Journal Issue

5. Country Case Studies

Tetsuya Konuki, and Mauricio Villafuerte
Published Date:
August 2016
  • ShareShare
Show Summary Details

This chapter examines the experience of three countries to establish and implement fiscal frameworks aimed at generating financial savings for rainy days: Nigeria, Botswana, and Chile.


Nigeria’s attempts to smooth expenditures in the face of volatile oil revenues and high oil revenue sharing with subnational governments has had mixed results. Its fiscal framework, which has been in place since 2004, consists of a budget reference oil price and an Excess Crude Account (ECA) that receives excess oil revenue or funds any revenue shortfall relative to the benchmark. This arrangement was relatively successful up to 2009: excess oil revenue during 2004–08 went into the ECA and the resulting buffers allowed the country (particularly subnational governments) to run an expansionary fiscal policy stance in the face of the negative oil price shock of 2009 (Figure 4). However, the oil price rule and the ECA have lost traction since 2010 (IMF 2012). Spending pressures resurged because of rebounding oil prices and the electoral cycle, which resulted in a procyclical expansionary fiscal stance during 2010–12 under higher oil prices and strong economic growth. Many discretionary, ad hoc withdrawals from the ECA took place during that period, and financial buffers in the ECA/Sovereign Wealth Fund (SWF) (and in international reserves) declined by end-2013 despite the oil price boom. Back-to-back negative shocks in oil production in 2013 and in oil prices in late 2014 depleted the ECA/SWF and international reserves considerably by the end of 2014 (IMF 2015c). The government needed to undertake a contractionary fiscal stance in 2015 amid deepening downward pressures in oil prices.

Figure 4.Nigeria: Fiscal Stance

Sources: Central Bank of Nigeria; IMF staff calculations.

Note: ECA/SWF stands for Excess Crude Account/Sovereign Wealth Fund.

Several papers have pointed out that some weaknesses in the fiscal framework prevented Nigeria from building up buffers during the 2010–12 oil boom (see IMF 2012 and 2013b). In particular, (1) the budget reference price is not formally instituted, but rather decided by bargaining between the government and legislature; (2) ECA is based on a political agreement among three layers (federal, state, and local) of government and subject to many discretionary withdrawals; and (3) fiscal responsibility laws do not cover the state and local governments, which receive more than half of total oil revenues.


Despite being highly dependent on mineral revenues, which account for over 35 percent of government revenue, the empirical evidence suggests that Botswana put in place countercyclical (or at least cyclically neutral) fiscal policies over the past decade (Table 6). Foreign reserves and fiscal cushions have been built during boom periods, which have been in turn been used during bust periods (specifically in 2009) to sustain aggregate demand and economic activity, while avoiding debt accumulation.18

Botswana’s prudent management of mineral fiscal revenues has been supported by several normative principles and guidelines complemented by the operation of the Pula Fund. Those guidelines have been implemented flexibly over time, which would suggest an institutional “bias” for prudent fiscal management rather than “foolproof” fiscal policy principles. A sustainable budget index principle seeks to ensure that current spending is financed only with nonmineral revenue; resource revenues should then be used to finance investment or saved in the Pula Fund managed by the central bank. At the same time, there is a cap on total expenditures as a ratio to GDP set at 40 percent, which would have been met if the mineral revenue cycle is taken into account, as well as debt ceilings on domestic and foreign debt (at 20 percent of GDP each), which have not been binding because public and publicly guaranteed debt has been under 25 percent of GDP. The Pula Fund, intended to hold financial assets for future generations, has been also used to help stabilize spending in the short term.


Chile, where copper represents about half of goods exports, has a well-earned track record of fiscal policy management that has become a model for other commodity-exporting countries (even though, admittedly, the level of fiscal dependency is much lower than in many resource-rich countries). Key features of Chile’s fiscal rule, formalized since 2001, are (1) that the budget target is formulated in terms of a structural balance linking total level of spending to cyclically adjusted levels of copper and noncopper revenue, (2) the existence of established rules for accumulating and managing fiscal resources within two SWFs, and (3) that the values of potential GDP and long-term copper prices (key inputs for fiscal targets) are determined by independent expert committees.

Chile’s comprehensive fiscal rule has helped shield the budget from volatility in copper prices, while allowing for a flexible response when warranted. During the copper boom of 2003–08, Chile ran substantial fiscal surpluses and saved part of them in the SWFs. Those financial savings allowed the government to increase spending sharply in 2009, when the copper price dropped significantly, and to ease the recession. During subsequent upturns in copper prices, the government clawed back much of the stimulus injected in 2009, which again allowed it to implement a strong fiscal stimulus in 2015 when the country was hit hard by a new copper price decline.19 Saving for rainy days made it possible to inject large fiscal stimulus when it was most sorely needed.

The country case studies discussed here and existing empirical studies point to the following lessons to successfully implement a fiscal framework aimed at saving for rainy days. First, although adoption of well-designed fiscal rules or resource funds, more generally defined as special fiscal institutions, may help enhance saving in good times, it does not lead to reduced procyclicality by itself.20 The existence of SFIs does not necessarily indicate a de facto compliance with the rule, as shown by Nigeria’s mixed experience. Second, while the regression in the previous chapter did not find a significant role of institutional quality, which may be due to the small difference in IQ among sub-Saharan African countries, SFIs need to be supported by strong political commitments and institutions (such as enhanced transparency and accountability) to implement saving for rainy days. Frankel, Vegh, and Vuletin (2013) find that IQ plays a key role in reducing procyclicality, using data from advanced and emerging market economies. Bova, Medas, and Poghosyan (2016) point out that the quality of institutions in resource-rich countries that have been successful in limiting the negative impact of commodity price volatility (namely Botswana, Chile, and Norway) is significantly higher than that of their peers. Third, Chile’s fiscal institutions may provide valuable lessons for many sub-Saharan African countries. An important element of the Chile’s framework is that it is holistic, in the sense that spending levels are set in line with “smoothed” revenue estimates and an SWF is properly integrated with the fiscal policy anchor (savings come from budget surpluses) and the budget (for example, no extra-budgetary spending authority).

    Other Resources Citing This Publication