealth and resource wealth. Thus, if all the revenue from nonrenewable resources were to be consumed, this would leave less wealth and lower consumption opportunities for future generations. This would generally be considered undesirable on intergenerational equity grounds.

Exactly how much revenue from nonrenewable resources should be saved rather than consumed is a complex question that has been the subject of substantial research.4 In general, sustainable government consumption is related to the permanent income out of government net wealth (inclusive of resource wealth). This relationship would need to take into account factors such as population growth and technological change. It is also difficult to estimate in practice, with any degree of confidence, such variables as the future price of the nonrenewable resource, the amount of the endowment, and the cost of extracting it, especially when these factors may vary substantially and frequently.

Nevertheless, considerations of longrun fiscal sustainability would generally imply saving a portion of today’s nonrenewable resource revenue, and setting normative limits on the nonresource fiscal deficit.5 This approach would both stabilize usable revenue and provide for the accumulation of financial resources that make up for the depletion of the natural resource, thereby helping to implement fiscal policies that are set within a longer-term framework. The factors that could help determine ranges for the sustainable level of the nonresource fiscal deficit are discussed by Barnett and Ossowski in Chapter 3 in this volume.

Savings with the objective of preserving net government wealth are different from the financial savings designed to smooth expenditure adjustment discussed in the previous subsection. The former represents an economic concept of saving—that is, the excess of current revenue over current expenditure—and the theory is mute whether it should be invested in public works or held as financial assets, and thus whether the government should run an overall surplus or deficit. Savings to smooth expenditure adjustment, however, relate to financial savings. For example, if a government runs high economic savings but spends massively on public investment during “good” times and fails to build up financial assets, this may not help it to finance expenditure adjustment during “bad” times.

Real Exchange Rate Volatility and “Dutch Disease”

Large revenues from volatile nonrenewable resources have implications for the economy as a whole, not just for the fiscal sector. Nonrenewable resource shocks can affect the level of the real exchange rate through several channels, including disposable income, wealth effects, procyclical government spending on nontradables, and short-run monetary disequilibrium. There is evidence that the volatility of the real effective exchange rate is damaging to the nonresource sector and capital formation (World Bank, 1993; Serven and Solimano, 1993). Moreover, an increase in resource revenues, particularly if perceived as permanent, may place upward pressure on the real effective exchange rate, with effects on the nonresource tradable sector (Gelb and Associates, 1988).

Fiscal policy can play a role in addressing these issues, particularly when the government receives substantial nonrenewable resource revenue. The basic fiscal response should be to smooth spending on non-tradables when resource revenues vary. For the balance of payments as a whole, large resource current account receipts could be offset by capital account outflows. To the extent that nonrenewable resource receipts flow to the government, the government or the central bank could build up external assets or repay foreign debt.


In addition to addressing net debt and sustainability issues, governments also need to manage their gross assets and liabilities (see Section IV). Countries with heavy reliance on volatile resource revenues will generally need to have substantial financing available. During downturns, governments could either borrow or run down their financial assets; which one to rely upon is mainly an asset-management issue.

International lending to developing countries and primary commodity producers with heavy reliance on volatile resource revenues, however, tends to be procyclical (World Bank, 1994). Some of these countries may find it difficult to ensure financing when the price of the resource falls sharply, at a time foreign resources may be most needed. They may also find other limits on their capacity to tap international capital markets, which may be difficult to predict. Countries that face such constraints in their borrowing capacity may place a premium on liquidity as such, and may wish to maintain a large stock of liquid financial assets, ideally in the form of external claims to avoid merely passing on the shock to the domestic private sector.

Other Issues

Running fiscal surpluses is often politically difficult. Even though there may be an economic case for building up public financial savings, decision makers may be subject to pressures for additional spending when revenues are available (Eifert, Gelb, and Tallroth, Chapter 4 in this volume). As a means of helping to build political support for financial savings, governments often “earmark” the savings for certain types of high-priority public spending. Governments also earmark funds in the desire that the high-priority public spending plans will have the requisite financing.

High nonrenewable resource revenues may be misused or otherwise subject to poor governance. Stringent institutional measures to prevent such behavior may be required. Linked to the issue of governance is that of transparency. The more transparent the resources flowing to the public sector, the more difficult it will be to misuse them.

III. Funds and Their Rationale

Some countries have considered, or turned to, the use of NRFs to address some of the issues discussed above, such as the short-run stabilization and long-run saving challenges posed by nonrenewable resource revenues. The general characteristic of such funds is that they are public sector institutions, separate from the budget, that receive inflows related to the exploitation of a nonrenewable resource. Table 11.2 summarizes the main objectives and design features of selected funds.

Stabilization Funds

A stabilization fund is a mechanism designed to reduce the impact of volatile revenue on the government and the economy. Its objectives may also include supporting fiscal discipline and providing greater transparency in the spending of revenue.

Stabilization funds do not set formal restrictions to the conduct of overall fiscal policy. In particular, they do not directly affect spending. Moreover, stabilization funds on their own cannot reduce the revenue uncertainty and volatility facing the public sector as a whole. The objective of rendering budget revenue more predictable and stable is achieved by transferring the uncertainty and volatility (or a portion of them) to the fund. Changing the revenue stream accruing to the public sector as a whole might be achieved by using commodity risk markets (see “Alternative Approaches,” below).

Contingent stabilization funds

Stabilization funds often take the form of price- or revenue-contingent funds. Such funds are designed to accumulate resources when the resource price or revenue is “high” (exceeding some threshold) and to pay out when the price or revenue is “low” (falling below a second threshold). The thresholds are usually preannounced.

These funds aim to smooth fluctuations in the recurrent resources available to the budget, by reducing or eliminating the uncertainty and volatility of resource-related revenues flowing into the budget. This could allow budgetary spending to be insulated from changes in the resource price—which is implicitly assumed to deviate only temporarily from its long-run average—or a more limited smoothing of expenditure adjustment to price shocks.

Contingent rules may determine that resources should be deposited in the fund if the export price or revenue exceeds some reference value. The reference value may be fixed in nominal terms, or it may be changed on a discretionary basis. Alternatively, the reference value may be calculated on the basis of a formula that may be linked to past observations, or may include forecasts of future prices. If prices or revenues are lower than the reference values used for determining with-drawals, the fund may use these resources to make transfers to the budget or for other purposes. In addition, the required accumulation and permissible depletion of resources may also be made dependent on the size of the fund at the time.

The accumulation of assets in the fund may be subject to a cap determining the fund’s maximum size, particularly if the main objective is short-run stabilization. The rules would also need to specify whether the fund can borrow (typically this is not the case) or needs to keep a minimum balance, and whether its capital may be used as explicit collateral for government debt operations.

Contingent funds with fixed rules may prove difficult to design and operate.6 As discussed in Section II, it may not be possible to specify long-run averages for prices or revenues with any degree of confidence, nor to determine whether a particular shock is likely to be permanent or not. Under such circumstances, a contingent fund could face the prospect of accumulating funds indefinitely or being rapidly exhausted. Indeed, shock persistence in commodity prices may explain why many domestic price stabilization schemes and international commodity stabilization agreements for producers collapsed or were terminated in the 1980s and 1990s owing to their financial unsustainability.

Even if a long-run average price could be established from historical data, this would not necessarily imply that deviations will be temporary in the future, that this average price will not change, or that the size of the shocks will not be overwhelming. Thus, the time-series properties of the resource price may change, making the fund unsustainable.7 These factors may help to explain why in some funds with these characteristics the rules have changed over time, or why the actual operations of the fund has included an element of discretion not contemplated in the rules.

Table 11.2.Objectives and Design Features of Selected Funds
Country/StatedDateWithdrawalCompliance with Rules/Control
StateNameObjective(s)EstablishedAccumulation RulesRulesChanges to Rules
AlbertaAlberta Heritage

Savings Trust

Savings (pre-1997, also economic and social development)197630 percent of resource revenues until 1983. 1984-87:15 percent. Transfers discontinued thereafter.Discretionary transfers to the budget.Yes/YesOversight Committee (members of parliament) and provincial treasurer.


Savings197650 percent of certain mineral revenues (increased from 25 percent in 1980).Principal (inflation-adjusted since 1982) invested permanently. Use of earnings decided by governor and legislature.1Yes/YesIndependent trustees, ultimately governor and legislature.

ChileCopperStabilization1985,Based on discretionaryTransfers to the budgetYes/NoMinistry of finance,
Stabilization Fundactivated in 1987reference price determined by the government.2(and extrabudgetary lending) based on discretionary reference price determined by the government.2central bank, and State copper Company (CODELCO).
GRFGeneral Reserve FundStabilization and savings1960Residual budgetary surpluses.Discretionary transfers to the budget.…/…Minister of finance, central bank governor, and other officials.
RFFGReserve FundSavings197610 percent of allDiscretionary transfers to…/…Minister of finance, central bank governor, and other officials.
for Future Generationsgovernment revenue.3the budget (with National Assembly approval).
KiribatiRevenueStabilization and savings19564“When surplus permits,” later apparently changed to 25 percent of all phosphate receipts.Discretionary transfers to the budget with parliamentary approval.No/YesMinister of finance, secretary of the cabinet, and other officials.
Equalization Reserve Fund
NorwayState Petroleum FundStabilization and savings1990, activated in 1995Net government oil revenues.Discretionary transfers to the budget to finance the non-oil deficit (approved by Parliament).Yes/NoMinistry of finance.
SGRFState General Reserve FundSavings1980Since 1998, oil revenue in excess of budgeted amount.Discretionary transfers to the budget.…/YesAutonomous


CFContingency FundStabilization1990, abolished in 1993Residual oil revenue after budget and SGRF allocations.…/…
OFOil FundOil sector investment1993Since 1998, market value of 15,000 barreis per day.…/…Ministry of finance.
Papua NewMineral ResourcesStabilization1974,Government mineral revenues.Government discretion,…/YesGovernment.
GuineaStabilization Fundabolished in 2001though based on estimates of long-run prices.

Stabilization Fund
Stabilization1998Since 1999, 50 percent of oil revenue above reference values, set by decree for 1999-2004.5Transfers to the budget and other state entities based on reference values; also discretionary transfers.5No/YesParliament and the executive.
Sources: National authorities; and IMF staff.

Fixed portion of the earnings distributed as cash to Alaskans; also used to inflation-proof the principal (as required by the 1982 amendment) and to increase capital.

If copper price is up to $0.04 per pound above reference price, no deposit; 50 percent deposit between $0.04 and $0.06 per pound, and 100 percent thereafter. With-drawals symmetrie.

Received 50 percent of GRF assets when established.

Phosphate stock became exhausted in 1979.

Fifty percent (100 percent before 1999 change) of revenue above reference value to be deposited. Withdrawals, with congress approval, if (a) oil revenues in given year are lower than reference value or (b) the resources of the fund exceed 80 percent of annual average oil revenue in the five preeeeding years. Withdrawals under (b) were initially earmarked for debt repayment and capital expenditure. After 1999, these withdrawals earmarked for social and investment spending and debt repayment. Fund balance at the end of the fiscal year must not be less than one-third of that at the end of the preceding year. In late 2001, the rules were modified again, and the central government and the state oil Company were exempted from depositing resources in the fund in the last quarter of 2001 and during 2002.

Sources: National authorities; and IMF staff.

Fixed portion of the earnings distributed as cash to Alaskans; also used to inflation-proof the principal (as required by the 1982 amendment) and to increase capital.

If copper price is up to $0.04 per pound above reference price, no deposit; 50 percent deposit between $0.04 and $0.06 per pound, and 100 percent thereafter. With-drawals symmetrie.

Received 50 percent of GRF assets when established.

Phosphate stock became exhausted in 1979.

Fifty percent (100 percent before 1999 change) of revenue above reference value to be deposited. Withdrawals, with congress approval, if (a) oil revenues in given year are lower than reference value or (b) the resources of the fund exceed 80 percent of annual average oil revenue in the five preeeeding years. Withdrawals under (b) were initially earmarked for debt repayment and capital expenditure. After 1999, these withdrawals earmarked for social and investment spending and debt repayment. Fund balance at the end of the fiscal year must not be less than one-third of that at the end of the preceding year. In late 2001, the rules were modified again, and the central government and the state oil Company were exempted from depositing resources in the fund in the last quarter of 2001 and during 2002.

An approach based on a backward-looking formula would effectively change the nature of the fund. It would no longer be designed to prevent spending from being affected by the resource price cycle, but rather it would smooth budget revenue, thereby allowing time to adjust spending to changes in the resource price. Given the large fluctuations of nonrenewable resource prices, however, the fund’s capital may experience large and protracted changes and may be quite sensitive to factors such as initial conditions.8

The accumulation and drawdown rules might be related to resource futures prices. Futures prices are, however, quite volatile (although somewhat less so than spot prices) and, like other forecasts of resource prices, contain large ex post errors.9

Contingent funds can render the recurrent resources available to the budget more predictable and stable by transferring uncertainty and volatility to the fund. This has implications for the liquidity that the fund may need to hold, in the absence of other financing sources, to function as a stabilization mechanism for the recurrent resources available to the budget (Arrau and Claessens, 1992).

Stabilization funds and the fungibility of resources

A distinction should be drawn between the operational objectives of stabilization funds and overall policy goals. The operational objective of stabilization funds is the stabilization of recurrent resources available to the budget, and funds may be helpful in shielding the budget from revenue uncertainty and volatility. But the fund’s rules do not deal with spending or deficits at the government level. The basic policy objective, however, is the stabilization of public finances. Therefore, the issue is whether the fund effectively constrains government spending or the nonresource deficit.

Since a stabilization fund does not directly affect spending and thus savings, the implicit mechanism whereby a fund would lead to higher savings during “good” times is via a liquidity constraint. By placing some of the resource revenue receipts out of reach of the budget, the government would not be able to finance more expansionary expenditure plans.10

In the absence of liquidity constraints, however, resources are fungible. The government could borrow or run down assets to finance higher expenditures, leaving government savings unchanged even if the fund were to operate in accordance with its rules and if budget revenue were stabilized. Thus, if there is insufficient control of expenditure or deficits outside the fund, the advantages of operating a fund that stabilizes resources available to the budget would be limited. Indeed, governments will probably find borrowing particularly easy when the resource price is high and the fund’s assets are burgeoning.11 The achievement of actual expenditure smoothing therefore requires additional fiscal policy decisions besides the operation of a fund.

Savings Funds

Savings funds seek to create a store of wealth for future generations. This would allow the latter to benefit from part of the revenue arising from the depletion of exhaustible natural resources in the current period (see Table 11.2).

Savings funds have frequently relied on noncontingent rules. In revenue-share funds, the accumulation rule may stipulate that revenues amounting to some prespecified share of resource revenues or of total revenues be deposited in the fund independently of resource market and overall fiscal developments. Alternatively, a fixed nominal contribution to the fund may be specified. The aim is to put away some resources to gradually build up a store of wealth so that future generations might benefit from part of the proceeds of nonrenewable resources extracted in the current period. An ancillary aim may be to reduce the reliance of the budget on a particularly volatile source of receipts.

Revenue-share savings funds may also have stabilization objectives. When withdrawals are allowed to finance the budget, for instance during resource price downturns, recessions, or catastrophic events, the fund’s operations also include short-term purposes.

The case for a savings fund is subject to conceptual issues analogous to those discussed in the context of stabilization funds. In particular, in the absence of liquidity constraints, savings funds would not necessarily lead to higher savings, as the government can finance spending in other ways. As long as the government can borrow to finance its transfers to the fund, the usefulness of placing floors on how much the fund should save on a gross basis would be limited because net indebtedness would not be constrained. The problem of determining a long-run average price also remains.

If a savings fund spends on investment items, financial savings are reduced. A fund dedicated to this end and managed separately from other public sector spending decisions could also lead to inefficiency. This is related to the issue of revenue earmarking, which is discussed in Section IV.

Financing Funds

In a financing fund the operational rules are designed so that it effectively finances the overall budget balance. The Norwegian State Petroleum Fund operates on this basis (Skancke, Chapter 12 in this volume). Under the rules in place, the budget is required to transfer to the fund net oil revenues. In turn, the fund finances the budget’s nonoil deficit through a reverse transfer. In practice, this amounts to the fund financing the overall budget balance. If the budget is running an overall surplus, the latter is transferred to the fund; if the budget is in deficit, the latter is financed by the fund. The assets held in the account may be managed according to separate investment guidelines (as in Norway), or jointly with other resources of the treasury.

A financing fund provides an explicit and transparent link between fiscal policy and asset accumulation, and addresses fungibility issues. Changes in the assets held by the fund correspond to those in the overall net financial asset position of the government, which is driven by the overall fiscal balance. The fund accumulates assets to the extent that there are actual surpluses in government finances. Thus, net allocations to the fund, together with the income earned by the fund’s assets, give an indication of the trajectory of financial wealth, because this arrangement’ rules out financing the accumulation of resources in the fund through borrowing. Fiscal surpluses are required, however, for a financing fund to become operational if its initial funding is not to be financed through borrowing.

The establishment of a financing fund, effectively little more than a government account, may be related to political economy considerations. The fund may help to make explicit the intertemporal implications of expenditure choices without the potential cost of budget fragmentation (see Section IV). For example, an increase in expenditure would automatically lead to lower deposits into the fund, or a greater withdrawal from the fund, with computable consequences for fiscal solvency and the returns on government assets in future years. At the same time, this type of fund may provide little “disciplining” effects, since the flows in and out of the fund depend on resource revenue and policy decisions of the authorities embodied in the nonresource fiscal stance.

Additional Arguments for Funds

A fund might dampen real exchange rate volatility and the effects of Dutch disease insofar as it might facilitate the placement of resources abroad during booms. This could also be achieved by the government or the central bank using the current receipts to increase, respectively, foreign deposits or foreign exchange reserves.

Similarly, a fund could help to increase the government’s stock of liquid assets, thereby providing an element of self-insurance. Again, the government could, in principle, hold liquidity for precautionary purposes without recourse to a formal fund.

A fund may seek to achieve greater transparency. For example, if the fund’s assets largely represent the net financial wealth of the government, and information about the fund is easily and frequently made available, a fund may be a useful vehicle to improve the transparency with which the government manages nonrenewable resource revenues.

Another potential transparency benefit of an NRF is that, by removing part of resource revenues from the budget, the reported budget balance could be more representative of the underlying budget position. For example, if revenues were higher than budgeted (owing to a higher resource price) and the excess were to be deposited into a fund, the reported budget balance would not improve. Moreover, if budget expenditures were to overrun, for example, financed by higher borrowing, the recorded budget balance would deteriorate. This transparency benefit could be similarly achieved, however, by an appropriate fiscal reporting system, for example, through inclusion of a nonresource balance.

Establishing a fund could also reduce transparency. For example, a fund’s assets may be claimed to be the government’s savings from resource revenues. But if the government borrows from elsewhere to finance its deposits into the fund, the gross assets held in the fund would provide a misleading indication of the government’s net wealth. Moreover, adding institutions and extra accounts to a fiscal system may in practice hamper transparency and budget management. These issues are discussed further in Section IV.

If governance were a major problem in existing institutions, a separate institution could, in principle, be created that would have better governance. The establishment of an institution with large gross assets, however, may pose major risks, even if it were initially expected to be well run. In particular, there is a danger that the fund may become infected with the poor governance practices already existing elsewhere in the public sector. Increases in the amount of public gross assets may widen the scope for losses to the public purse. The preferred solution may well be to tackle the governance issues directly, rather than set up new institutions.

Alternative Approaches

The objectives of stabilization, saving for the future, or investing abroad to sterilize large foreign exchange inflows could be achieved through implementation of a sound fiscal policy within the context of an overall budget strategy (Barnett and Ossowski, Chapter 3 in this volume). If the appropriate fiscal response to a higher nonrenewable resource price was to increase public savings, the government could achieve it in the context of such a framework, and with any financial saving comprising part of the total financial resources available to the government. Similarly, when prices fall and the appropriate response is to dissave, this can be done by borrowing or running down total financial assets. An overall fiscal policy could also be geared toward saving for the future or placing resources abroad to sterilize large foreign exchange inflows.

The formulation of an overall fiscal policy may be aided by a medium-term expenditure framework that can help to limit the extent of short-run expenditure responses to rapidly changing resource revenues. Multiyear expenditure planning can also allow a better appreciation of the future spending implications of present policy decisions, including the recurrent costs of capital spending (Potter and Diamond, 1999).

Stabilization funds on their own cannot reduce the uncertainty and volatility of nonrenewable resource revenues facing the public sector as a whole. In this context, however, there may be a role for the use of contingent financial instruments such as options and futures contracts to deal with the external exposure and transfer risk to international financial markets. Recourse to contingent markets might permit prices (or price ranges) for nonrenewable resource deliveries in future periods to be “locked in.” As a result, budgeting could become more realistic and certain. Hedging could also provide some protection against substantial price falls. In practice, however, there may be limitations to the extent to which future production might be hedged. In addition, the undertaking of hedging operations requires an appropriate institutional framework, to minimize possible governance and transparency risks (Daniel, Chapter 14 in this volume).

Funds and the Political Economy of Government Spending

The establishment of NRFs may be justified on political economy grounds. Funds have been seen as potentially helpful instruments when governments have difficulty in maintaining stable expenditures.

First, governments, even if they see the case for increased financial savings when nonrenewable resource revenues are high, often face substantial political pressures to spend the higher revenues. This case argues for funds to play a role in mitigating the pressures on governments, but not necessarily to place any additional constraints on fiscal policy

Second, politicians may not fully appreciate the need to save in such circumstances, they may be short-sighted, or they may not be rewarded for thinking about long-term issues. In such cases, it could be argued that they should be constrained to do so. This situation could suggest the placement of additional constraints on fiscal policy (for instance, in the form of binding fiscal rules) to ensure more “responsible” behavior.12

Third, governments may actually find it politically difficult to issue gross debt to finance spending and transfers to an NRF. For example, parliaments may be opposed to further issues of debt. In all these cases, by formally limiting the resources available, funds could help to prevent large increases in spending during revenue upswings.

However, large (or rapidly growing) NRFs may themselves give rise to domestic spending pressures and exacerbate the problem of rendering longer-run saving abroad politically acceptable. This could happen, for example, if there is public perception that some of the resources in the fund could be better used to increase domestic expenditure or to reduce taxation.

IV. Operational Aspects of Funds

The establishment of an NRF requires decisions about its integration within the fiscal framework and its asset-management strategy. Governance, transparency, and accountability issues also need to be addressed.

The Fund and the Budget

Consideration needs to be given to the integration of the fund within the budget process and to the consequent institutional arrangements.

Integration with the budget

If a decision is made to establish a fund, it should be integrated within the budget process in a coherent manner. Proper integration of the fund and the budget helps to maintain a unified control of fiscal policy and avoid problems in expenditure coordination, such as duplication of expenditure or capital spending decisions made without taking into account their impact on future recurrent spending. It also facilitates a consistent prioritization across all government operations.

This would suggest preference for institutional arrangements that maintain a unified control over expenditure, avoiding the emergence of two “budgets,” namely the traditional budget and a separate expenditure program financed by the fund. The separation of spending programs could lead to fiscal management problems. In practice, it may not be clear how spending priorities would be set, or which expenditures would be financed by the fund and which by the budget. Therefore, to address the risks that funds might pose in terms of fragmentation of policymaking and loss of overall fiscal control, it would be important to ensure that spending decisions are taken within the context of the budget and that expenditure is included in the budget in a comprehensive way.

The need for legitimacy and contestability of budgetary resources provides additional reasons why it would be preferable for the resources in the fund to be spent through the normal budgetary approval process. Public resources should be raised and spent in accordance with public demands and for the highest (marginal) value. The legitimacy of the budget is enhanced by legislative approval of the annual appropriation law. This therefore suggests that any off-budget spending that is allowed should remain subject to parliamentary scrutiny and consideration.

Institutional arrangements for the fund

Three institutional arrangements may be distinguished that vary according to the degree of integration with the budget.

The virtual fund

The existence of a fund need not imply the creation of a new institutional mechanism. A nonrenewable resource “fund” may be a fund in name only. This accounting-only design is referred to as a “virtual fund” because there is no separate institutional structure for the management of the fund, and all revenues and expenditures are on-budget. Certain resources would be identified as belonging to the fund. These resources could be held in the government’s main account or in a separate government account. Restrictions in line with the objectives of the fund would be placed on drawing down the fund’s resources for expenditure. Any drawdown of government deposits, including the fund account, would appear as deficit financing. The assets that “belong to the fund,” however, would be managed like other government assets.

Under a virtual fund arrangement, there would be no earmarking of the fund’s resources for certain items of expenditure. Expenditures would continue to be executed by the relevant line ministries and agencies and would be included in the budget. Correspondingly, allocative decisions at budget time would be taken by the parliament. Thus, a virtual fund design need not hamper fiscal management, and it would be consistent with transparent policy decisions, accountability, and control of expenditures through normal budgetary procedures—provided it is supported by adequate accounting, reporting, and audit procedures (see “Governance, Transparency, and Accountability,” below).

A virtual fund could strengthen the political feasibility and support for saving nonrenewable resource revenues. It could also help to strengthen the incorporation of sound economic principles within the budget process by focusing attention on the nonresource balance and by highlighting that nonrenewable resource revenues are not like other revenues and should, in general, be saved rather than spent.

All resources pass through the budget

Under this approach, transfers to and from the fund’s account could be explicit line items in the budget. All revenues would be included in the budget, and the amount that is to be saved in the fund would be shown as a transfer to the fund. If there is a need to dissave, or draw-down on the fund, this would be shown in the budget as a transfer, and all spending would be done by appropriation. This approach would preserve the unity of the budget, without the restrictive rules implicit in the virtual fund.

The resources transferred to the budget could be earmarked for particular expenditures. Earmarking may be seen as making it easier to resist political pressures to use windfalls for less appropriate purposes. However, earmarking would result in resources being placed outside the allocative budget process and might lead to inefficient expenditure and the misuse of resources.13 The impact of earmarking is also uncertain insofar as budgetary resources are fungible.

Off-budget expenditure

An extrabudgetary fund may be set up as a separate entity with authority to undertake off-budget expenditures. Arrangements may also include the fund having its own direct sources of revenue. A rationale for this design is the notion that potential overspending might be prevented by keeping resources off-budget. Also, such an approach may be justified as one means to “get around” an inefficient or corrupt system and to deliver more effectively the desired spending policies.

Box 11.1.Oil Funds and Extrabudgetary Spending in Nigeria and Venezuela


Before 1995, Nigeria had various types of extrabudgetary funds that were financed by oil revenues and used for off-budget expenditure. Spending from these funds expanded from 4 percent of GDP in 1990 to close to 12 percent of GDP in 1994—more than one-third of the federal budget. Serious problems were experienced as a result of the nontransparent use of offbudget funds. Expenditures were mainly undertaken in various types of investments in the oil sector and other “priority” development projects for which project selection criteria and procedures were lax. Moreover, implementation capacity to manage investment expenditure was inadequate. As a result, a number of large investment projects have required large and costly financing and have had low ex post rates of return.


The Venezuelan Investment Fund (VIF) was established in the mid-1970s to act as the repository of the oil windfall. Its resources were soon diverted toward equity stakes in public enterprises (including in the manufacturing sector), many of which turned out to be loss makers. In recent years, a share of the VIF’s resources has been used to provide cash injections to state companies in the electricity sector. These companies have registered deficits and relied on transfers from the central government and the VIF to finance capital expenditure and meet debt-service obligations. In effect, subsidies have been provided off-budget through the use of VIF resources.

This approach may lead to coordination problems with the budget. Moreover, if spending is undertaken without parliamentary approval and adequate oversight, it could result in nontransparent off-budget practices and give rise to governance concerns. In addition, it remains doubtful on practical grounds whether, if the overall budget system is poor, a better subsystem can be established to deal with windfall proceeds. As illustrated in Box 11.1, in a number of cases the oversight of a fund’s spending has been inadequate, and public resources have been misallocated.

If a separate NRF with spending authority is considered, a separate appropriation bill for the fund should be submitted for parliamentary approval. Budget formulation and reporting should focus on a consolidated presentation (inclusive of the operations of the fund), and all the expenditures should be executed by the treasury.

Asset Management Issues

An NRF could, over time, hold an important share of the public sector’s financial assets. The management of the fund’s capital is therefore a key component of the strategy for the fund. Strategies for managing NRF assets have varied greatly among countries (Table 11.3).

Asset management strategy

An asset management strategy would need to be defined for the fund, including prudential investment rules targeting desired levels of risk, liquidity, and return. The fund’s financial operations should be designed to avoid disrupting financial markets and macroeconomic stability. Equally important, the strategy would need to take into account the main objectives of the fund, and in particular the relative emphasis placed on stabilization and savings, in the government’s overall asset management strategy.

Consideration would need to be given to the appropriate time horizon. For example, the liquidity and maturity of “risk-free” assets would be a relevant consideration. A fund with mainly a stabilization objective that might need to draw down its assets at short notice, for instance during sharp commodity price downturns, would not necessarily view high-quality longterm bonds as “risk free.” Similarly, decisions whether to hold equities in the portfolio might depend on whether the fund’s objectives are seen as mainly related to long-term savings or short-term stabilization. The currency composition of the assets would also be important.

The asset management strategy should reflect a consolidated portfolio of the government. In addition, the fund’s short-term asset operations should be consistent with, and coordinated with, the debt management operations of the ministry of finance, the treasury’s management of the government’s cash flow, and the financial assets already held as part of the government’s balance sheet. In some cases, difficult choices may need to be made between assets held in the fund and outstanding gross government debt.

Table 11.3.Asset Management of Selected Funds
Foreign / DomesticLevel of Assets1
Country/ StateAsset SplitOperational Management(In percent of GDP)
AlbertaMainly domesticTreasury’s Investment8
(Canada)Management Division
AlaskaMainly non-Alaskan, including foreignAlaska Permanent Fund982
(United States)Corporation (special
private corporation)
ChileMainly foreignCentral bank
GRFDomestic and foreignKuwait Investment Authority (since 1982), autonomous government body
RFFGMainly foreignKuwait Investment Authority (since 1982), autonomous government body
KiribatiForeignReserve Fund Investment897
NorwayEffectively foreign.Central bank, partly using41
Held as local currency account at central bank, which manages a counterpart portfolio of foreign assetsprivate investment managers
SGRFAlmost entirely foreignAutonomous government agency23
OFMostly foreignMinistry of Finance4
Papua New GuineaHeld as local currency account at central bankMRSF Board30
VenezuelaForeignCentral bank5
Sources: Data provided by the authorities; and IMF staff.


In percent of gross state product, end-2000.

For names of funds, see Table 11.2.

Sources: Data provided by the authorities; and IMF staff.


In percent of gross state product, end-2000.

For names of funds, see Table 11.2.

A strong case may exist for placing the fund’s accumulated resources abroad. Investing them in domestic nongovernmental financial assets would transmit resource revenue volatility to the economy. In down-turns, the liquidation of domestic financial assets (such as domestic deposits) could have a contractionary effect on the economy (unless offset by open market operations), while investment in domestic financial assets and monetization of the fund’s flows during upturns could fuel aggregate demand.14 Also, the protection of the competitiveness of the nonresource tradable sector may be a policy objective, which could be helped by the sterilization of savings.

In general, the fund should not invest in the government’s own domestic or foreign liabilities as part of its asset allocation. From a portfolio perspective, such a strategy would make little sense. It would amount to the government issuing debt to itself—with potential costs in terms of transaction fees paid to intermediaries and liquidity of the domestic debt market. Moreover, arrangements whereby the fund holds its own government’s debt could lack transparency.

The fund should not be permitted to borrow or to lend. For the transparent and effective conduct of fiscal policy, it is best for borrowing and lending decisions to be centralized at the ministry of finance, in collaboration with the central bank. Also, the fund’s capital should not be used as collateral for government borrowing.

Domestic investment issues

The fund’s resources might be used to undertake domestic investment in physical assets rather than be sterilized abroad. Countries with pressing infrastructural needs or with perceived opportunities for productive domestic investment are particularly likely to consider this Option. Such a strategy could also aim at enhancing the competitiveness (and promote the growth) of the nonresource tradables sector; in effect, part of the resource wealth would be given up for the prospect of higher nonresource wealth. There is, however, a danger that such spending may rise to an unsustainable level, or that too quick an increase may result in poor-quality projects.

There are a number of reasons to suggest that an NRF should not undertake domestic capital expenditure directly. First, investment should be guided by overall policy considerations (including medium-term recurrent implications), rather than by the availability of resources in the fund. Second, a perception that resources are readily available for domestic uses could create incentives for rent seeking and make the fund prone to abuse. Third, it may be difficult to assess the effects of the domestic use of resources on aggregate demand and competitiveness if the spending is off-budget. Finally, an NRF with stabilization objectives may need to build up liquid assets to preserve its precautionary objective for budget financing.

Operational management of assets

Specific operational asset-management guidelines should govern the allocation of the fund’s resources. The guidelines should be publicized to allow performance of the fund to be measured relative to them. They should be unambiguous regarding the desired risk-return combination, the proportions to be invested in various types of assets, the geographical mix of assets, and the desired currency composition of the portfolio. There should be clear responsibility for the establishment and implementation of the guidelines. This might rest with the ministry of finance since it is responsible for the overall management of public resources.

There are several options regarding the operational management of the fund’s assets. The ministry of finance could be responsible, or this may be delegated to the central bank. A board, comprising representatives from the government or legislature or both, could be established to manage the fund or to advise the government on the management of the fund. Responsibility for managing the fund’s assets could be assigned directly to an independent board of trustees that answers to the cabinet and the parliament but is not a political organization. The management of the fund’s assets could be subcontracted to private investment managers, with their selection decided in the same way as procurement for any other government service.

Whichever model is chosen, a clear allocation of responsibilities would be important to ensure that those who manage and oversee the operations of the fund are held accountable. Provisions would need to be drawn up stipulating who is in charge of, and accountable for, setting the fund’s overall investment policy, drawing up operational guidelines, managing the fund’s resources, and evaluating performance (see below). There should be an unambiguous assignment of accountability for the performance of the fund, preferably with one individual answering to parliament. More broadly, the division of responsibilities among the ministry of finance, the monetary authority, and the fund should be clearly specified.

Governance, Transparency, and Accountability

The rules and operations of an NRF should be transparent and free from political interference. To facilitate this objective and performance evaluation, the law creating the fund should clearly state its rules, purposes, and objectives. Lack of transparency would hamper legitimacy and undermine public support for the fiscal policy objectives related to the fund’s operations. It would also allow incentives for lobbying for resources, and pressures to increase spending with positive nonrenewable resource shocks. Therefore, stringent mechanisms should be put in place to ensure accountability and prevent the misuse of resources.

This requires regular and frequent disclosure and reporting on principles governing the fund, its inflows and outflows, and the allocation of assets. Regulär interyear reporting should be submitted to the legislature and made widely available to the public, for example, by posting on the Internet, as done by Norway and Alaska. In addition, a detailed annual report should be provided to the legislature on the flows into and out of the fund during the year and the allocation of the resources under the fund’s supervision. The report should contain a summary of the asset allocation of the portfolio, summary statistics on the performance of the portfolio during the year, and a critical retro-spective on the activities of the fund during the year.

To ensure propriety in the fund’s activities, it will be important to have the fund’s activities audited by an independent agency to supplement the internal audit of the fund. Such an audit should include both financial and performance audits and, if relevant, the procedures for the choice of external managers for the fund. Audit and reporting should cover evaluation of the fund’s performance. Such evaluations should be done by an independent professional company with no financial interest in the outcome.15

V. How Effective Are NRFs?

This section evaluates the effectiveness of NRFs in two ways. First, it considers the effect of NRFs on government expenditure and its relationship to resource export receipts. The empirical evidence draws on econometric estimates, using data for a number of countries with NRFs.16 Second, it provides a review of selected country experience with NRFs to assess whether, and in what way, the rules of the NRF may have constrained government behavior.

Empirical Results

The experiences of selected nonrenewable resource-producing countries with and without NRFs are examined below; for a given country with an NRF, pre- and post-fund performance results are compared.

A sample of 12 countries is examined, including 5 countries that have had NRFs for a significant period and 7 others that are used as a comparator group (Table 11.4). The statistical analysis focuses on central government expenditure and nonrenewable resource export earnings, both in real per capita terms. The use of export earnings may be preferable to government resource revenue because the latter may accrue with a lag and could even be endogenous.17

In some countries with NRFs, expenditure has tended to be less correlated with changes in the price of the resource. Three of the five countries with an NRF surveyed (Chile, Kuwait, and Norway) share some distinctive characteristics. Along with the United Kingdom, these are the only countries in which nonrenewable resource export earnings do not bear a statistically significant positive relationship to expenditure (see Table 11.4). In Chile the relationship is actually negative, which could be due to the procyclicality of copper export earnings (Spilimbergo, 1999) combined with a countercyclical fiscal policy. Similar results, although not statistically significant, are found for Norway.

The case of Oman is more difficult to assess. Over the longer run, the relationship between oil export earnings and expenditure appears similar to that in Bahrain and Saudi Arabia, two comparable countries without an NRF (Figure 11.1). Moreover, among the countries in the sample, nonrenewable resource export earnings have the strongest influence on spending in Oman. Inspection of the data, however, suggests that expenditure may have been driven less by revenue availability in recent years, although formal tests do not find evidence of a change in the relationship. Finally, Papua New Guinea exhibited a small but positive response of spending to resource export earnings.

Table 11.4.Selected Countries: Relationship Between Nonrenewable Resource Export Earnings and Central Government Expenditure
Ratio of AveragePercent Change in Government
Nonrenewable Resource ExportExpenditure Associated with aImpact of
SampleFundEarnings to Government50 Percent NonrenewableNonrenewable Resource1
countryPeriodStartExpenditure (In percent)Resource Price IncreaseLaggedContemporaneous
Countries with nonrenewable resource funds
Papua New
Countries without nonrenewable resource funds
Saudi Arabia1965-99-83.011.5ns+
United Arab
United Kingdom1983-99-5.02.8nsns
Source: Davis and others (2001), Tables A2.1 and A2.2.

Based on preferred equations, as described in Davis and others (2001); “ns” indicates that the variable is not statistically significant at the 10 percent level. A”+”or “-” indicates the sign on the estimated coefficient, if statistically significant.

Venezuela introduced an NRF in late 1998.

Source: Davis and others (2001), Tables A2.1 and A2.2.

Based on preferred equations, as described in Davis and others (2001); “ns” indicates that the variable is not statistically significant at the 10 percent level. A”+”or “-” indicates the sign on the estimated coefficient, if statistically significant.

Venezuela introduced an NRF in late 1998.

Figure 11.1.Nonrenewable Resource Export Earnings and Central Government Spending

Sources: IMF, World Economic Outlook, various years; and IMF staff estimates.

1In thousands of local currency per capita; deflated by the CPI, 1995 = 100.

2For Chile, copper; for Papua New Guinea, copper, gold, and oil; for other countries, oil.

3Excludes information for 1991-93 owing to regional conflict and subsequent reconstruction period.

The empirical evidence suggests that the establishment of the NRF did not have an impact on government spending. This result is quite robust and holds for the four countries in which tests could be performed.18 Tests were performed to assess whether: (i) there was a significant change in the process driving central government expenditure after the establishment of the NRF; (ii) the specific relationship between central government expenditure and nonrenewable resource export earnings changed after the establishment of the fund—for example, a stabilization fund might be expected to reduce the sensitivity of expenditure to resource export earnings; and (iii) the establishment of the NRF coincided with a downward shift in the path of expenditure, as might be expected from a savings fund. For all four countries, none of the three tests suggested that creation of the fund had a statistically significant impact on expenditure.

While the empirical results are quite strong, their interpretation should be qualified. The results are constrained by limitations on the availability and quality of data and the small sample. A particular concern is that government spending, including possibly direct spending by the NRF itself, may not be fully captured in the expenditure data—this would tend to bias the results in favor of finding a positive effect of NRFs on fiscal policy. Moreover, it is difficult to determine the optimal relationship between nonrenewable resource export earnings and expenditure, and, in comparing the results across countries, the size of nonrenewable resource export earnings relative to the economy (or expenditure) should not be ignored. For example, developments in nonrenewable resource exports are more important to Venezuela than to Chile.

The empirical evidence points toward two general results. First, it suggests that some of the countries with an NRF had a more limited expenditure reaction to changes in resource revenues than those without such funds—expenditure is found not to have been positively related to resource export earnings in the former. In Oman, however, prior to the 1990s, government expenditure was sensitive to oil export earnings despite the existence of a fund, and this has also been the case, to a lesser extent, in Papua New Guinea. Second, the evidence suggests that the relationship between government spending and resource export earnings was not affected by the establishment of NRFs in the four cases considered. This may suggest that countries with more prudent expenditure policies tended to establish an NRF, rather than that the NRF itself led to more prudent expenditure policy, though in some cases the fund may have helped maintain cautious policies.

Selected Country Experience

The rest of this section examines the specific historical experience of selected countries with NRFs.19 Particular attention is paid to how the design and implementation of funds have addressed the uncertainties underlying nonrenewable resource prices and the extent to which funds may have constrained overall fiscal policy. The main characteristics of some more recent oil funds are discussed in Box 11.2.

Norzvay’s State Petroleum Fund (SPF)

The Norwegian government established the SPF in 1990 (Skancke, Chapter 12 in this volume). However, the fund was not activated until 1995, following the achievement of overall budget surpluses. The fund is designed to manage accumulated budgetary surpluses and does not have specific rules for the accumulation or withdrawal of resources, making its operations flexible. Specifically, the budget transfers to the SPF net oil revenues. In turn, the SPF finances the budget’s non-oil deficit through a reverse transfer (provided there are enough resources in the SPF).20 Thus, the SPF effectively finances the overall budget balance. An overall budget surplus would be transferred to the fund; a budget deficit would be financed by the fund. The accumulation of assets in the SPF, which include returns on the fund’s capital, thus represents government net financial savings. The amount actually saved depends on oil prices and the fiscal stance as embodied in the non-oil fiscal deficit. SPF assets are under the control of the ministry of finance and are managed by the central bank, with a high level of transparency and accountability. The size of accumulated funds is increasing rapidly, and reached 41 percent of GDP at end-2001.

Box 11.2.Some Recent Oil Funds

Several countries have set up new oil funds in the last few years. Creation of these funds may have been prompted in part by the large oil price volatility observed in recent years.1

Algeria. An oil stabilization fund was established in 2000. Oil revenues in excess of budgeted amounts are to be deposited in the fund. Withdrawals are permitted to finance the budget and lower the stock of outstanding public debt. In practice, the authorities have decided to accumulate in the fund a reserve to finance expenditures in case of a shortfall in hydrocarbon revenue below the amount projected in the budget, and to use the balance to amortize the public debt. At end-2001, the resources in the fund amounted to about 6 percent of GDP.

Iran. An oil stabilization fund was created in late 2000 to insulate the budget from fluctuations in oil prices. The fund receives oil revenues in excess of the budgeted amount. If by the end of the eleventh month of the fiscal year the realized crude oil export revenue is less than the budget figure, the treasury may draw from the fund the amount required to compensate for the shortfall. Up to 50 percent of the fund’s accumulated assets may be lent out domestically in foreign currency to eligible firms in the private sector. In fiscal year 2002/03, in addition to these provisions, a substantial one-time with-drawal from the fund was envisaged to compensate for the exchange rate unification costs.

Mexico. An oil stabilization fund was established in 2000. According to the fund’s rules, a proportion of total federal government revenue (which includes oil revenue) in excess of budgeted amounts is to be deposited in the fund. Originally, the resources accumulated in the fund could only be used to compensate the budget for oil export revenue shortfalls due to a price decline of more than US$1.5 a barrel below the budget reference price; total withdrawals from the fund were capped at 50 percent of accumulated assets at the end of the previous year. In March 2002, however, the fund’s rules were amended to allow for full compensation of shortfalls, and during the course of the year the resources that had been accumulated through end-2001 (equivalent to 0.2 percent of GDP) were fully drawn.

Trinidad and Tobago. The Revenue Stabilization Fund has been operational since 2001. If oil revenue is higher than budgeted by at least 10 percent, two-thirds of the excess revenue must be placed in the fund. Withdrawals can be made from the fund if oil revenue is lower than budgeted, up to the revenue shortfall or 25 percent of the accumulated fund balance at the end of the previous year (whichever is the lowest).

In several of the funds described above, the trigger for accumulation/ withdrawal of resources is budgeted oil revenue. Therefore, the objective of these funds would seem to be the stabilization of budget revenues as the budget is executed during the year. This design could provide incentives for strategic setting of oil revenue in the budget—budgeting a relatively high level of oil revenues would increase the likelihood of being able to draw from the fund during the fiscal year. Moreover, if the budget is in deficit, higher-than-budgeted oil revenues could lead to the paradoxical situation of having to borrow in order to place resources in the fund.

1 The funds recently created in Azerbaijan and Kazakhstan are discussed in detail by Wakeman-Linn, Mathieu, and van Selm in Chapter 13 of this volume.

A key reason for establishing the SPF was the desire to make more transparent the intertemporal policy choices available to the country, related to the expected secular decline in oil and gas output and increase in pension outlays. In this context, the SPF has helped to provide a long-term framework for the annual process of setting the non-oil budget deficit. There is currently a wide-ranging debate in Norway on the proper use of the rapidly growing assets in the SPF, which focuses on both long-term and cyclical considerations.21

The SPF is effectively a government account rather than a fund. Its features ensure integration into a unitary fiscal system and address fungibility issues. The fund does not attempt to deal directly with the problems posed to the budget by the volatility of oil prices—the latter are addressed in the context of the standard budgetary process. The lack of restrictions posed by the SPF has worked well, since Norway has typically followed sound fiscal and macroeconomic policies. Moreover, for a country like Norway, with a highly diversified production structure and a broad fiscal revenue base—oil revenues have typically accounted for less than 15 percent of government revenue—the challenge posed by oil price volatility to fiscal management is significantly less than for other oil producers.

Chiles Copper Stabilization Fund (CSF)

The CSF was established in 1985 following a sustained increase in the international copper price. The CSF’s accumulation and with-drawal rules are based on a reference copper price determined annually by the authorities. No explicit formula is used to calculate the reference price. In practice, however, the reference price followed a ten-year moving average until the mid-1990s; more recently, the reference price has been set somewhat lower than the moving average. When the price of copper exceeds the reference price by between US$0.04 and US$0.06 a pound, 50 percent of the resulting state copper company’s revenues is deposited in the CSF; above US$0.06 per pound, 100 percent. The rules for withdrawals are symmetric.

The resources of the CSF are understood to have grown substantially after 1987.22 However, significant withdrawals took place beginning in 1998, mainly due to a sharp downturn in copper prices, and CSF resources were also used to subsidize domestic gasoline prices through credits to the Oil Stabilization Fund. By 2002, the resources of the CSF had been exhausted, and the fund had to be replenished.

The impact of fluctuations in copper exports on Chile’s public finances is significantly less than in the case of many major oil producers. Copper revenues in Chile have typically amounted to less than 10 percent of total government revenues. In addition, the volatility of copper prices has been lower than that of oil prices.

Fiscal and macroeconomic policy has generally been sound in Chile. From a political economy perspective, operation of the CSF may have helped the government to resist expenditure pressures during upswings in copper prices in the late 1980s and mid-1990s, a fact consistent with the negative correlation between copper price increases and government spending reported above. On the other hand, the CSF did not constrain expenditure, since the government would have been able to borrow.23

Oman’s State General Reserve Fund (SGRF)

The SGRF was established in 1980 with the objective of saving oil revenue for future generations. In addition, the Contingency Fund was established in 1990 to smooth the budgetary oil revenue stream, but this was replaced in 1993 by the Oil Fund, which finances investments in the oil sector.

Oman’s long experience with funds illustrates the difficulties that the behavior of oil prices and integration with overall fiscal policy can pose. At inception, the SGRF received 15 percent of oil revenues. However, the rules for the operations of the SGRF have since been changed frequently. Since 1998, the SGRF has received oil revenue in excess of the reference oil price set in the annual budget. In any given year, the government may withdraw from the SGRF up to the amount of the budgeted deficit; special procedures exist, however, for additional withdrawals in excess of the budgeted deficit. Under this arrangement, the SGRF accumulates resources when oil revenues in excess of the budgeted reference oil price are larger than SGRF financing of the budget deficit.24

Because resources of the SGRF can effectively be withdrawn at the discretion of the government, the SGRF’s balance has been determined in part by overall budgetary needs. Mainly as a result of withdrawals from the SGRF to finance the budget, the fund does not seem to have been able to fulfill its objective of accumulating resources for the time (probably only 15 to 20 years away) when oil reserves are exhausted.

Kuwait’s Reserve Fund for Future Generations (RFFG)

The RFFG was established in 1976. The objective of the fund is to save in order to provide a stream of income for future generations. The accumulation rule of the fund requires the government to deposit 10 percent of total government revenue, irrespective of oil or budgetary developments. In addition, the fund accumulates the return on its assets. The fund’s capital is understood to be invested mainly in foreign assets.25 There are no precise rules governing the withdrawal of assets, although drawing on the fund requires approval by the national assembly. Use of the fund’s resources in the aftermath of the Gulf War helped to finance a large part of the reconstruction effort.

On the basis of available information, Kuwait has followed relatively prudent fiscal policies. Over the past two decades, the consolidated fiscal position has generally been in strong surplus (excluding the reconstruction period in the early 1990s), and expenditure policy has not generally been driven by revenue availability.

Papua New Guinea’s Mineral Resources Stabilization Fund (MRSF)

The MRSF was established in Papua New Guinea in 1974, with the objective of stabilizing revenue to the budget from mining and oil sources. The inflows into the MRSF’s account were the revenues from mineral resources. The MRSF could make transfers to the general treasury account, based on a combination of rules and discretion. The MRSF Board, which was made up of government officials, had to project average annual mineral resource revenue over the next eight years, with price forecasts constrained by long-run historical average prices. On this basis, a transfer, considered by the board to be sustainable over the next five years, was made.

Performance of the MRSF was mixed. First, despite its stated objectives, transfers from the MRSF varied significantly from year to year, almost as much as the resource revenues themselves. This was due to the instability of revenue forecasts—itself a reflection of underlying resource price volatility, but also of budgetary needs. An initial provision restricting the amount transferred to the budget in any one year to no more than 20 percent higher than the previous year was found to be unduly restrictive and was relaxed in 1986. Second, the fund does not appear to have been well integrated with overall fiscal policy or to have helped stabilize budget expenditure, which was partly financed with debt operations outside of the MRSF.26 The fund was recently wound down.

Venezuela’s Macroeconomic Stabilization Fund (MSF)

The MSF, established in late 1998 with the objectives of insulating the budget and the economy from fluctuations in oil prices, initially had relatively rigid rules for transfers to and from the fund. Contributions to the fund were specified as the oil revenues above a reference value corresponding to the five-year moving average. Resources could only be drawn from the fund if oil revenues in a given year were below the reference values, or resources in the fund exceeded 80 percent of the five-year moving average of oil export revenues; in the latter case, excess resources were to be used to amortize government debt.

The rules of the MSF were substantially modified in May 1999. The reference values triggering accumulation or withdrawal of resources were fixed (based on an oil price of US$9 per barrel). The resources to be deposited in the fund were limited to only half of every dollar over the new reference value, and discretionary withdrawals from the fund with government authorization and legislative approval were allowed. In late 2001, the MSF was modified again and the government and the state oil Company were exempted from having to deposit resources in the last quarter of 2001 and during 2002. Further changes to the rules are currently under discussion.

The experience with the MSF in recent years has been disappointing, as it has not resulted in an improved fiscal performance, and has led to high-cost borrowing to meet its rules. The integration of the fund’s operations with central government operations has proven especially problematic. Because the central government remained in deficit in 1999-2000 despite the strong recovery in oil prices, it could only make deposits into the fund with recourse to other financing. In particular, the buildup of gross assets in the fund was financed in part by domestic borrowing. Moreover, operations of the MSF did not prevent the implementation of an expansionary expenditure policy as oil prices recovered from their low levels in 1998 and early 1999.

Summary of country experience

These country experiences highlight some of the practical difficulties posed by the operations of funds. NRFs have been associated with a variety of operating rules and fiscal policy experience. In some cases where the underlying fiscal policies were generally sound to begin with (such as Norway), funds have been better able to address the problems posed by the behavior of nonrenewable resource prices and fungibility issues. At the same time, however, their operations may not have provided significant restrictions to government behavior. In many other cases, however, the funds’ rules have been frequently by-passed or changed, effectively incorporating an element of discretion. In most funds, the rules allow discretionary withdrawals to be made. As a result, often they do not seem to have constrained government spending or the nonresource deficit.

NRF performance appears to be related in part to the size of the volatility faced by governments. In particular, in Chile and Norway the share of volatile resource revenue in total government revenue is significantly lower than in other countries with NRFs. In these countries, the problems that revenue volatility poses for fiscal management are less severe than for countries that have a heavier reliance on revenues from nonrenewable resources. Conversely, the experiences of Venezuela and Oman suggest that where volatile resource revenues are large, funds (and contingent funds in particular) may be difficult to operate, and their effectiveness may be limited.

VI. Conclusions

Fiscal policy in countries with a high degree of dependence on oil and other nonrenewable resources is complicated by the uncertainty and volatility of revenues, as well as by the fact that the resources are exhaustible. NRFs have been suggested as a way of dealing with the effects of price variability, making it easier to put revenues aside when prices are high so that they can be made available to maintain expenditures when prices are low. Funds may also serve as mechanisms to allow part of the nonrenewable resource wealth to be shared by future generations.

NRFs are, however, not an easy—nor necessarily an appropriate—solution to the fiscal policy problems faced by these countries. Statistical evidence suggests that the prices of nonrenewable resources such as oil may not have an average that is constant over time; shocks can be persistent, and it may not be possible to distinguish clearly between transitory and permanent components. This means that there is no simple signal for determining when resources should be put aside and in what amount. It is also important to focus on the overall stance of fiscal policy: if a fund accumulates resources while the budget runs substantial deficits, there may be little effective contribution to stabilization or savings.

An NRF cannot substitute for effective fiscal management in the short run or for a measured intertemporal approach to fiscal policy in the longer term. The issue then becomes whether the establishment of an NRF might contribute to such policies. In some circumstances, this could be the case. Thus, an NRF might facilitate political acceptance of the idea of saving part of a windfall. Similarly, it might focus attention on the fact that the resources are limited. Large or rapidly growing NRFs, however, may themselves give rise to spending pressures.

There are additional risks and possible disadvantages to establishing an NRF. In the absence of liquidity constraints, an NRF may not constrain the overall stance of fiscal policy. Moreover, a fund does not reduce the volatility of prices, which might, in some cases, be too severe for it to handle. An NRF may itself spend excessive amounts of the resources it receives, or use them inappropriately. More generally, if the NRF is not well integrated with the budget, it can complicate fiscal management, lead to an inefficient allocation of the government’s total resources, and contribute to lack of transparency and governance problems. Therefore, if a decision is made to establish an NRF, it is crucial that the fund be designed appropriately.

An NRF should be coherently integrated within the budget process. This can be achieved by identifying certain resources as belonging to the fund, but maintaining these revenues in identified accounts within the overall budget. A separate institutional structure might be argued, particularly where budget management of resources has been poor. Governance problems can, however, emerge just as easily in the NRF. Even with a separate institutional structure, it would be preferable for all spending and transfers to go through the budget. In any event, budget formulation and reporting should focus on a consolidated presentation, and expenditure should best be executed by the treasury.

An NRF may receive large amounts of resources, lending importance to its asset-management strategy. This should be effectively coordinated with other government financing operations. A strong case may exist for placing the NRF’s assets abroad, since investment in domestic nongovernment financial assets could transmit resource revenue volatility to the economy.

Similarly, the rules and operations of an NRF should be transparent, with stringent mechanisms to ensure accountability and prevent the misuse of resources. This requires regular and frequent disclosure and reporting on the principles governing the fund, its inflows and outflows, and the allocation and return on assets. The NRF’s activities should be audited by an independent agency, and investment performance should be periodically evaluated.

The limited number of cases, and problems with data, complicate the evaluation of the operations of existing NRFs. In some countries with NRFs, expenditure has tended to respond less to changes in resource prices than in those without funds, although this experience is not uniform. Moreover, the data suggest that these countries followed similarly prudent expenditure policies both before and after the establishment of a fund. It could, however, be argued that establishment of a fund helped these countries to maintain cautious policies in the face of ongoing revenue volatility.

More detailed evaluation of country experience suggests that NRFs have been associated with a variety of operating rules and fiscal policy experience. In several cases, rules have been bypassed or changed and do not themselves seem to have effectively constrained spending, and the integration of the fund’s operations with overall fiscal policy has often proven problematic. Although flexible transfer rules may not formally restrict government behavior, they could still make expenditure restraint more politically acceptable. There is evidence that NRFs have been more difficult to operate when reliance on resource revenues was greatest.

Whether the political economy arguments for an NRF outweigh the potential disadvantages will need to be considered on the basis of the situation in each country. This decision should reflect two strong results that emerge from this study. First, NRFs should not be seen as a simple solution to a complex problem. Second, if an NRF is established, then it should be designed appropriately; otherwise it may well do more harm than good. Key features of a well-designed fund would include coordination of the fund’s operations with those of the rest of the public sector, in the context of a sound fiscal policy; effective integration with the budget, which would best be achieved by not imposing rigid rules on fund operations; an appropriate asset-management strategy; and mechanisms to ensure full transparency and accountability.


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This paper is a shortened and revised version of the paper initially published as IMF Occasional Paper No. 205 (Davis and others, 2001). An earlier version was also included in a volume published by the University of Alberta (Ossowski, 2002).

“Dutch disease” refers to the tendency for large resource revenues to appreciate the real exchange rate, which then damages the nonresource tradable sector.

It is usually easier to assess whether volume shocks are temporary or permanent.

Countries that have just discovered large nonrenewable resource endowments may be justified in consuming the initial revenue from the resource if it is below the estimated permanent income from the resource.

For example, a technological change may alter the equilibrium demand or supply of the resource, or both.

Simulations confirm the importance of the initial conditions for the results.

Research indicates that crude oil futures prices provide forecasts that are, in general, superior to those obtained from alternative techniques for short-term horizons. For longer periods, their accuracy diminishes markedly; however, even for those horizons, the futures forecasts are no worse than, and are often better than, those obtained from alternative techniques (Kumar, 1992).

If the government did not raise its expenditure plans when the resource revenue rose, savings would increase automatically and there would be no need for a fund.

If the fund were allowed to spend directly or to lend, this would further impair any ability of the fund to generate financial savings.

Fiscal rules may constrain expenditure, the deficit, or they may restrict the ability to borrow. As discussed in Kopits and Symansky (1998), fiscal rules can have both advan-tages and disadvantages.

These risks would likely be increased when earmarking takes place for off-budget expenditures.

These arguments, however, may not apply in the case of perfect capital mobility and highly developed domestic financial markets, and when the operations of the fund are small relative to the size of the domestic financial market.

Performance evaluation should be distinguished from financial compliance assess-ments: the latter aims to ensure that all resources are accounted for, while the performance evaluation aims to assess whether resources were used in the best possible way, and adhered to investment guidelines.

Davis and others (2001) provide more details on the data, methodology, and results.

A forward-looking government would alter spending on the basis of anticipated revenue. Thus, even if the revenue from higher resource export earnings does not reach the budget for some time, government spending could respond immediately. The endo-geneity could arise if profit transfers from the state resource enterprise are determined at least in part by the level of expenditure.

Papua New Guinea had an NRF throughout the sample period and thus could not be included.

See also Fasano (2000).

The overall budget balance is calculated with oil investments made on behalf of the state direct financial interest in the oil sector.

Under guidelines for a new macroeconomic policy framework adopted in 2001, for each year the structural non-oil budget deficit should approximately correspond to the expected return on the SPF at the start of the year. The expected real rate of return is estimated at 4 percent.

Information on the fund’s assets is not publicly available.

In 2001, a fiscal rule was introduced in Chile. The rule targets a central government structural fiscal surplus of 1 percent of GDP.

The Oil Fund receives oil revenues equivalent to the market value of a fixed volume of oil production. In 1998, the government borrowed from the Oil Fund to finance the budget; this was repaid in 1999.

Partly in reflection of the desire to insulate the fund from spending pressures, provision of public information on the fund’s assets is prohibited by law.

The government concluded in the 2000 budget that the performance of the MRSF had not been as originally envisaged, and that the stabilization objectives of the legislation setting up the fund had not been achieved in the face of the fiscal decision makers’ will-ingness to issue excessive volumes of government debt (Morauta, 2000).

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