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, or, if they have one, that the speed with which they return to it is too slow to be of practical relevance. This in turn means that there is no simple signal for 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 to 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; rather, the question should be whether they might help to facilitate implementation of a sound overall fiscal policy. Second, if an NRF is to be 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; an appropriate asset-management strategy; and mechanisms to ensure full transparency and acountability.